Samsung Heavy Industries Co., Ltd. · Samsung Heavy Industries Co., Ltd. Non-Consolidated Financial Statements ... Advance payments 1,769,943,738 980,508,653 1,886,531 1,045,096

Samsung Heavy Industries Co., Ltd. Non-Consolidated Financial Statements

December 31, 2007 and 2006

Samsung Heavy Industries Co., Ltd. Index December 31, 2007 and 2006

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

Statement of Changes in Shareholders’ Equity ............................................................................... 10-11

Statements of Cash Flows ............................................................................................................... 12-14

Notes to Financial Statements ......................................................................................................... 15-41

Report of Independent Accountants’ Review of Internal Accounting Control System ................ 42

Report on the Operations of the Internal Accounting Control System ....................................... 43

.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, 2007 and 2006, and the related non-consolidated statements of income, appropriations of retained earnings and cash flows for the years then ended, and the statement of changes in shareholders’ equity for the year ended December 31, 2007, 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, Samsung Heavy Industries Ningbo Co., Ltd. and Samsung Heavy Industries Rongcheng Co., Ltd., the investments in which are reflected in the accompanying financial statements using the equity method of accounting. The investments in those subsidiaries represent 1% of the Company’s total assets as of December 31, 2007 and 2006, and the equity in their net income represents 0.2% and 7% 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 accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audits 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, 2007 and 2006, and the results of its operations, the appropriations of its retained earnings and its cash flows for the years then ended, and the changes in its shareholders’ equity for the year ended December 31, 2007, 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, 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 by December 31, 2000. In the event that the sales proceeds fall short of ￦2,450 billion, the Company and the Affiliates have agreed to 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 amount of ￦2,450 billion has been agreed 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 yet 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 Companies, for losses arising from 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. Interest on the damages for delays has been calculated on a monthly basis from January 1, 2001. In addition, the Creditors are claiming further damages for delay (calculated at 19% per annum on ￦2,450 billion) from December 1, 2005, until settlement. On January 31, 2008, the court ruled that the original agreement was valid, and that Mr. Kun-Hee Lee, the Company and 27 of the remaining Affiliates have a joint and severable liability for the principal less an amount related to Samsung Life shares that have already been disposed of by the Creditors, plus interest at a rate of 6% per annum. As of December 31, 2007, 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. As discussed in Note 32 to the accompanying non-consolidated financial statements, with respect of the oil spill accident involving the Hebei tanker off the west coast of the Republic of Korea, the Company, upon the approval of its board of directors on February 29, 2008, announced its plan to contribute ￦ 100 billion to local development funds, aside from compensation of damages subject to the final outcome of legal proceedings. 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, change in shareholders’ equity 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 March 19, 2008 This report is effective as of March 19, 2008, 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, 2007 and 2006

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(In thousands of Korean won, in thousands of U.S. dollars (Note 3)) 2007 2006 2007 2006 Assets Current Assets

Cash and cash equivalents (Note 4) ￦ 220,849,806 ￦ 553,826,073 $ 235,397 $ 590,307 Short-term financial instruments (Note 4) 2,011,266,418 1,644,936,965 2,143,750 1,753,290 Available-for-sale securities (Note 8) 50,487,500 131,909,468 53,813 140,598 Held to maturity securities (Note 9) 313,266,077 116,123,629 333,901 123,773 Trade accounts and notes receivable, net (Notes 6 and 24) 1,113,306,752 792,949,559 1,186,641 845,182

Other accounts receivable, net (Note 6) 120,845,097 59,309,387 128,805 63,216 Inventories (Note 7) 312,338,417 187,733,688 332,912 200,100 Accrued income 46,103,974 36,514,142 49,141 38,919 Advance payments 1,769,943,738 980,508,653 1,886,531 1,045,096 Short-term loans receivable, net (Note 11) 34,879,740 3,638,208 37,177 3,878 Prepaid expenses 271,697,786 197,647,762 289,595 210,667 Prepaid taxes 82,218,913 63,812,943 87,635 68,016 Current forward exchange contracts (Note 17) 334,929,773 624,501,524 356,992 665,638 Other current assets 7,510,418 14,733,026 8,007 15,704 Total current assets 6,689,644,409 5,408,145,027 7,130,297 5,764,384 Property, plant and equipment including revaluation, net of accumulated depreciation (Note 12) 3,121,160,993 2,719,251,230 3,326,754 2,898,372 Long-term available-for-sale securities (Note 8) 35,783,139 22,601,706 38,140 24,090 Held to maturity securities (Note 9) 10,292,740 12,081,545 10,971 12,877 Equity-method investments (Note 10) 305,945,993 201,050,001 326,099 214,293 Long-term financial instruments (Note 4) 30,100 30,100 32 32 Long-term loans receivable, net (Note 11)

50,439,845 7,382,044 53,762 7,868

Guarantee deposits 94,849,057 73,730,484 101,097 78,587 Deferred income tax assets (Note 22) - 34,490,346 - 36,762 Intangible assets, net (Note 13) 20,805 32,923 22 35 Forward exchange contracts (Note 17) 191,218,035 446,517,683 203,814 475,930 Other non-current assets 61,239,313 63,871,626 65,273 68,080

Total other assets 3,870,980,020 3,581,039,688 4,125,964 3,816,926 Total assets ￦10,560,624,429 ￦ 8,989,184,715 $ 11,256,261 $ 9,581,310


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(In thousands of Korean won, in thousands of U.S. dollars (Note 3)) 2007 2006 2007 2006 Liabilities and Shareholders’ Equity Current liabilities Trade accounts and notes payable (Note 24) ￦ 789,596,429 ￦ 659,628,566 $ 841,60 $ 703,079

Short-term borrowings (Note 14) 23,929,741 23,929,741 25,506 25,506 Current maturities of long-term debts, net (Note 14) 866,667 612,000 924 652

Advance receipts 6,528,480,131 4,770,134,708 6,958,516 5,084,347 Other accounts payable 148,416,888 107,753,158 158,193 114,851Accrued expenses 331,692,406 189,593,074 353,54 202,082 Income tax payable 121,987,832 - 130,023 -Current forward exchange contracts (Note 17)

151,552,113 365,087,695 161,535 389,136

Current deferred income tax liabilities (Note 22) 1,651,824 109,412,125 1,76 116,619Other current liabilities 52,510,917 31,202,170 55,970 33,258 Total current liabilities 8,150,684,948 6,257,353,237 8,687,577 6,669,530

Long-term debts, net of current maturities (Note 15) 107,262,220 104,089,371

114,32 110,946

Guarantee deposits received 35,207,504 67,028,533 37,527 71,444 Warranty provision (Notes 5 and 17) 58,733,831 41,450,014 62,603 44,180 Provision for losses from construction contracts (Notes 5 and 17) 59,940,709 7,834,688

63,889 8,351

Accrued severance benefits, net (Note 16) 73,981,720 89,429,945 78,855 95,321

Forward exchange contracts (Note 17) 261,195,072 181,149,852 278,400 193,082 Deferred income tax liabilities 78,105 - 83 -Other long-term liabilities 3,616,201 18,706,800 3,854 19,939 Total liabilities 8,750,700,310 6,767,042,440 9,327,116 7,212,793


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(In thousands of Korean won, in thousands of U.S. dollars (Note 3)) 2007 2006 2007 2006

Shareholders' equity Capital stock (Note 1) Common stock ￦ 1,154,376,930 ￦ 1,154,362,810 $ 1,230,417 $ 1,230,402 Preferred stock 574,225 574,225 612 612 Capital surplus Paid-in capital in excess of

par value 417,172,244 417,110,276 444,652 444,586 Other surplus (Notes 12 and 18) 78,884,503 82,628,551 84,081 88,071 Capital adjustment Treasury stock (593,471,142) (31,606,643) (632,564) (33,689) Consideration for conversion rights - 31,778 - 34

Stock options (Note 21)

1,015,615 1,302,244 1,082 1,388

Accumulated other comprehensive income and expense

Unrealized gain on valuation of available-for-sale securities (Note 8) 9,622,319 1,384,364 10,256 1,476 Unrealized gain on valuation of equity method investments (Note 10) 50,036,655 34,154,098 53,333 36,404 Unrealized loss on valuation of equity method investments (Note 10) - (3,237,501) - (3,451)

Unrealized gain from forward exchange contracts (Note 17) (4,590,338) 297,349,910 (4,893) 316,937 Retained earnings (Note 18) Legal reserve 22,100,000 16,300,000 23,556 17,374 Discretionary reserve 188,269,854 97,269,854 200,671 103,677

Unappropriated retained earnings

485,933,254 154,518,309 517,942 164,696

Total shareholders' equity 1,809,924,119 2,222,142,275 1,929,145 2,368,517 Total liabilities and shareholders' equity ￦10,560,624,429 ￦ 8,989,184,715 $ 11,256,261 $ 9,581,310

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, 2007 and 2006

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(In thousands of Korean won, in thousands of U.S. dollars (Note 3)) 2007 2006 2007 2006 Sales (Notes 5 and 24) Domestic ￦ 741,647,726 ￦ 794,896,377 $ 790,501 $ 847,257 Export 7,777,418,527 5,556,794,349 8,289,723 5,922,825 8,519,066,253 6,351,690,726 9,080,224 6,770,082 Cost of sales (Note 24) 7,774,351,877 6,022,975,832 8,286,455 6,419,714

Gross income 744,714,376 328,714,894 793,769 350,368

Selling, and administrative expenses (Note 28) 287,469,568 229,696,020 306,405 244,826

Operating income 457,244,808 99,018,874 487,364 105,542

Non-operating income

Interest and dividend income 145,279,875 84,908,066

154,850

90,501

Realized and unrealized foreign exchange gains (Note 25) 27,509,310 36,191,030 29,321 38,575

Realized and unrealized gains on available-for-sale securities 32,875 39,271,485 35 41,858

Realized and unrealized gains from forward exchange contracts (Note 17) 128,715,849 120,753,097 137,194 128,707Gain on valuation of equity method investments (Note 10) 53,206,343 36,323,992 56,711 38,717Others 9,222,219 40,435,690 9,830 43,099

363,966,471 357,883,360 387,941 381,457

Non-operating expenses

Interest expenses

6,629,808 1,638,400

7,067

1,746 Fee expenses 65,362,731 71,701,260 69,668 76,424 Realized and unrealized foreign exchange losses (Note 25)

15,548,626 44,285,096

16,573

47,202

Realized and unrealized losses from forward exchange contracts (Note 17) 47,696,769 74,923,098 50,839 79,859Loss on disposal of inventories 508,804 1,840,878 542 1,962Loss on disposal of tangible assets 4,969,631 20,641,716 5,297 22,001

Loss on valuation of equity method investments (Note 10) 8,138,351 - 8,674 -

Others 13,815,053 29,345,309 14,725 31,279 162,669,773 244,375,757 173,385 260,473

Samsung Heavy Industries Co., Ltd. Non-Consolidated Statements of Income Years ended December 31, 2007 and 2006

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Income before income taxes 658,541,506 212,526,477 701,920 226,526

Income tax expense (Note 22) 173,155,617 58,429,137 184,561 62,278

Net income ￦ 485,385,889 ￦ 154,097,340 $ 517,359 $ 164,248 Basic earnings per share (Note 23) (in Korean won and U.S. dollars)

￦ 2,178 ￦ 675 $ 2.321 $ 0.719

Diluted earnings per share (Note 23) (in Korean won and U.S. dollars)

￦ 2,162 ￦ 670 $ 2.304 $ 0.714


Samsung Heavy Industries Co., Ltd. Non-Consolidated Statements of Appropriations Retained Earnings Years ended December 31, 2007 and 2006 (Date of Appropriations : March 28, 2008 and February 28, 2007 for the years ended December 31, 2007 and 2006, respectively)

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(In thousands of Korean won, in thousands of U.S. dollars (Note 3)) 2007 2006 2007 2006 Retained earnings before appropriations

Unappropriated retained earnings carried over from prior year ￦ 547,365 ￦ 420,968 $ 584 $ 449 Net income 485,385,889 154,097,340 517,359 164,248 485,933,254 154,518,308 517,943 164,697

Transfer from discretionary reserve - - - - 485,933,254 154,518,308 517,943 164,697

Appropriations of retained earnings Legal reserve 10,900,000 5,800,000 11,618 6,182 Cash dividends (Note 19) 108,690,293 57,170,943 115,850 60,937 (Common stock: 10% in 2007 and 5% in 2006) (Preferred stock: 11% in 2007 and 6% in 2006) Reserve for facility investment 366,000,000 91,000,000 390,109 96,994 485,590,293 153,970,943 517,577 164,113

Unappropriated retained earnings carried forward to subsequent year ￦ 342,961 ￦ 547,365 $ 366 $ 584


Samsung Heavy Industries Co., Ltd. Non-Consolidated Statement of Change in Shareholders’ Equity Year ended December 31, 2007

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(In thousands of Korean won, in thousands of U.S. dollar)

Capital stock Capital surplus Capital adjustment Accumulated other

comprehensive income and expense

Retained earnings Total

Balance as of January 1, 2007

₩ 1,154,937,035 ₩ 499,738,827 ₩ (30,272,621) ₩ 329,650,871 ₩ 268,088,163 ₩ 2,222,142,275

Dividends

-

-

-

- (57,170,944) (57,170,944)

Net income

-

-

-

-

485,385,889

485,385,889

Conversion of convertible debentures 14,120

61,968 (31,778)

-

-

44,310

Other surplus

- (3,744,048)

-

-

- (3,744,048)

Treasury stock

-

- (561,864,499)

-

- (561,864,499)

Stock purchase options

-

- (286,629)

-

- (286,629)

Unrealized gain on valuation of investments with the equity method

-

-

-

8,237,955

-

8,237,955

Unrealized loss on valuation of securities for using the equity method

-

-

-

15,882,556

-

15,882,556

Unrealized gain on valuation of available-for-sale securities

-

-

-

3,237,501

-

3,237,501 Unrealized gain from forward exchange contracts - - - (301,940,247) - (301,940,247)

Balance as of December 31, 2007 ₩ 1,154,951,155 ₩ 496,056,747 ₩ (592,455,527) ₩ 55,068,636 ₩ 696,303,108 ₩ 1,809,924,119

Samsung Heavy Industries Co., Ltd. Non-Consolidated Statement of Change in Shareholders’ Equity Year ended December 31, 2007

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Capital stock Capital surplus Capital adjustment Accumulated other

comprehensive income and expense

Retained earnings Total

Balance as of January 1, 2007

$1,231,014 $532,657 ($32,266) $351,365 $285,747 $2,368,517

Dividends - - - - (60,937) (60,937) Net income - - - - 517,359 517,359

Conversion of convertible debentures 15 66 (34) - - 47

Other surplus - (3,991) - - - (3,991) Treasury stock - - (598,875) - - (598,875) Stock purchase options - - (306) - - (306)

Unrealized gain on valuation of investments with the equity method - - - 8,780 - 8,780

Unrealized loss on valuation of securities for using the equity method - - - 16,929 - 16,929

Unrealized gain on valuation of available-for-sale securities

-

-

-

3,451

-

3,451

Unrealized gain from forward exchange contracts

-

-

-

(321,829)

-

(321,829)

Balance as of December 1, 2007 $1,231,029 $528,732 ($631,481) $58,696 $742,169 $1,929,145


Samsung Heavy Industries Co., Ltd. Non-Consolidated Statements of Cash Flows Years ended December 31, 2007 and 2006

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(In thousands of Korean won, in thousands of U.S. dollars (Note 3)) 2007 2006 2007 2006 Cash flows from operating activities Net income ￦ 485,385,889 ￦ 154,097,340 $ 517,359 $ 164,248 Adjustments to reconcile net income to net cash provided by operating activities

Provision for severance benefits 66,298,206 51,034,589 70,665 54,396 Depreciation and amortization 216,001,277 198,472,248 230,229 211,546 Bad debt expense 972,593 - 1,037 -

Other bad debt expense 835,910 - 891 - Reversal of allowance for doubtful

accounts - (9,040,748) - (9,636)Loss on disposal of short-term financial instruments 2,307 35,753 2 38

Loss on disposal of inventories (720,122) 1,840,878 (768) 1,962 Gain on disposal and valuation of available-for-sale securities (32,875) (39,260,150) (35) (41,846)Gain on disposal and valuation of investments (378,875) (406,018) (404) (433)Loss on disposal of property, plant and equipment 3,947,341 20,170,354 4,207 21,499

Development expenses - 19,250 - 21 Loss(Gain) on foreign currency

translation 6,693,236 (856,522) 7,134 (913)Gain on disposal and valuation of forward exchange contracts (81,019,080) (45,830,000) (86,356) (48,849)Amortization of discounts on

debentures and conversion rights adjustment

3,024 10,660 3 11

Gain on valuation of equity method investments (53,206,343) (36,323,992) (56,711) (38,717)

Loss on valuation of equity method investments 8,138,351 - 8,674 -

Warranty provision 29,529,522 15,979,260 31,475 17,032 Provision of construction contracts loss 52,106,022 4,358,214 55,538 4,645 Other (9,176,597) (359,817) (9,779) (383) 725,379,786 313,941,299 773,161 334,621 Changes in operating assets and

liabilities: Trade accounts and notes receivable (321,111,400) 227,816,959 (342,263) 242,823 Other accounts receivable (61,703,220) (15,639,968) (65,768) (16,670)

Inventories (123,884,608) 44,016,285 (132,045) 46,916 Accrued income (9,589,831) (9,371,608) (10,222) (9,989) Advance payments (789,435,086) (691,536,701) (841,436) (737,089) Prepaid expenses (70,022,106) (31,641,054) (74,635) (33,725)

Long-term prepaid expenses (1,158,906) (25,921,743) (1,235) (27,629) Deferred income tax assets - (3,157,459) - (3,365) Trade accounts and notes payable 129,697,836 141,926,164 138,241 151,275


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Advance receipts ￦1,758,345,423 ￦1,354,347,471 $ 1,874,169 $ 1,443,559 Accrued expenses 139,545,354 73,970,515 148,737 78,843 Income taxes payable 121,987,832 - 130,023 - Current deferred tax liabilities 6,768,759 55,121,342 7,215 58,752 Deferred tax liabilities 24,191,275 - 25,785 - Long-term other accounts payable (15,090,600) 8,927,100 (16,085) 9,515 Guarantee deposits received (31,821,029) 7,006,078 (33,917) 7,468 Withholdings 20,572,593 5,570,302 21,928 5,937 Payment of severance benefits (29,249,959) (28,592,719) (31,177) (30,476) Others (87,546,484) (36,536,216) (93,312) (38,943) 660,495,843 1,076,304,748 704,003 1,147,202

Net cash provided by operating activities 1,385,875,629 1,390,246,047 1,477,164 1,481,823

Cash flows from investing activities

Acquisition of short-term financial instruments (366,331,760) (377,781,621) (390,462) (402,666)

Disposal (Acquisition) of available-for-sale securities 79,636,107 (77,276,981) 84,882 (82,367)

Acquisition of held-to-maturity securities (184,655,313) (85,763,137) (196,819) (91,412)

Acquisition of equity-method investments (33,935,507) (37,843,649) (36,171) (40,336)

Decrease(Increase) in short-term loans receivable (29,115,625) 7,205,284 (31,033) 7,680

Proceeds from disposal of property, plant and equipment 4,525,714 21,426,950 4,824 22,838Acquisition of property, plant and equipment (626,371,978) (433,761,957) (667,632) (462,334)

Increase in long-term loans receivable (45,372,107) (9,819,248) (48,361) (10,466)Decrease (Increase) in guarantee

deposits (8,937,085) 1,908,071 (9,526) 2,034 Others 317,786 (51,606) 339 (57)

Net cash used in investing activities (1,210,239,768) (991,757,894) (1,289,959) (1,057,086)

Cash flows from financing activities Issuance of debenture - 93,320,000 - 99,467 Repayment of short-term borrowings - (49,300,000) - (52,547) Changes in forward exchange

contracts 75,930,812 14,113,357 80,932 15,043 Repayment of current maturities of long-term debts (612,000) (1,431,682) (652) (1,526)

Increase in other accounts payable 40,663,730 46,808,133 43,343 49,891 Stock options 3,473,380 4,811,960 3,702 5,129 Payment of dividends (57,170,944) (57,035,349) (60,937) (60,792) Acquisition of treasury stock (570,897,106) - (608,503) -

Net cash provided by (used in) financing activities (508,612,128) 51,286,419 (542,115) 54,665


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Net increase(decrease) in cash and cash equivalents ￦ (332,976,267) ￦ 449,774,572 $ (354,910) $ 479,402

Cash and cash equivalents Beginning of the year 553,826,073 104,051,501 590,307 110,905 End of the year ￦ 220,849,806 ￦ 553,826,073 $ 235,397 $ 590,307


Samsung Heavy Industries Co., Ltd. Notes to Non-Consolidated Statements December 31, 2007 and 2006

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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 off-shore plants. 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, 2007, 230,990,231 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, 2007, 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, 2007. 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, 2007. 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 seven years after two years from the date of the resolution of the shareholders approving the grant of stock options, while others may be exercised within eight years after three years of grant. As of December 31, 2007, stock options of 1,656,700 shares have been granted (Note 21).


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2. Summary of Significant Accounting Policies Basis of presentation The Company maintains its accounting records in Korean won and prepares statutory financial statements in Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying financial statements have been condensed, restructured and translated into English from the Korean language financial statements.

The following is a summary of significant accounting policies followed by the Company in the preparation of its financial statements. These policies have been consistently applied to all the years presented, unless otherwise stated.

In 2007, the Company adopted the following new Statements of Korean Financial Accounting Standards (SKFAS) issued by the Korea Accounting Standards Board: • SKFAS No. 21, Preparation and Presentation of Financial StatementsⅠ • SKFAS No. 23, Earnings Per Share

In accordance with SKFAS No. 21, Preparation and Presentation of Financial Statements I, the Company’s financial statements include the statement of changes in shareholders' equity. The Company classified its capital adjustments account into capital adjustments and accumulated other comprehensive income and expense, and also disclosed the details of its comprehensive income in the notes to the financial statements. In addition, the Company disclosed its earnings per share on the face of its statements of income. Certain prior year accounts, presented herein for comparative purposes, have been reclassified to conform to current year’s presentation within the financial statements. Such reclassification does not impact the net income or net assets reported in the prior year. Revenue and Cost Recognition Revenues from construction contracts are recognized using the percentage-of-completion method, measured principally by the percentage of costs incurred up to the balance sheet date over the total estimated costs for each 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.


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Cash and Cash Equivalents Cash and cash equivalents include cash on hand and in banks, and financial instruments with maturity of three months or less at the time of purchase. These financial instruments are readily convertile into cash without significant transaction costs and bear low risks from changes in value due to interest rate fluctuations. Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts and notes receivable. Allowances are calculated based on the estimates made through a reasonable and objective method. Investments in securities Costs of securities are determined using the moving-weighted average method. Investments in 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. Investments in equity securities of companies, over which the Company exercises a significant control or influence, are recorded using the equity method of accounting. Trading securities are classified as current assets while available-for-sale securities and held-to-maturity securities are classified as long-term investments, excluding those securities that mature or are certain to be disposed of within one year, which are then classified as current assets. Held-to-maturity securities are measured at amortized cost while available-for-sale and trading securities are measured at fair value. However, non-marketable securities, classified as available-for-sale securities, are carried at cost when the fair values are not readily determinable. Gains and losses related to trading securities are recognized in the income statement, while unrealized gains and losses of available-for-sale securities are recognized under other comprehensive income and expense. Realized gains and losses of available-for-sale securities are recognized in the income statement. Equity method investments Investees over which the Company can exercise significant influence should reflect any changes in equity after the initial purchase date. Under the equity method, the Company records changes in its proportionate ownership in the book value of the investee in current operations, as capital adjustments or as adjustments to retained earnings, depending on the nature of the underlying change in the book value of the investee. All other changes in equity should be accounted for under other comprehensive income and expense.

Currency translation for foreign operations Assets and liabilities of a foreign branch or company subject to the equity method of accounting for investments are translated into Korean won at the rates of exchange in effect at the balance sheet date, while their equity is translated at the exchange rate at the time of transaction, and income statement accounts at the average rate over the period. Resulting translation gains and losses are recorded as accumulated other comprehensive income and expense. Corresponding gains and losses are recognized as gain or loss when the foreign branch or company is liquidated or sold.


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Inventories The quantities of inventories are determined using the perpetual method and periodic inventory count, while the costs of inventories are determined using the moving-weighted average method. Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expense. Replacement cost is used for the estimate of net realizable value of raw materials. If, however, the circumstances which caused the valuation loss cease to exist, the valuation loss is reversed up to the original carrying amount before valuation. The said reversal is deducted from cost of sales.

Property, Plant and Equipment and Related Depreciation Property, plant and equipment are stated at cost, which includes acquisition cost, production cost and other costs required to prepare the asset for its intended use. It also includes the present value of the estimated cost of dismantling and removing the asset, and restoring the site after the termination of the asset's useful life, provided it meets the criteria for recognition of provisions. Property, plant and equipment are stated net of accumulated depreciation calculated based on the following depreciation method and estimated useful lives:

Estimated Useful Lives Buildings and structures 5 - 60 years Machinery and equipment 4 - 25 years Tools, furniture and fixtures 5 - 20 years Vehicles and heavy equipment 5 - 18 years

Expenditures incurred after the acquisition or completion of assets are capitalized if they enhance the value of the related assets over their recently appraised value or extend the useful life of the related assets. Routine maintenance and repairs are charged to expense as incurred.

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 five to ten years. Impairment of Assets When the book value of an asset is significantly greater than its recoverable value due to obsolescence, physical damage or an abrupt decline in the market value of the asset, the said decline in value is deducted from the book value to agree with recoverable amount and is recognized as an asset impairment loss for the period. When the recoverable value subsequently exceeds the book value, the impairment amount is recognized as gain for the period to the extent that the revised book value does not exceed the book value that would have been recorded without the impairment. Reversal of impairment of goodwill is not allowed.


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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 with the Company based on their length of service and rate of pay at the time of termination. The Company has partially funded the accrued severance benefits through severance insurance deposits with an insurance company. Deposits made by the Company are recorded as deductions from accrued severance benefits. The Company deposits certain portion severance benefits to National Pension Service according to National Pension Law. The deposit amount is recorded as deduction from accrued severance benefits.

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. 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 the rates of exchange in effect at the balance sheet date in case of U.S. dollars, US$1 to ￦938.2 at December 31, 2007 (2006 : US$1 to ￦929.6), and the resulting translation gains and losses are recognized in current operations.

Income tax and deferred income tax Income tax expense includes the current income tax under the relevant income tax law and the changes in deferred tax assets or liabilities. Deferred tax assets and liabilities represent temporary differences between financial reporting and the tax bases of assets and liabilities. Deferred tax assets are recognized for temporary differences which will decrease future taxable income or operating loss to the extent that it is probable that future taxable income will be available against which the temporary differences can be utilized. Deferred tax effects applicable to items in the shareholders’ equity are directly reflected in the shareholders’ equity. 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.


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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. Derivatives All derivative instruments are accounted for at their fair value according to the rights and obligations associated with the derivative contracts. The resulting changes in fair value of derivative instruments are recognized either under the income statement or shareholders’ equity, depending on whether the derivative instruments qualify as a cash flow hedge. Fair value hedge accounting is applied to a derivative instrument purchased with the purpose of hedging the exposure to changes in the fair value of an asset or a liability or a firm commitment that is attributable to a particular risk. The resulting changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized under the shareholders’ equity under accumulated other comprehensive income and expense.

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 : ￦938.2, the exchange rate in effect on December 31, 2007. 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 2006 U.S. dollar amounts, which were previously expressed at ￦929.6 : US$1, the rate in effect on December 31, 2006, have been restated to reflect the exchange rate in effect on December 31, 2007.

4. Restricted Deposits As of December 31, 2007, ￦30 million of bank deposits are restricted to maintain checking accounts. Certain other financial instruments amounting to ￦405,914 million are subject to withdrawal restrictions in relation to a retention for the guarantee of refunds of the advanced payments (Note 14).

5. Construction Contracts

Details of the outstanding construction contract amounts as of December 31, 2007, are as follows:


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Opening Construction Balance Increase Revenue Closing Balance (In thousands of Korean won) of Contracts (Decrease) Recognized of Contracts Shipbuilding contracts ￦17,247,776,459 ￦11,070,024,062 ￦6,263,934,684 ￦ 22,053,865,837 Plant-building contracts 4,125,599,820 3,949,517,240 1,630,265,447 6,444,851,613 Construction contracts 467,832,196 938,178,199 586,544,202 819,466,193 Other 24,201,869 59,515,134 38,321,920 45,395,083 ￦ 21,865,410,344 ￦ 16,017,234,635 ￦ 8,519,066,253 ￦29,363,578,726

As of December 31, 2007, the Company is guaranteed up to ￦377,638 million for the execution and ￦26,414 million for the warranty after completion in relation to the construction contracts. The Company is guaranteed for up to ￦422,513 million for the execution and ￦8,800 million for the warranty after completion in relation to the ship building contracts (Note 9). In addition, a warranty provision of ￦58,734 million is provided for completed contracts and provision of ￦59,941 million is provided for losses from construction contracts (Note 17).

6. Accounts and Notes Receivable Accounts and notes receivable and their allowance for doubtful accounts, as of December 31, 2007 and 2006, consist of the following: (In thousands of Korean won) 2007 2006 Trade accounts and notes receivable ￦ 1,155,648,928 ￦ 836,669,136 Less: Allowance for doubtful accounts 42,342,176 43,719,577 ￦ 1,113,306,752 ￦ 792,949,559 Other accounts and notes receivable ￦ 133,358,096 ￦ 71,343,698 Less: Allowance for doubtful accounts 12,512,999 12,034,311 ￦ 120,845,097 ￦ 59,309,387 Long-term accounts and notes receivable and their allowance for doubtful accounts, as of December 31, 2007 and 2006, consist of the following: (In thousands of Korean won) 2007 2006 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, 2007 and 2006, consist of the following:


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(In thousands of Korean won) 2007 2006 Raw materials ￦ 94,452,710 ￦ 83,677,743 Supplies 37,532,225 25,846,758 Materials in-transit 146,304,503 53,301,905 Land 24,279,647 24,863,949 Other 9,769,332 43,333 ￦ 312,338,417 ￦ 187,733,688 Inventories are insured against fire and other casualty losses for up to ￦1,593,910 million as of December 31, 2007. In addition, the Company is insured against fire and other casualty losses of up to approximately US$11,642 million for ships under construction as of December 31, 2007. 8. Available-For-Sale Securities

Available-for-sale securities as of December 31, 2007 and 2006, consist of the following: 2007 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 ￦ 6,577,217 ￦ 5,100,000 Samsung Investment Trust Management Co., Ltd. 3.9 3,626,900 15,837,222 15,837,222 Samsung Card Co., Ltd. 0.03 1,350,186 1,924,528 1,924,528 iMarket Korea, Inc. 9.7 1,300,000 5,736,434 1,300,000 Samsung Economic Research Institute 1.0 600,000 810,522 600,000 11,977,086 30,885,923 24,761,750

Other investments

Equity investments - 15,010,000 4,254,294 804,500 Beneficiary certificates - 50,000,000 50,487,500 50,487,500 Other securities - 10,216,889 13,340,898 10,216,889 75,226,889 68,082,692 61,508,889 ￦ 87,203,975 ￦ 98,968,615 ￦ 86,270,639 2006 Percentage of Acquisition Market Value or Recorded

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


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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 The fair values of non-marketable equity securities, excluding Samsung Investment Trust

Management Co., Ltd., Samsung Card Co., Ltd. and certain beneficiary certificates, could not be reliably estimated due to the lack of financial information. Accordingly, these securities were presented at their acquisition cost. 9. Held-To-Maturity Securities

Held-to-maturity securities as of December 31, 2007 and 2006, consist of the following:

(In thousands of Korean won) 2007 2006

Due date Recorded Book Value Recorded Book Value

Less than 1 year Government bonds ￦ 313,266,077 ￦ 116,123,629

1 ~ 5 years Government bonds 10,256,060 12,029,140

5~ 10 years Government bonds 36,680 52,405 ￦ 323,558,817 ￦ 128,205,174

Held-to-maturity securities amounting to ￦760 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, 2007 and 2006, consist of the following:


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(In thousands of Korean won, 2007

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 ￦ 50,705,716 ￦ 68,913,940 ￦ 68,913,940

Doosan Engine Co., Ltd. 1,920,000 32 9,600,000 159,409,847 159,409,847

Samsung Sakhalin LLC - 100 3,909 10,675,254 10,675,254


Rongcheng Co., Ltd. - 100 66,404,990 61,572,785 61,572,785

MMHE-SHI LNG SDN BHD 300,000 30 291,959 291,960 291,960


Indaia Pvt.Ltd. - 100 2,608,551 2,608,551 2,608,551

Camellia Consulting

Corporation - 100 2,473,656 2,473,656 2,473,656

￦ 132,088,781 ￦ 305,945,993 ￦ 305,945,993

(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


Ningbo Co., Ltd. - 100 ￦ 38,678,629 ￦ 56,982,761 ￦ 56,982,761

Doosan Engine Co., Ltd. 1,920,000 32 9,600,000 102,829,176 102,829,176

Samsung Sakhalin LLC - 100 3,909 3,394,414 3,394,414


Rongcheng Co., Ltd. - 100 37,551,690 37,551,690 37,551,690

MMHE-SHI LNG SDN BHD 300,000 30 291,960 291,960 291,960

￦ 86,126,188 ￦ 201,050,001 ￦ 201,050,001

The equity, method was not applied on the investment in MMHE-SHI LNG SDN BHD, Samsung Heavy Industries India Pvt. Ltd. and Camellia Consulting Corporation as the change in their equity is not material to the Company’s financial statements.


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Financial information of significant investees for the years ended December 31, 2007 and 2006, consist of the following: 2007

(In thousands of Korean won) Assets Liabilities Sales Net Income

Investee (Loss)


Ningbo Co., Ltd. ￦ 260,569,503 ￦ 191,655,563 ￦ 207,813,866 ￦ 6,810,842

Doosan Engine Co., Ltd. 1,848,870,671 1,350,715,093 1,221,703,211 124,466,053 Samsung Sakhalin LLC 21,859,731 11,305,004 79,637,462 6,566,364 Samsung Heavy Industries

Rongcheng Co., Ltd. 191,879,931 130,307,146 1,374,931 (8,138,351)

￦ 2,323,179,836 ￦ 1,683,982,806 ￦ 1,510,529,470 ￦ 129,704,908

2006

(In thousands of Korean won) Assets Liabilities Sales Net Income

Investee (Loss)


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 56,541,331

Samsung Sakhalin LLC 17,378,731 13,984,317 70,030,027 3,387,042 ￦ 1,149,136,184 ￦ 767,418,028 ￦ 1,277,517,551 ￦ 74,772,097

There are no unrealized gains or losses arising from the inter-company transactions between the Company and investees. As of December 31, 2007 and 2006, the cumulative net gain of the equity-method investments consists of the following:

2007 Gain from Unrealized Current year Dividend

(In thousands of Korean won) prior years gain (loss1) gain(loss) received Total

Investee


Ningbo Co., Ltd. ￦ 10,742,563 ￦ 654,820 ￦ 6,810,842 ￦ - ￦ 18,208,225

Doosan Engine Co., Ltd. 49,003,539 64,337,171 39,829,137 (3,360,000) 149,809,847

Samsung Sakhalin LLC 3,387,042 717,939 6,566,364 - 10,671,345


Rongcheng Co., Ltd. - 3,306,146 (8,138,351) - (4,832,205)

￦ 63,133,144 ￦ 69,016,076 ￦ 45,067,992 ￦ (3,360,000) ￦ 173,857,212


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2006 Gain from Unrealized Current year Dividend

(In thousands of Korean won) prior years gain (loss¹) gain received Total


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 accumulated other comprehensive income by recognizing unrealized gain on valuation of equity method investments amounting to ￦50,037 million, 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, 2007 and 2006.

11. Short-Term and Long-Term Loans Receivable

Short-term and long-term loans at December 31, 2007 and 2006, consist of the following:

Annual Interest Rates (%) as of (In thousands of Korean won) December 31, 2007 2007 2006 Loans to employees 0-4 ￦ 8,430,485 ￦ 6,653,252 Other loans receivable 0-16 78,553,108 5,842,608 86,983,593 12,495,860 Less: Allowance for doubtful accounts (1,664,008) (1,475,608) Less: Short-term loans receivable (34,879,740) (3,638,208) ￦ 50,439,845 ￦ 7,382,044


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12. Property, plant and equipment

Changes in property, plant and equipment for the years ended December 31, 2007 and 2006, consist of the following:

2007 (In thousands of Korean won)

January 1, 2007 Acquisition

Transfer Disposal Depreciation

December 31, 2007

Land ￦ 482,312,977 ￦ 258,251 ￦ 12,092,937 ￦ (529,842) ￦ - ￦ 494,134,323Buildings and structures 1,248,116,957 269,200 117,277,256 (4,430,684) (34,080,673) 1,327,152,056Machinery and equipment 551,045,087 - 85,489,436 (733,719) (88,829,932) 546,970,872Vehicles and heavy equipment 67,819,487 246,182 33,044,357 (179,815) (15,664,146) 85,266,065Tools, furniture and fixtures 216,109,152 22,543,161 99,810,925 (2,598,994) (77,414,408) 258,449,836Construction in- progress 153,817,059 571,141,229 (329,982,556) - - 394,975,732Machinery in-transit 30,511 31,913,953 (17,732,355) - - 14,212,109 ￦2,719,251,230 ￦ 626,371,976 ￦ - ￦ (8,473,054) ￦ 215,989,159 ￦3,121,160,993

2006 (In thousands of Korean won)

January 1, 2007 Acquisition

Transfer Disposal Depreciation

December 31, 2007

Land ￦ 454,331,750 ￦ 933,293 ￦ 47,232,077 ￦ (20,184,143) ￦ - ￦ 482,312,977 Buildings 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

As of December 31, 2007, the use of certain portions of the Company's property, plant and equipment are restricted for real estate lease up to a maximum of ￦23,272 million. Depreciable assets are insured against fire and other casualty losses for up to ￦2,322,178 million as of December 31, 2007. Land, recorded at cost of ￦494,134 million, has a posted land price issued by the Korean tax authority of ￦611,042 million at December 31, 2007.


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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, 2007, ￦76,709 million of revaluation surplus includes the ￦52,939 million revaluation surplus recorded on October 1, 1990.

13. Intangible Assets

Changes in intangible assets for the years ended December 31, 2007 and 2006, consist of the following:

2007

(In thousands of January Disposal and December Accumulated

Korean won) 1, 2007 Acquisition Amortization Impairment 31, 2007 Amortization

Exclusive facility use rights ￦ 32,923 ￦ - ￦ 12,118 ￦ - ￦ 20,805 ￦ 78,204

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

The amortization expense of intangible assets for the years ended December 31, 2007 and 2006, are distributed into the following accounts:

(In thousands of Korean won) Account 2007 2006 Selling and administrative expenses ￦ 12,118 ￦ 12,118

Research and development expenses charged to operations for the years ended December 31, 2007 and 2006, consist of following : (In thousands of Korean won) 2007 2006 Research expenses ￦ 640,811 ￦ 491,267 Ordinary development expenses 29,279,986 28,792,584 ￦ 29,920,797 ￦ 29,283,851


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14. Short-Term Borrowings and Current Maturities of Long-Term Debts Short-term borrowings as of December 31, 2007 and 2006, consist of the following:

Annual Interest Rates (%) as of (In thousands of Korean won) December 31, 2007 2007 2006 General term loans from commercial banks 1.8-4.2 ￦ 23,929,741 ￦ 23,929,741 Short-term financial instruments are pledged as collaterals for the above loans (Notes 4 ). Current maturities of long-term debts as of December 31, 2007 and 2006, consist of the following: (In thousands of Korean won) 2007 2006 Long-term debts in local currency (Note 15) ￦ 866,667 ￦ 612,000

15. Long-Term Debts Long-term debts as of December 31, 2007 and 2006, consist of the following:

(In thousands of Korean won) Reference 2007 2006 Local currency loans (A) ￦ 9,533,333 ￦ 10,145,333 Debentures (B) 98,595,554 94,556,038 108,128,887 104,701,371 Less: Current maturities (Note 14) (866,667) (612,000) ￦ 107,262,220 ￦ 104,089,371

(A) Long-term debts denominated in local currencies as of December 31, 2007 and 2006, consists of the following: Annual Interest Rates (%) as of

(In thousands of Korean won) December 31, 2007 2007 2006 Woori Bank and others - ￦ - ￦ 612,000 Korea Housing Gurantee Co., Ltd. 1.0 9,533,333 9,533,333 ￦ 9,533,333 ￦ 10,145,333


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(B) Debentures outstanding as of December 31, 2007 and 2006, consist of the following: Annual Interest Rates (%) as of (In thousands of Korean won) December 31, 2007 2007 2006 Floating rate notes LIBOR+0.35 ￦ 98,595,554 ￦ 94,508,070 Convertible debentures - - 57,121 98,595,554 94,565,191

Less: Adjustment for conversion rights ￦ - ￦ (9,153) ￦ 98,595,554 ￦ 94,556,038 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 at December 31, 2007 are as follows:

Local (In thousands of Korean won) Currency Loans Debentures Total 2009 ￦ 866,667 ￦ - ￦ 866,667 2010 866,667 - 866,667 2011 866,667 98,595,554 99,462,221 Thereafter 6,066,665 - 6,066,665

￦ 8,666,666 98,595,554 107,262,220

16. Accrued Severance Benefits

Changes in accrued severance benefits for the years ended December 31, 2007 and 2006, consist of the following: (In thousands of Korean won) 2007 2006 Balance at the beginning of the year ￦ 184,620,097 ￦ 162,178,227 Provision for severance benefits1 66,957,149 51,034,589 Actual severance payments (29,908,902) (28,592,719) 221,668,344 184,620,097 Less: Cumulative deposits to the National Pension Fund (1,792,885) (2,044,594) Severance insurance deposits (145,893,739) (93,145,558) Balance at the end of the year ￦ 73,981,720 ￦ 89,429,945

1 Provision for severance benefits includes ￦659 million assumed from a related company. As of December 31, 2007, the Company funded 65.8% of severance payable through severance insurance deposits with Samsung Life Insurance Co., Ltd.


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

Liability provisions as of December 31, 2007, are as follows:

(In thousands of Korean won) Reference January 1,

2007 Increase Decrease December 31, 2007

Provision for long-term incentives (A) ￦ 18,706,800 15,380,400 10,961,894 23,125,306Warranty provision (B) 41,450,014 29,642,257 12,358,440 58,733,831Provision for losses from Construction contracts (C) 7,834,688 56,872,026 4,766,005 59,940,709

Provision for performance guarantees (D) 21,287,840 196,940 - 21,484,780 ￦ 89,279,342 ￦102,091,623 ￦ 28,086,339 ￦163,284,626 (A)The Company introduced long-term incentive plans for its executives based on three-year

management performance criteria and has made a provision for the estimated incentive cost for the current year.

(B) 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.

(C)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.

(D)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

(A)As of December 31, 2007, the Company is contingently liable for guarantees of indebtedness of

suppliers approximating ￦4,370 million. (B)As of December 31, 2007, the Company provided four notes amounting to ￦5,514 million,

three 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.


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(C)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, 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 by December 31, 2000. In the event that the sales proceeds fall short of ￦2,450 billion, the Company and the Affiliates have agree to 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 has been agreed 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 yet 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 Companies, 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. The interest on the damages for delays has been calculated on monthly basis from January 1, 2001. In addition, the Creditors are claiming further damages for delay (calculated at 19% per annum on ￦2,450 billion) from December 1, 2005, until settlement.

On January 31, 2008, the court ruled that the agreement was valid, and that Mr. Kun-Hee Lee, the Company and 27 of the remaining Affiliates have a joint and severable liability for the principal less an amount related to Samsung Life shares that have already been disposed of by the Creditors, plus interest at a rate of 6% per annum.

As of December 31, 2007, 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.

(D)As of December 31, 2007, the Company has been named as a defendant in 27 legal cases,

excluding the case discussed above(C). The aggregate amounts of claims as the defendant amounted to approximately ￦16,640 million. As of December 31, 2007, 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.

Main legal actions are as follows: (In millions of Korean won) Legal actions Amount Penalty for delay claims ￦ 3,572 Claims for damages 4,877


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C. Commitments

As of December 31, 2007, the Company has entered into bank overdraft agreements with Woori Bank and five other banks amounting to ￦86,000 million.

As of December 31, 2007, the Company has technical assistance agreements with eight foreign companies. Total royalty expenses incurred under these technical assistance agreements for the years ended December 31, 2007, approximate ￦83,618 million (2006 :￦66,026 million). The terms of these agreements require the Company to pay royalties during the term of the agreements. As of December 31, 2007, 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$ 23,869 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, 2007, the Company has gain and loss on valuation of derivatives with various financial institutions including Barclays Bank to hedge local cash flows risk on trade accounts receivable, trade accounts payable, debenture and interest. For the year ended December 31, 2007, the unrealized gains and losses recognized from the valuation of derivatives held, amount to ￦7,063 million and ￦53 million, respectively. On the other hand, the ineffective portion of unrealized gains and losses amounting to ￦79,688 million and ￦24,335 million, respectively, resulting from the derivatives used to hedge cash flows, are charged to the current operations. In addition, the Company recognized the effective portion of unrealized gains of ￦4,590 million from cash flow hedge instrument, excluding tax effect, as deferred gains and charged to accumulated other comprehensive income , of which ￦130,167 million is expected to be realized within one year from December 31, 2007.

For the year ended December 31, 2007, the Company recognized realized gains of ￦41,965 million and losses of ￦23,309 million, charged to the current operations from the settlement of derivatives.

18. Retained Earnings

Retained earnings as of December 31, 2007 and 2006, consist of the following: (In thousands of Korean won) 2007 2006 Appropriated Legal reserve (A) ￦ 22,100,000 ￦ 16,300,000

Voluntary reserve (B) 188,269,854 97,269,854 210,369,854 113,569,854 Unappropriated 485,933,254 154,518,309 ￦ 696,303,108 ￦ 268,088,163


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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 against 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.

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

may be used for any purpose with the approval of the shareholders.

19. Dividends

Details of dividends declared for the years ended December 31, 2007 and 2006, are as follows: 2007 2006 (In thousands of Dividend Ratio Dividend Dividend Ratio Dividend Korean won) (%) Amount (%) Amount Common shares 10 ￦ 108,627,128 5 ￦ 57,136,491 Preferred shares 11 63,165 6 34,452 ￦ 108,690,293 ￦ 57,170,943 The Company’s dividend payout ratio for the year ended December 31, 2007, is: (In thousands of Korean won) Total dividends (A) ￦ 108,690,293 Net income (B) 485,385,889 Dividend payout ratio (A/B) 22.4% The Company’s dividend yield ratios for the year ended December 31, 2007, are: (In Korean won) Common Shares Preferred Shares Dividend per share (A) ￦ 500 550 Market price as of balance sheet date (B) 40,200 46,000 Dividend yield ratio (A/B) 1.2% 1.2%


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20. Treasury Stock

As of December 31, 2007, the Company holds 13,621,129 shares of its common stock amounting to ￦593,471 million. The treasury stock is recorded as a capital adjustment and is reserved for the exercise of stock options and others.

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 as of December 31, 2007, follows.

Date of the grant

March 24, 2000 March 5, 2001 March 9, 2002 February 28, 2003 March 31, 2003 May 10, 2006

Quantity of stock

Will be issued 418,000 280,300 445,900 230,800 5,000 276,700

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

Exercisable period from

the date of the grant (2) 3~7 years 3~7 years 2~8 years 2~8 years 2~8 years 2~8 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), there is no compensation cost for stock options recognized for the year ended December 31, 2007. 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

.


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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, 2007 and 2006, consists of the following: (In thousands of Korean won) 2007 2006

Current income taxes ￦ 140,673,850 ￦ 4,383,992

Changes in deferred income tax 32,481,767 54,045,145

￦ 173,155,617 ￦ 58,429,137

The reconciliation between income before income taxes and taxable income for the years ended December 31, 2007 and 2006, follows: (In thousands of Korean won) 2007 2006

Income before income taxes ￦ 658,541,506 ￦ 212,526,477

Add (deduct) :

Increase due to permanent differences 13,794,309 32,599,083

Decrease due to temporary differences (43,404,143) (109,248,448)

Taxable income ￦ 628,931,672 ￦ 135,877,112

The income tax effect of temporary differences including available net operating loss carry-forwards and tax credits as of December 31, 2007, is as follows:

(In thousands of Korean won) Current Non-Current Deferred tax assets

Allowance for doubtful accounts ￦ 13,492,647 ￦ -

Impairment losses on property, plant and equipment - 3,952,397 Severance and retirement benefits - 39,130,173 Unrealized gain from forward exchange contracts 1,741,163 - Impairment losses on equity securities - 260,807 Warranty provision - 16,151,804 Provision for loss from construction contracts - 16,483,695 Depreciation - 322,387 Others 12,189,359 22,785,871

￦ 27,423,169 ￦ 99,087,134


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(In thousands of Korean won) Current Non-Current Deferred tax liabilities Gain on valuation of investment securities ￦ - ￦ 58,152,629 Unrealized gain from forward exchange contracts 15,960,793 - Accrued interest income 12,643,224 - Capitalized interest - 100,515 Brokerage fees - 39,130,173 Others 470,976 1,781,922 29,074,993 99,165,239 ￦ (1,651,824) ￦ (78,105) 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 ￦187,157 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, 2007, is 26.3%.

23. Earnings Per Share Basic earnings per share for the year ended December 31, 2007, was calculated as follows:

(In thousands of Korean won, except per share amount) Net income ￦ 485,385,889 Adjustments: Dividends for preferred stock 34,454 Undeclared participating preferred stock dividend 227,738 Net income available for common stock 485,123,697 Weighted average number of common stock 222,733 Earnings per share in Korean won ￦ 2,178

Basic earnings per share for the year ended December 31, 2006, was ￦675. Diluted earnings per share for the year ended December 31, 2007, is ￦2,162 ( 2006 : ￦670).


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24. Related Party Transactions Significant transactions with related parties for the years ended December 31, 2007 and 2006, and the related account balances as of December 31, 2007 and 2006, are as follows: (In thousands of Korean won) 2007 2006 Sales, including exports ￦ 329,785,950 ￦ 416,369,165 Trade accounts, notes and other receivables 475,324,694 273,349,982 Purchases 933,009,847 829,946,425 Trade accounts, notes and other payables 186,762,765 129,863,931 Key Management Compensation For the year ended December 31, 2007, key management compensation includes short-term benefits (including short-term incentives) of ￦3,082 million and long-term benefits (including severance benefits) of ￦2,949 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, 2007, assets and liabilities denominated in foreign currencies and related gains and losses on foreign currency translation for the year ended December 31, 2007, 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$ ￦ 113,071,170 ￦ 790,711 ￦ 51,472Trade accounts and US$ 866,503,196 190,235 - notes receivable EUR 169,729 16,471 - JPY 537,123 11,680 - 1,009,097 51,472Foreign currency liabilities Trade accounts and notes payable US$ 14,713,826 - 270,027Accrued expenses US$ 178,876,111 44,211 2,598,323Debenture US$ 98,595,554 - 4,087,483 44,211 6,955,833 ￦ 1,053,308 ￦ 7,007,305


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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, 2007, follows: General information by business segment

Segment Sales type Items Sales ratio (%) Shipbuilding product Tanker, LNG, off-shore platform, others 93.11 Construction product Engineering works, construction, others 6.89 100.00

Financial data by business segment (In thousands of Korean won) Shipbuilding Construction Total Sales Sales to external customers ￦ 7,932,522,051 ￦ 586,544,202 ￦ 8,519,066,253

Inter-segment sales 150,647,828 210,971,510 361,619,338 ￦ 8,083,169,879 ￦ 797,515,712 ￦ 8,880,685,591 Operating profit ￦ 496,468,976 ￦ 29,378,125 ￦ 525,847,101 Property, plant and equipment & intangible assets ￦ 3,092,139,454 ￦ 29,042,345 ￦ 3,121,181,799 Depreciation & amortization ￦ 214,740,462 ￦ 1,260,815 ￦ 216,001,277

Reconciliation to operating profit

Total business segments operating profit ￦ 525,847,101 Inter-segment revenue - Undivided selling & administrative expenses 68,602,293 Operating profit per statement of income ￦ 457,244,808


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27. Comprehensive Income Comprehensive income for the years ended December 31, 2007 and 2006, consists of:

(in thousands of Korean won) 2007 2006

Net income ￦ 485,385,889 ￦ 154,097,340

Other comprehensive income (expense)

Gain on valuation of available-for-sale securities, net of related income taxes of ￦3,125 million (2006: ￦525 million)

8,237,955 1,384,365

Gain on valuation of equity-method investments, net of related income taxes of ￦6,024 million (2006: ￦3,842 million)

15,882,556 10,127,607

Loss on valuation of equity-method investments, net of related income taxes of ￦1,228 million (2006: 670 million) 3,237,501 (1,765,507)Unrealized gain(loss) from forward exchange, net of contracts related taxes of ￦114,529 million( 2006: ￦68,206 million)

(301,940,247)

179,816,782

￦ 210,803,654 ￦ 343,660,587 28. Selling and administrative expenses

(in thousands of Korean won) 2007 2006

Salaries and wages ￦ 132,838,184 ￦ 98,844,864Taxes and dues 7,415,676 6,298,347Commission expenses 33,362,755 32,831,195Depreciation 23,482,044 20,316,935Warranty expenses 13,151,423 16,654,583other 77,219,486 54,750,096 ￦ 287,469,568 ￦ 229,696,020

29. Transactions Not Affecting Cash Flows Significant transactions not affecting cash flows for the years ended December 31, 2007 and 2006, are as follows: (In thousands of Korean won) 2007 2006 Current maturities of held to maturities securities ￦ 2,568,120 ￦ . 5,338,685 Current maturities of long-term loans receivable 2,314,307 5,979,458 Current maturities of long-term prepaid expenses 4,027,918 25,733,617 Reclassification of construction

in-progress to other property, plant and equipment accounts 347,714,912 345,068,632

Current maturities of long-term debentures 866,667 612,000


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30. Final Interim Period Information

Financial information for the three-month period ended December 31, 2007, is as follows: (In thousands of Korean won, except for per share amounts) Sales ￦ 2 ,337,936,622 Net income 117,769,073 Basic earnings per share 542 Diluted earnings per share 538

31. Approval of Financial Statements

The December 31, 2007 financial statements of the company were approved by the board of directors on March 5, 2008.

32. Subsequent Event

With respect to the oil spill accident involving the Hebei tanker off the west coast of the Republic of Korea, the Company, upon its board of directors’ approval on February 29, 2008, announced a plan to contribute ￦100 billion to local development funds, separate from compensation of damages to be determined at the pending lawsuit. The announcement of said plan had no effect on financial statements as of December 31, 2007.

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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, 2007. 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, 2007, the Company’s IACS has been designed and is operating effectively as of December 31, 2007, 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, 2007, and we did not review management’s assessment of its IACS subsequent to December 31, 2007. 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 March 19, 2008

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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, 2007. 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, 2007, in all material respects, in accordance with the IACS standards. February 5, 2008 Seo Yoon Kim, Internal Accounting Control System Officer Jing Wan Kim, Chief Executive Officer and President

Documents

Samsung Heavy Industries Co., Ltd. · Samsung Heavy Industries Co., Ltd. Non-Consolidated Financial Statements ... Advance payments 1,769,943,738 980,508,653 1,886,531 1,045,096