MODEC, INC. and Subsidiaries

Consolidated Financial Statements
As of December 31, 2005 and 2004

MODEC, INC. and Subsidiaries

CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004ASSETS

Thousands of Japanese yen
2004
2005
CURRENT ASSETS:
Cash and time deposits
Accounts receivable – trade (Note 16)
Inventories (Note 2)
Short-term loans receivable (Note 16)
Short-term lease receivable
Deferred tax assets (Note 11)
Other current assets
Less- Allowance for bad debts
Total current assets
PROPERTY AND EQUIPMENT:
Buildings and equipment
VesselConstruction in progressLess- Accumulated depreciation

INTANGIBLE ASSETS (Note 4)
OTHER ASSETS:
Investment securities (Note 3)Long-term loans receivable fromunconsolidated subsidiaries and affiliatedcompanies (Note 16)
Long-term lease receivable
Deferred tax assets (Note 11)
Other investments
Less- Allowance for bad debts

Total assets

Thousands of
U.S. dollars
2005¥ 25,061,948
16,409,320
2,237,994
255,827
2,145,448
156,195
2,568,466(3,013)
48,832,185¥14,061,927
14,059,343
165,116
9,783,707
1,735,858
451,8662,448,341(5,392)42,700,766$212,263
138,980
18,955
2,167
18,171
1,323
21,754(26)
413,587

774,407
10,236,883
3,735,215(7,651,566)
7,094,939

695,591
11,744,758－(6,731,787)
5,708,562

6,558
86,702
31,636(64,805)
60,091

5,246,688

4,769,788

44,437

8,463,479

3,882,262

71,68228,289,633
5,043,801
1,345,512
388,817(6,400)43,524,842

1,745,350
6,273,428
1,081,245
366,038(6,400)13,341,923

239,601
42,71911,3963,292(54)368,636¥104,698,654¥66,521,039$886,751

The accompanying notes are an integral part of these balance sheets.

LIABILITIES AND SHAREHOLDERS’ EQUITY

Thousands of Japanese yen
2004
2005
CURRENT LIABILITIES:
Accounts payable - trade
Short-term loans payable (Notes 5 and 6)
Current portion of long-term loans payable(Note 5)

Accrued expenses
Income taxes payable (Note 11)
Provision for product warranty
Deferred tax liabilities (Note 11)
Other current liabilities
Total current liabilities

Thousands of
U.S. dollars
2005¥ 18,889,959
27,960,410¥10,255,786
12,663,619$159,989
236,8123,107,316
1,692,027
345,594504,574
725,719
3,205,519
56,431,118

6,652,649
1,280,488
1,517,446
322,184
238,298
1,979,190
34,909,660

26,3182,927
14,3304,274
6,147
27,149477,946

LONG-TERM LIABILITIES:Long-term loans payable (Note 5)
Severance and retirement benefits
For employees (Note 9)
For directors and corporate auditors
Deferred tax liabilities (Note 11)
Other long-term liabilities
Total long-term liabilities

6,478,169

6,345,467

54,867

113,839
120,9441,548,182
355,674
8,616,808

103,109104,980
1,378,991–
7,932,547

964
1,025
13,112
3,013
72,981MINORITY INTERESTS IN CONSOLIDATEDSUBSIDIARIES

1,807,072

1,393,822

15,305

12,391,600
13,121,672
10,434,178
865,195
1,031,558(547)
37,843,656

7,159,000
7,675,150
7,531,745
575,834(656,489)(230)
22,285,010

104,951
111,135
88,373
7,328
8,737
(5)
320,519¥104,698,654¥66,521,039$886,751

CONTINGENT LIABILITIES (Note 12)
SHAREHOLDERS’ EQUITY (Note 7):
Common stock;
Authorized – 102,868,000 shares
Issued – 37,408,000 shares and 34,008,000
shares at December 31, 2005 and 2004,
respectively
Capital surplus
Retained earnings
Net unrealized holding gains on securities
Foreign currency translation adjustments
Less- Treasury stock at cost
Total liabilities and shareholders’equityMODEC, INC. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2005 and 2004

Thousands of Japanese yen
2004
2005
SALES
COST OF SALES (Note 10)
Gross profit

Thousands of
U.S. dollars
2005¥71,614,166
63,053,293
8,560,873¥51,891,763
44,553,251
7,338,512$606,540
534,033
72,507SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
Operating profit

4,665,333
3,895,540

3,559,153
3,779,359

39,51432,993OTHER INCOME (EXPENSES):Interest income and dividend income
Interest expense
Foreign exchange gain (loss), net
Equity in earnings of affiliates
Depreciation of idle assets
Gain from cancellation of derivative transaction
Loss on sale of property and equipment, net
Loss on bad debt
Other, net
Total other income (expenses)

1,287,727(1,261,365)
580,714763,396－－－－
142,046
1,512,518

842,171(685,374)(420,480)
128,327(229,126)
119,056(44,612)(242,808)
167,744(365,102)

10,907(10,683)
4,918
6,466
－
－
－
－
1,203
12,811

INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS

5,408,058

3,414,257

45,804

INCOME TAXES (Note 11):
Current
Adjustment to prior years
Deferred

1,010,252－
841,9032,290,352(489,908)(1,174,044)

8,556
－
7,131

INCOME BEFORE MINORITY INTERESTS

3,555,903

2,787,857

30,117

342,901

557,364

2,904¥ 3,213,002¥ 2,230,493$ 27,213

MINORITY INTERESTSNET INCOME

Japanese yen
Net income per share (Note 8)
Dividends per share¥93.46¥10.00¥72.77¥7.50

The accompanying notes are an integral part of these statements.

U.S. dollars
$0.79
$0.08

MODEC, INC. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended December 31, 2005 and 2004

Balance, December 31, 2003
Issuance of new shares
Net income
Cash dividends paid
Bonuses paid to directors
Change for the year
Purchases of treasury stock
Balance, December 31, 2004
Issuance of new shares
Net income
Cash dividends paid
Bonuses paid to directors
Change for the year
Purchases of treasury stock
Balance, December 31, 2005

Balance, December 31, 2004
Issuance of new shares
Net income
Cash dividends paid
Bonuses paid to directors
Change for the year
Purchases of treasury stock
Balance, December 31, 2005

Number ofshares ofcommon stock
29,992,000
4,016,000–––––
34,008,000
3,400,000–––––
37,408,000

Commonstock¥4,659,200
2,499,800–––––
7,159,000
5,232,600–––––¥12,391,600$60,634
44,317–––––$104,951

Capitalsurplus¥5,175,350
2,499,800–––––
7,675,150
5,446,522–––––¥13,121,672

Thousands of Japanese yenNetunrealized
holding gains
Retainedearnings
on securities¥5,648,661¥337,398––
2,230,493–(337,409)–(10,000)––
238,436––
7,531,745¥575,834––
3,213,002–(297,569)–(13,000)––
289,361––¥10,434,178¥865,195

Foreigncurrencytranslation
adjustments¥ (638,583)––––(17,906)–(656,489)––––
1,688,047–¥1,031,558

Treasury
stock
–
–
–
–
–
–
¥(230)
(230)
–
–
–
–
–
(318)
¥ (547)$65,005
46,130–––––$111,135

Thousands of U.S. dollars$63,791$4,877––
27,213–(2,520)
–
(111)
–
–
2,451
–
–
$88,373$7,328$(5,560)––––
14,297–$8,737

$(2)
–
–
–
–
–
(3)
$(5)

The accompanying notes are an integral part of these statements.

MODEC, INC. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWSFor the years ended December 31, 2005 and 2004

Thousands of Japanese yen
2004
2005
CASH FLOWS FROM OPERATINGACTIVITIES:
Income before income taxes and minority
interests
Adjustments to reconcile income before income
taxes and minority interests to net cash
provided by operating activities:
Depreciation and amortization
Amortization of consolidated differences
Provision for (reversal of) allowance for bad
debts
Provision for severance and retirement
benefits for employees
Provision for severance and retirement
benefits for directors and corporate auditors
Provision for product warrantyInterest income and dividend income
Interest expense
Foreign exchange loss
Equity in earnings of affiliates
Gain from cancellation of derivativetransaction
Loss on sale of property and equipment, net
Changes in assets and liabilities:
Decrease (Increase) in– Accounts receivable - trade– Inventories– Consumption taxes refund receivable
Increase (Decrease) in– Accounts payable - trade
Bonuses paid to directors
Other, net
Interest and dividend received
Interest paid
Income taxes refund
Income taxes paid
Net cash provided by operating activities

Thousands of
U.S. dollars
2005¥ 5,408,058¥3,414,257$45,804

1,116,419
26,486635,640
26,4869,456
224(2,379)

2,101

(20)

10,7307,250

91

15,964
139,505(1,287,727)
1,261,365
131,722(763,396)

54,556
297,870(842,171)685,374
96,030(128,327)

135
1,182
(10,906)
10,683
1,116(6,466)－－(119,056)
44,612－－

1,407,818(2,072,878)(51,674)

3,559,708
1,708,890
46,863

11,924(17,556)(438)

7,614,825(13,000)
1,424,803
14,366,641
1,132,849(1,513,965)－(2,107,517)
11,878,008(856,050)(10,000)
1,002,337
9,626,370
619,103(426,204)
489,908(685,858)
9,623,319

64,494(110)
12,066
121,679
9,595(12,823)－(17,850)
100,601

Thousands of
U.S. dollars
2005

Thousands of Japanese yen
2004
2005
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment andintangible assets
Proceeds from sale of property and equipment
and intangible assets
Purchases of investment securities
Purchases of investments in affiliates
Decrease (Increase)in short-term loans
receivable
Disbursement of long-term loans receivableCollection of long-term loans receivable
Purchase of investment subsidiaries
Other, net
Net cash used in investing activities
CASH FLOWS FROM FINANCING
ACTIVITIES:
Increase in short-term loans payable
Proceeds from long-term loans payable
Repayment of long-term loans payable
Issuance of shares
Cash dividends paid to minority interests
Cash dividends paid
Other, net
Net cash provided by financing activities
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS
NET INCREASE IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
INCREASE IN CASH AND CASH
EQUIVALENTS DUE TO ADDITIONALCONSOLIDATED SUBSIDIARIESCASH AND CASH EQUIVALENTS AT END
OF YEAR(4,399,785)(3,785,888)(37,264)－－(2,613,862)

1,486,812(100,000)(1,624,995)－－(22,138)

10,699,185(25,660,021)
426,203－(1,500)(21,549,780)(3,395,875)(4,504,064)
2,521,307(4,999,680)－(14,402,383)

90,617(217,329)
3,610
－
(13)
(182,517)

13,853,314
3,075,259(8,225,701)
10,679,122(81,202)(297,379)(316)
19,003,097

4,244,338
156,300(3,816,005)
4,999,600(84,402)(334,960)(230)
5,164,641

117,331
26,046(69,668)
90,447(688)(2,518)(2)
160,948

1,668,696(119,367)

14,133

11,000,021

266,210

93,165

14,061,927

13,795,717

119,098－

0－¥25,061,948¥14,061,927$212,263

The accompanying notes are an integral part of these statements.

MODEC, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Significant Accounting and Reporting Policies(a) Basis of Presenting Consolidated Financial Statements
The accompanying consolidated financial statements of MODEC, Inc. (the “Company) havebeen prepared in accordance with the provisions set forth in the Japanese Securities andExchange Law and its related accounting regulations, and in conformity with accounting
principles generally accepted in Japan, which are different in certain respects as to applicationand disclosure requirements of International Financial Reporting Standards.
The accounts of overseas subsidiaries are based on their accounting records maintained inconformity with generally accepted accounting principles prevailing in the respective
countries of domicile. The accompanying consolidated financial statements have been
restructured and translated into English (with some expanded descriptions and the inclusion of
consolidated statements of shareholders' equity) from the consolidated financial statements of
the Company prepared in accordance with Japanese GAAP and filed with the appropriate
Local Finance Bureau of the Ministry of Finance as required by the Securities and Exchange
Law. Some supplementary information included in the statutory Japanese language
consolidated financial statements, but not required for fair presentation, is not presented in theaccompanying consolidated financial statements.
The translations of the Japanese yen amounts into U.S. dollars are included solely for theconvenience of readers outside Japan, using the prevailing exchange rate at December 31,
2005, which was ¥118.07 to U.S. $1. The convenience translations should not be construed as
representations that the Japanese yen amounts have been, could have been, or could in the
future be, converted into U.S. dollars at this or any other rate of exchange.
(b) Principles of Consolidation and Equity Method
The accompanying consolidated financial statements include the accounts of the Company
and 19 of its subsidiaries for the year ended December 31, 2005 and 15 of its subsidiaries forthe year ended December 31, 2004. Material inter-company balances, transactions and profits
have been eliminated in consolidation.
Investments in all of significant unconsolidated subsidiaries and affiliates, which were 10
companies for the year ended December 31, 2005 and 5 companies for the year ended
December 31, 2004, were accounted for by using the equity method.

The consolidated financial statements are required to include the accounts of the Company
and significant companies that are controlled by the Company through substantial ownershipof more than 50% of the voting rights or through ownership of a high percentage of the voting
rights, even if it is equal to or less than 50%, and existence of certain conditions evidencing
control by the Company of decision-making bodies of such companies.
Investments in significant unconsolidated subsidiaries and affiliates, of which the Company
has ownership of 20% or more but less than or equal to 50%, and of 15% or more and lessthan 20% and can exercise significant influences over operating financial policies of investees,
have been accounted for by the equity method.
All consolidated subsidiaries have the same balance sheet date, December 31, corresponding
with that of the Company.
(c) Valuation of Assets and Liabilities of Subsidiaries
In the elimination of investments in subsidiaries, the assets and liabilities of the subsidiaries,
including the portion attributable to minority shareholders, were evaluated using the fair value
at the time the Company acquired the control of the respective subsidiaries.
(d) Consolidated Differences
The differences between cost and net assets acquired of consolidated subsidiaries andaffiliated companies which are accounted for by using the equity method are recognized as
consolidated differences and amortized using the straight-line method over estimated useful
lives, except that these differences recognized in a consolidated subsidiary in the U.S.A. aretreated in accordance with U.S. GAAP.
(e) Securities
In accordance with the Japanese accounting standard for financial instruments, all companies
required to examine the intent of holding each security and classify those securities as (a)securities held for trading purposes (hereafter, “trading securities”), (b) debt securities
intended to be held to maturity (hereafter, “held-to-maturity debt securities”), (c) equity
securities issued by unconsolidated subsidiaries and affiliated companies, and (d) all othersecurities that are not classified in any of the above categories (hereafter, “available-for-salesecurities”).
Based on the examination of the intent of holding, the Company classifies its securities as
equity securities issued by unconsolidated subsidiaries and affiliated companies and available-for-sale securities. Available-for-sale securities maturing within one year from the balance
sheet date are included in current assets. Other securities are included in investments
securities. The Company does not have trading securities or held-to-maturity debt securities.
Equity securities issued by unconsolidated subsidiaries and affiliated companies that are notaccounted for by equity method are stated at moving-average cost. Available-for-salesecurities with available fair market values are stated at fair market value as of balance sheet
dates. Unrealized gains and losses on these securities are reported, net of applicable income
taxes, as a separate component of shareholders’ equity. Realized gains and losses on sale ofsuch securities are computed using moving-average cost. Available-for-sale securities without
available fair market values are stated at moving-average cost.
(f) Inventories
Both raw materials and costs of uncompleted contracts are stated at cost, determined on an
individual project basis.
(g) Property and Equipment
Property and equipment are carried substantially at cost. Depreciation of Floating Production
Storage & Offloading (“FPSO”) and Floating Storage & Offloading (“FSO”), owned by the
consolidated overseas subsidiaries are calculated by using the straight-line method based on
their lease term or their economic useful lives.
Depreciation of property and equipment other than FPSO and FSO is calculated as follows.
The Company depreciates property and equipment using the declining-balance method basedon their useful lives and residual value prescribed by the Japanese corporation tax laws andregulations, except that buildings, acquired after March 31, 1998, are depreciated using thestraight-line method. Consolidated overseas subsidiaries depreciate property and equipmentusing the straight-line method based on their useful lives.
(h) Intangible Assets
The Company amortizes software costs using the straight-line method over the estimateduseful life (5 years), and amortizes intangible assets using the straight-line method based on
their useful lives and residual value prescribed by the Japanese corporation tax laws andregulations.

Goodwill of a consolidated overseas subsidiary is amortized using the straight-line method
based on the terms of an agreement.
Mining rights of a consolidated overseas subsidiary is amortized using the production method
based on the amount of production forecast.
(i) Impairment of Fixed Assets
Effective January 1, 2005, The Company adopts early the new accounting standard for
impairment of fixed assets (“Opinion Concerning Establishment of Accounting Standard for
Impairment of Fixed assets” issued by the Business Accounting Deliberation Council on
August 9, 2002) and the implementation guidance for the accounting standard for impairmentof fixed assets (the Financial Accounting Standard Implementation Guidance No.6 issued by
the Accounting Standards Board of Japan on October 31, 2003).
As a result of adopting the new standard and the guidance, there is no effect on the
consolidated financial statements.
(j) Allowance for Bad Debts
The Company provides for a sufficient allowance for bad debts to cover probable losses oncollection by estimating uncollectable amounts individually in addition to amounts forpossible losses based on actual losses on collection in the past.
(k) Accrued Employees’ Bonuses
The Company accrues employees’ bonuses based on the estimated amounts to be paid in thesubsequent period.
(l) Provision for Product Warranty
Provision for product warranty is provided based on the estimated amounts for covering theprobable product warranties.
(m) Severance and Retirement Benefits for Employees
The Company has an unfunded lump-sum severance and retirement payment plan for
employees. The Company and some overseas consolidated subsidiaries also adopt defined
contribution pension plans. Under the plan, employees whose employment is terminated or
who retire are entitled to benefits which are, in general, determined on the basis of length ofservice and current basic salary at the time of termination or retirement. If the termination isinvoluntary, the employees are generally entitled to larger benefits than in the case ofvoluntary termination or retirement.
The Company provides allowance for employees’ severance and retirement benefits based on
the estimated amount of projected benefit obligation at the balance sheet date.
(n) Severance and Retirement Benefits for Directors and Corporate Auditors
Subject to shareholders’ approval, directors and corporate auditors customarily receive lumpsum payments upon retirement under an unfunded retirement allowances plan.
The Company records severance and retirement benefits for directors and corporate auditors at
the amounts payable if all directors and corporate auditors voluntarily terminated theiremployment at the balance sheet date.
(o) Translation of Foreign Currency Accounts
Foreign currency transactions are translated into Japanese yen using the exchange rate ineffect at the time of each transaction or at the applicable exchange rates under forward
exchange contracts.
Assets and liabilities denominated in foreign currencies are translated into Japanese yen at the
year-end exchange rate, and the resulting gains or losses are included in other income(expenses) in the statement of income.
Financial statements of consolidated overseas subsidiaries are translated into Japanese yen
using the exchange rates prevailing at the end of each fiscal year, except the exchange rates in
effect at the date of transactions are used for shareholders’ equity. The Company records
foreign currency translation adjustments in the shareholders’ equity.
(p) Finance Lease Transactions without Transfer of Ownership
Finance lease transactions, other than those that transfer ownership of the leased property to
the lessee, are accounted for in the same way as operating lease transactions.
(q) Derivative Transactions and Hedge Accounting
Derivative financial instruments of the Company are stated at fair value and gains or losses arerecognized for changes in the fair value unless derivative financial instruments are used forhedging purposes.

If derivative financial instruments are used as hedges and meet certain hedging criteria, theCompany defers recognition of gains or losses resulting from changes in fair value ofderivative financial instruments until the related losses or gains on the hedged items arerecognized.
However, in cases where forward foreign exchange contracts are used as hedges and meetcertain hedging criteria, forward foreign exchange contracts and hedged items are accounted
for in the following manner.
1) If a forward foreign exchange contract is executed to hedge existing foreign currency
receivables or payables,a) the difference, if any, between the Japanese yen amount of the hedged foreign
currency receivable or payable translated using the spot rate at the inception date of
the contract and the book value of the receivable or payable is recognized in theincome statement in the period which includes the inception date, andb) the discount or premium on the contract (that is, the difference between the Japanese
yen amount of the contract translated using the contracted forward rate and thattranslated using the spot rate at the inception date of the contract) is recognized over
the term of the contract.
2) If a forward foreign exchange contract is executed to hedge a future transaction
denominated in a foreign currency, the future transaction will be recorded using thecontracted forward rate, and no gains or losses on the forward foreign exchange contract
are recognized.
Also, if interest rate swap contracts are used as hedges and meet certain hedging criteria, thenet amount to be paid or received under the interest rate swap contract is added to or deductedfrom the interest on the assets or liabilities for which the swap contract was executed.
Some consolidated overseas subsidiaries adopt hedge accounting in accordance with
U.S.GAAP.
(r) Revenue Recognition
The Company recognizes revenues on contracts by the completed contract method, except for
those items whose contract amount is over 1 billion yen and whose term of construction isover one year in which cases the percentage of completion method is used.
The U.S.A. consolidated subsidiary recognizes revenues on all contracts by the percentage ofcompletion method.

(s) Income Taxes
The Company provides income taxes at the amounts currently payable based on taxable
income for tax purposes that may be different from income for the accounting purposes. The
Company recognizes tax effects of temporary differences between the carrying amounts ofassets and liabilities for tax and financial reporting purposes. The asset and liability approachis used to recognize deferred tax assets and liabilities for the expected future tax consequencesof temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
(t) Cash Flow Statement
In preparing the consolidated statements of cash flows, cash on hand, readily available
deposits and short-term highly liquid investments with maturities not exceeding three months
at the time of purchase are considered to be cash and cash equivalents.
Reconciliations of cash and time deposits shown in the consolidated balance sheets and cash
and cash equivalents in the consolidated statements of cash flows as of December 31, 2005
and 2004 were as follows:
Thousands ofJapanese Yen
Cash and time deposits
Cash and cash equivalents

2005¥25,061,948¥25,061,948

2004¥14,061,927¥14,061,927

Thousands of
U.S. dollars
2005$212,263$212,263(u) Reclassification
Certain reclassifications have been made to the previously reported fiscal 2004 amounts toconform to fiscal 2005 presentation. These reclassifications had no effect on previously
reported net income or total shareholders’ equity.

2. Inventories
Inventories as of December 31, 2005and 2004 consisted of the following:Thousands ofJapanese Yen
Raw materials
Costs of uncompleted contracts

2005¥1,836,861
401,133¥2,237,994

2004－¥165,116¥165,116

Thousands of
U.S. dollars
2005$15,557
3,398$18,955

3. Marketable Securities and Investment Securities(a) The following tables summarize acquisition costs, book values (fair values) of securities withavailable fair values as of December 31, 2005and 2004
Thousands of Japanese Yen
Acquisition
Book value
Differences
cost

2005
Available-for-sale securities:
Securities with book values
exceeding acquisition costs:
Equity securities
Total

2004：
Available-for-sale securities:
Securities with book values
exceeding acquisition costs:
Equity securities
Total

2005：
Available-for-sale securities:
Securities with book values
exceeding acquisition costs:
Equity securities
Total¥310,587¥310,587¥1,777,020¥1,777,020¥1,466,433¥1,466,433

Thousands of Japanese Yen
Acquisition
Book value
Differencescost¥310,587¥310,587¥1,286,576¥1,286,576¥975,989¥975,989

Thousands of U.S. dollars
Acquisition
Book value
Differencescost$2,631$2,631$15,051$15,051$12,420$12,420(b) The following table summarizes book values of securities with no available fair values as ofDecember 31, 2005and 2004

Thousands of Japanese Yen
2004
2005
Available-for-sale securities:
Unlisted equity securities
Investments in non-consolidated
subsidiaries and affiliates:
Total

Thousands of
U.S. dollars
2005¥ 200,000¥ 200,000$ 1,694

6,486,459¥6,686,459

2,395,685¥2,595,685

54,937$56,631

4. Consolidated Differences
Consolidated differences included in intangible assets as of December 31, 2005 and 2004 were
¥3,866,433 thousand ($32,747 thousand) and ¥3,768,431 thousand, respectively.

5. Loans Payable
Short-term loans payable represent notes payable to banks due generally in twelve months andbearing an average interest rate of 5.1% and 2.1% as of December 31, 2005 and 2004,
respectively.
Long-term loans payable as of December 31, 2005 and 2004 are summarized below:

Thousands of
U.S. dollars

Thousands ofJapanese Yen

Loans from banks and others,
at average rate of 4.1% due through 2008
Less: Current portion included in current
liabilities

2005

2004

2005

¥9,585,485¥12,998,116$81,185(3,107,316)(6,652,649)(26,318)¥6,478,169¥6,345,467$54,867

The aggregate annual maturities of long-term loans payable are summarized below:
Year ended December 31,
2006
2007
2008

Thousands ofJapanese Yen

Thousands of
U.S. dollars¥ 3,107,316
4,125,355
2,352,814¥9,585,485$ 26,318
34,39019,927$81,185

6. Lending Commitment
The Company has a commitment line provided by co-financing consisted of five correspondent
financial institutions for the purpose of efficient providing operating funds. The commitment line
amount is $150,000 thousand, and the amount of loans as of December 31, 2005 is $48,000
thousand.

7. Shareholders’ Equity
Under the Commercial Code of Japan, the entire amount of the issue price of shares is required tobe accounted for as capital, although a company may, by resolution of its Board of Directors,
account for an amount not exceeding one-half of the issue price of the new shares as additional
paid-in capital, which is included in capital surplus.
The Commercial Code provides that an amount equal to at least 10% of cash dividends and othercash appropriations shall be appropriated and set aside as a legal earnings reserve until the total
amount of legal earnings reserve and additional paid-in capital equals 25% of common stock. The
legal earnings reserve and additional paid-in capital may be used to eliminate or reduce a deficit
by resolution of the shareholders' meeting or may be capitalized by resolution of the Board of
Directors. On condition that the total amount of legal earnings reserve and additional paid-in
capital remains being equal to or exceeding 25% of common stock, they are available for
distribution by the resolution of shareholders' meeting. Legal earnings reserve is included inretained earnings in the accompanying financial statements.
The maximum amount that the Company can distribute as dividends is calculated based on the
non-consolidated financial statements of the Company in accordance with the Commercial Code.
The Company issued 1,774,000 of common stock by public offering on December 13, 2005 and1,626,000 shares of common stock to Mitsui Engineering & Shipbuilding Co., Ltd., the parent
company, on December 13, 2005, respectively. Consequently, common stock increased from
¥7,159,000 thousand to ¥12,391,600 thousand ($104,951 thousand), and additional paid-in capitalincreased from ¥7,675,150 thousand to ¥13,121,672 thousand ($111,135 thousand).

8. Per Share Data
Net income per share is calculated based on the weighted average number of shares of common
stock outstanding during the fiscal year.
Diluted net income per share reflects the effect of potential dilution that could occur if securities orother contracts to issue common stock were exercised or converted into common stock. There isno outstanding potential common stock for the year ended December 31, 2005 and 2004.

9. Severance and Retirement Benefits for Employees
The company has an unfunded lump-sum severance and retirement payment plan for employees.
The Company and some overseas consolidated subsidiaries also adopt defined contribution
pension plans. In accordance with the Japanese accounting standard for employees’ severance andpension benefits, a “simpler method” can be adopted to calculate severance and retirements
benefits employees if the number of employees is less than 300. Therefore the Company adopts
the “simpler method”, and records severance and retirement benefits for employees at the amounts
payable if all employees voluntarily terminated their employment at the balance sheet date. Noneof the consolidated subsidiaries have any termination and retirement allowances plan for
employees.
The severance and retirement benefits for employees included in the liability section of theconsolidated balance sheets as of December 31, 2005 and 2004 consisted of the following:Thousands of Japanese Yen

Projected benefit obligation
Severance and retirement benefits for
employees

Thousands of
U.S. dollars

2005

2004

2005

¥113,839¥103,109$964¥113,839¥103,109$964

Severance and retirement benefit expenses included in the consolidated statements of income forthe years ended December 31, 2005 and 2004 were comprised of the following:Thousands of Japanese Yen

Thousands of
U.S. dollars

2005

2004

2005

Service costs – benefits earned during the year

¥22,638¥16,109$192

Others

11,180¥33,818

－

94
$286

Severance and retirement benefit expenses¥16,109

10. Research and Development Costs
Costs relating to research and development activities charged to income for the years ended
December 31, 2005 and 2004 are ¥17,108 thousand ($145 thousand) and ¥6,828 thousand,respectively.

11. Income Taxes
The normal statutory income tax rate in Japan arising out of the aggregation of corporate,
enterprise and inhabitants taxes are 41% for the year ended December 31, 2005 and 42% for theyear ended December 31, 2004.

The following table summarizes the significant differences between the statutory tax rate and theCompany and its consolidated subsidiaries’ effective tax rate for financial statement purposes forthe years ended December 31, 2005 and 2004:
2005

2004

41.0%

42.0%

Non-deductible expenses for tax purposes

0.3

Additional payment or refund based on tax examination
Offset of dividends from overseas consolidated subsidiaries
Taxation on revenue basis of foreign subsidiaries
Deductible income excluded from accounting purposes
Deductible expenses excluded from accounting purposes
Income of foreign subsidiaries taxed at lower thanJapanese normal rate
Credit for foreign taxes
Tax loss carry forward
Equity in earning of affiliates
Realization of tax loss carry forward
Others

0.1
6.2
4.8
–
1.9

0.5
(15.4)

Statutory tax rate

Effective tax rate

–
3.8
2.1
–

(8.9)
(5.9)
1.8
(5.8)
(2.1)
0.8

(10.3)
–
2.8
(1.6)
(4.8)
(0.8)

34.2%

18.3%

Significant components of deferred tax assets and liabilities as of December 31, 2005 and 2004
were as follows:
Thousands ofJapanese Yen
2004
2005
Deferred tax assets:
Current assets:
Enterprise tax payable
Accrued employees’ bonuses
Provision for product warranty
Undistributed profits in a tax havenTax loss carry forwardCredit for foreign taxes
Foreign exchange losses
Others
Sub total
Offset to deferred tax liabilities (short-term)
Total
Fixed assets:
Unrealized inter-company profit on fixed
assetsTax loss carry forward

Thousands of
U.S. dollars
2005－¥ 19,469
31,152－
194,534
156,440
22,07728,318451,990(295,795)
156,195¥105,959
18,807－
31,110－－288,4447,546
451,866－
451,866

－
$165
264
－
1,648
1,325
187
239
3,828
(2,505)
1,323

868,100
273,698

954,623
134,482

7,352
2,318

Depreciation
Severance and retirement benefits for
employees
Others
Sub total
Valuation allowance
Offset to deferred tax liabilities (long-term)
Total
Total deferred tax assets
Deferred tax liabilities:
Current liabilities:
Reduction of tax rate in foreign subsidiaries
Refund repair costs
Foreign exchange gains
Others
Sub total
Offset to deferred tax assets (short-term)
TotalLong-term liabilities:
Finance lease
Depreciation
Net unrealized holding gains on securities
Gain from forgiveness of debt
Others
Sub total
Offset to deferred tax assets (long-term)
Total
Total deferred tax liabilities
Net deferred tax liabilities

280,649

117,766

2,377

44,807
270,467
1,737,721(295,886)(96,323)
1,345,512¥1,501,707

38,541
112,299
1,357,711(134,482)(141,984)
1,081,245¥1,533,111

380
2,291
14,718(2,506)(816)
11,396$12,719¥ (121,229)(81,412)(606,263)(212,610)(1,021,514)
295,795(725,719)¥ (102,045)(79,033)－(57,220)(238,298)－(238,298)$(1,027)(690)(5,135)(1,800)(8,652)
2,505(6,147)(962,548)－(601,237)－(80,720)(1,644,505)
96,323(1,548,182)(2,273,901)¥(772,194)(986,488)(36,150)(400,156)(87,417)(10,764)(1,520,975)
141,984(1,378,991)(1,617,289)¥(84,178)(8,152)－(5,092)－(684)(13,928)816(13,112)(19,259)$(6,540)

12. Contingent Liabilities and Commitments
As of December 31, 2005 and 2004, the Company was contingently liable for the following:Thousands ofJapanese Yen
Guarantees of bank loans and otherindebtedness

2005

2004

¥510,450¥9,745,928

Thousands of
U.S. dollars
2005$4,323

13. Leases(a) As Lesseei)Information on a “as if capitalized” basis of leased property such as acquisition cost,
accumulated depreciation, obligations under finance leases and depreciation equivalent offinance leases that do not transfer ownership of the leased property to the lessee for theyears ended December 31, 2005 and 2004, were as follows:

2005:

Thousands of Japanese Yen
Buildings
andTotal
equipment

Acquisition cost
Accumulated depreciation¥9,700(8,070)¥ 1,630

Net leased property

2004:

Thousands of Japanese Yen
Buildings
andTotal
equipment

Acquisition cost
Accumulated depreciation¥9,700(5,250)¥ 4,450

Net leased property

2005:¥9,700(8,070)¥ 1,630¥9,700(5,250)¥ 4,450

Thousands of U.S. dollars
Buildings
andTotal
equipment

Acquisition cost
Accumulated depreciation

$82
(68)
$ 14

Net leased property

$82
(68)
$ 14

ii) Obligations under finance leases:
Thousands ofJapanese Yen
Due within one year
Due after one year
Total

Thousands of
U.S. dollars

2005

2004

2005

¥ 906
942
¥1,848¥ 3,094
1,848¥4,942$88$16iii) Annual lease payments and depreciation equivalent:Thousands ofJapanese Yen
Annual lease payments
Depreciation equivalentInterest expense equivalentThousands of
U.S. dollars

2005

2004

2005

¥3,0942,820
174¥5,084
4,653
380

$26
24
1

Depreciation equivalent is computed by a straight-line method over the lease period withno residual value. The difference between total lease payments and acquisition costs
under finance leases is recognized as interest expense equivalent, which is allocated to
relevant accounting period based on the interest method.
(b) As Lessor
Future lease receivables from operating lease transactions as of December 31, 2005 and 2004,
were as follows:
Thousands ofJapanese Yen
Due within one year
Due after one year
Total

Thousands of
U.S. dollars

2005

2004

2005

¥1,474,165
9,731,307¥11,205,472¥754,408–¥754,408$12,486
82,419$94,905

14. Derivative Transactions of the Company and its Consolidated Subsidiaries
The Company and its consolidated subsidiaries utilize forward foreign currency contracts in orderto hedge currency fluctuation risks arising from export of products in addition to hedging throughincreases in overseas production and overseas procurement of materials.
The Company and its consolidated subsidiaries also utilize interest rate swaps as derivativetransactions in order to hedge interest rate risks of bonds and loans payable.
As the derivative transactions are made solely with leading financial institutions, the Company andits consolidated subsidiaries do not expect any credit risks.
The Company follows its internal regulations for derivatives, which stipulates the policy,
objective, scope, organization, procedures, and financial institutions to deal with, and has areporting system for derivative transactions reflecting proper internal control functions.

The following summarizes hedging derivative financial instruments used and items hedged:
Hedging instruments:
Forward foreign exchange contracts
Currency swap contracts
Interest rate swap contracts

Hedged items:
Foreign currency receivables and payables
including future transactions
Foreign currency receivables and payables
Foreign currency bonds and loans payable

The Company evaluates hedge effectiveness on a semi-annual basis by comparing the cumulativechanges in cash flows from or the changes in fair value of hedged items with the corresponding
changes in the hedging derivative instruments.
Also, if interest rate swap contracts are used as hedges and meet certain hedging criteria, the net
amount to be paid or received under the interest rate swap contract is added to or deducted fromthe interest on the assets or liabilities for which the swap contract was executed.
Some consolidated overseas subsidiaries adopt hedge accounting in accordance with U.S.GAAP.
The following tables summarize market value information as of December 31, 2005 and 2004 of
derivative transactions for which hedge accounting has not been applied:

2005:
Currency related derivatives:
Forward contracts:
To sell U.S. dollars

Thousands of Japanese Yen
Notional amountDue after
Marketone year
value
Total

¥5,316,056–¥5,348,855

2004:

Thousands of Japanese Yen
Notional amountDue after
Marketone year
value
Total

Currency related derivatives:
Forward contracts:
To sell U.S. dollars¥320,612–¥310,592

Unrealized
gain (loss)(¥34,986)(¥34,986)

Unrealized
gain (loss)¥10,020¥10,020

2005:

Thousands of U.S. dollars
Notional amountDue after
Marketone year
value
Total

Currency related derivatives:
Forward contracts:
To sell U.S. dollars$45,025–

Unrealized
gain (loss)($296)($296)$45,302

15. Segment Information
Industry segment information for the years ended December 31, 2005 and 2004 is not disclosed
because the Company and its consolidated subsidiaries operate a single business relevant tofloating production facilities.
Geographical segment information by area for the years ended December 31, 2005 and 2004 is asfollows:
Thousands of Japanese Yen

Japan

Asia

CentralandSouth
America

Sales:
Outside customers
Inter segment¥19,314,068
4,588,182¥ 8,416,882–¥ 2,497,624–¥41,385,592
1,107,069

Total

23,902,250

8,416,882

2,497,624

42,492,661–

77,309,417(5,695,251)

71,614,166

Operating expenses

23,517,371

6,726,316

1,406,035

41,399,583¥ 32,814

73,082,119(5,363,493)

67,718,626

Operating profit¥

384,879

1,690,566

1,091,589

1,093,078(32,814)4,227,298(331,758)

3,895,540

Assets¥72,208,210¥13,592,948¥12,295,612¥20,747,989 ¥1,921,812¥120,766,571¥ (16,067,917)¥104,698,654

2005:

North
America

Total

Corporate
andElimination

Consolidated––¥71,614,166
5,695,251–¥ (5,695,251)¥ 71,614,166–

OthersThousands of Japanese Yen

Japan

Asia

CentralandSouth
America

Sales:
Outside customers
Inter segment¥18,328,752
1,108,790¥4,437,888
51,991¥ 2,450,724–¥26,674,399
943,855––¥51,891,763
2,104,636–¥ (2,104,636)¥51,891,763
–

Total

19,437,542

4,489,879

2,450,724

27,618,254–

53,996,399(2,104,636)

51,891,763

Operating expenses

17,943,502

3,263,683

1,200,960

27,798,730–

50,206,875(2,094,471)

48,112,404

Operating profit¥ 1,494,040¥1,226,196¥ 1,249,764¥ (180,476)–¥ 3,789,524¥(10,165)¥3,779,359

Assets¥42,165,399¥10,179,518¥12,555,986¥14,280,875¥3,781¥79,185,559¥(12,664,520)¥66,521,039

2004:

North
America

Others

Total

Corporate
andElimination

Consolidated

Thousands of U.S. dollars
CentralandSouth
America

North
America

Japan

Asia

Sales:
Outside customers
Inter segment$163,582
38,859$71,287–$21,154–$350,517
9,377

Total

202,441

71,287

21,154

Operating expenses

199,181

56,96911,909Operating profit$ 3,260$14,318$ 9,245$

Assets$611,571$115,126$104,138

2005:

Others

Total

Corporate
andElimination

Consolidated––$606,540
48,236–$(48,236)$606,540–

359,894–

654,776(48,236)

606,540

350,636$ 278

618,973(45,426)

573,547

9,258$(278)$ 35,803$ (2,810)$ 32,993$175,726$16,278$1,022,839$136,088$886,751

The overseas sales of the Company and its consolidated subsidiaries for the years ended December
31, 2005 and 2004 consisted of the following:Thousands of Japanese Yen

2005:
Overseas sales

Asia

Oceania

North
America¥7,883,375, ¥20,821,801 ¥13,414,920 ¥28,880,883

Consolidated sales
The ratio of consolidated
sales

AfricaCentralandSouth
America

0

0

0

0

11.%

29.1%

18.8%

40.3%

Total

¥588,397 ¥71,589,376
0 ¥71,614,166
0.8%

100.0%

Thousands of Japanese Yen

2004:
Overseas sales

Asia

AfricaOceania¥4,613,475 ¥24,202,490 ¥17,098,572

CentralandSouth
America

North
America¥5,677,457¥288,294 ¥51,880,288

Total

Consolidated sales
The ratio of consolidated
sales¥51,891,763
8.9%

46.6%

33.0%

10.9%

0.6%

100.0%

Thousands of U.S. dollars

Asia

AfricaOceania

CentralandSouth
America

Overseas net sales$66,769$176,351$113,618$244,608$4,984$606,330

Consolidated sales

0

0

0

0

0

$606,540

11%

29.1%

18.8%

40.3%

0.8%

100.0%

2005:

The ratio of consolidated
sales

North
AmericaTotal

16. Related Party Transactions
Significant related party transactions and corresponding balances between the Company andunconsolidated subsidiaries and affiliates for the year ended December 31, 2005 and 2004 are as
follows:
Thousandsof U.S.
dollars

Thousands ofJapanese Yen
Related party
Jasmine FPSO PTE LTD.
Jasmine FPSO PTE LTD.
MODEC FPSO B.V.
MODEC FPSO B.V.
MODEC VENTURE 10
B.V.
MODEC VENTURE 11
B.V.
STYBARROW MV 16
B.V.
IMC-MODEC JV 1 PTE
LTD.

Transactions

2005

2004

－
－
¥53,643－－¥1,341,128
406,702
25,074
588,779
8,750,446

－
－
$454
－
－

Construction of FPSO－

15,311,351－

Construction of FPSO

8,458,765－

71,642－771,705－

Construction of FPSO
Guarantees of bank loans
Construction of FPSO
Guarantees of bank loans
Guarantees of bank loans

Disbursement of loans receivable

2005

Thousandsof U.S.
dollars

Thousands ofJapanese Yen
Related party
Jasmine FPSO PTE LTD.
Jasmine FPSO PTE LTD.
MODEC FPSO B.V.
MODEC FPSO B.V.
MODEC VENTURE 10
B.V.
MODEC VENTURE 10
B.V.
MODEC VENTURE 11
B.V.
MODEC VENTURE 11
B.V.
MODEC VENTURE 11
B.V.
IMC-MODEC JV 1 PTE
LTD.
ESPADORETE MV14
B.V.
PRA-1 MV 15 B.V.
STYBARROW MV 16
B.V.

Balances

2005

2004

2005

Accounts receivable - tradeLong-term loans receivable
Accounts receivable - tradeLong-term loans receivable
Short-term loans receivable－¥1,957,285
2,477,603
1,977,673－¥1,292,080－
3,070,588
1,745,350
3,344,539－$16,577
20,984
16,750－Long-term loans receivable

2,361,400－

20,000Accounts receivable - trade－

2,516,529－

Short-term loans receivable－

6,097,784－

Long-term loans receivable

1,289,324－

10,920

Short-term loans receivable－

771,705－

Long-term loans receivable

11,408,986－

96,629Long-term loans receivable
Accounts receivable - trade

8,642,724
7,029,790－－

73,20059,539