MODEC, INC. and Consolidated Subsidiaries

Consolidated Financial Statements
As of December 31, 2006 and 2005

MODEC, INC. and Consolidated Subsidiaries

CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005ASSETS

Thousands of Japanese yen
2005
2006
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
2006¥28,827,361
10,641,277
2,518,199
27,270,756
2,352,593
335,005
3,040,775(3,408)74,982,558¥ 25,061,948
16,409,320
2,237,994
255,827
2,145,448
156,195
2,568,466(3,013)
48,832,185$ 242,003
89,332
21,140228,935
19,7502,812
25,528(29)
629,471936,512
10,893,929
30,759(7,933,102)
3,928,098

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

7,862
91,453
258(66,597)
32,97615,119,857

5,246,688

126,930

11,127,213

8,463,479

93,412

13,782,627
2,565,483
1,339,169
507,647(2,400)29,319,739

28,289,633
5,043,801
1,345,512
388,817(6,400)43,524,842

115,704
21,537
11,243
4,261(21)
246,136¥123,350,252¥104,698,654$1,035,513

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

LIABILITIES AND NET ASSETS

Thousands of Japanese yen
2005
2006
CURRENT LIABILITIES:
Accounts payable – trade
Short-term loans payable (Notes 5 and 6)
Current portion of long-term loans payable

Thousands of
U.S. dollars
2006¥ 16,265,379
34,172,577¥ 18,889,959
27,960,410$ 136,546
286,875

2,955,844
5,025,737
1,842,845
791,649
7,941
3,182,919
64,244,891

3,107,316
1,692,027
345,594504,574
725,719
3,205,519
56,431,118

24,81442,191
15,4706,646
67
26,721
539,330

12,822,085

6,478,169

107,640

125,594
189,671
3,167,137
578,399
16,882,886

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

1,054
1,592
26,588
4,856
141,730

NET ASSETS :SHAREHOLDERS’ EQUITY (Note 7):
Common stock;
Authorized – 102,868,000 shares
Issued – 37,408,000 shares
Capital surplus
Retained earnings
Less- Treasury stock, at cost
Total shareholders’ equity

12,391,600
13,121,672
13,319,511(713)
38,832,070

12,391,600
13,121,672
10,434,178(547)
35,946,903

104,026
110,155
111,816(6)
325,991

ACCUMULATED GAINS FROM VALUATION
AND TRANSACTION ADJUSTMENTS
Net unrealized holding gains on securities
Foreign currency translation adjustments
Total valuation transaction and adjustments

780,351
1,237,041
2,017,392

865,195
1,031,558
1,896,753

6,551
10,385
16,936

1,373,013
42,222,475¥123,350,252

1,807,073
39,650,729¥104,698,654

11,526354,453$1,035,513(Note 5)

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

MINORITY INTERESTS IN CONSOLIDATEDSUBSIDIARIES
Total net assets
Total liabilities, net assets

MODEC, INC. and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2006 and 2005

Thousands of Japanese yen
2005
2006
SALES
COST OF SALES (Note 10)
Gross profit

Thousands of
U.S. dollars
2006¥99,149,334
89,767,807
9,381,527¥71,614,166
63,053,293
8,560,873$832,348
753,591
78,757SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
Operating profit

5,887,122
3,494,405

4,665,333
3,895,540

49,422
29,335OTHER INCOME (EXPENSES):Interest income and dividend income
Interest expense
Foreign exchange gain (loss), net
Equity in earnings of affiliates
Other, net
Total other income (expenses)

3,552,577(2,555,538)(1,106,006)
1,132,458
187,443
1,210,934

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

29,824(21,454)(9,285)
9,507
1,574
10,166

INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS

4,705,339

5,408,058

39,501

INCOME TAXES (Note 11):
Current
Deferred

2,636,783(1,511,569)

1,010,252
841,903

22,136(12,689)

INCOME BEFORE MINORITY INTERESTS

3,580,125

3,555,903

30,054274,376

342,901

2,303¥ 3,305,749¥ 3,213,002$ 27,751

MINORITY INTERESTSNET INCOME

Japanese yen
Net income per share (Note 8)
Dividends per share¥88.37¥12.50¥93.46¥10.00

The accompanying notes are an integral part of these statements.

U.S. dollars
$0.74
$0.10

MODEC, INC. and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETSFor the years ended December 31, 2006 and 2005
Thousands of Japanese yen
Accumulated gains from valuation andtransaction adjustments

Shareholders' equity

Commonstock

CapitalsurplusRetainedearnings

Treasurystock at
cost

Total
shareholders'equityNet
unrealized
holding gains
on securities

Foreigncurrencytranslation
adjustments

Totalvaluationtransaction
and otheradjustments

Balance at December 31,
2004

7,159,000

7,675,150

7,531,745(230)

22,365,665

575,834(656,489)(80,655)

Issuance of new shares

5,232,600

5,446,522

Minority
interests inconsolidated
subsidiaries

1,393,822

Total net assets

23,678,832

10,679,122－

10,679,122

Net income

3,213,002

3,213,002－

3,213,002

Cash dividends paid

(297,569)(297,569)－(297,569)

Bonuses paid to directors(13,000)(13,000)－(13,000)

－

－

－

(317)

－

(317)

289,361

289,361

1,688,047

1,688,047

Other

Purchases of treasury
stock

(317)

Increase due to changes
in fair market values ofavailable-for-sale securities－

Adjustments fromtranslation of foreign
currency financial
statements
Increase in minority
interests in consolidated
subsidiaries
Balance at December 31,
2005

289,361－

1,688,047－

12,391,600

13,121,672

10,434,178(547)

35,946,903

865,195

1,031,558－

413,250

413,250

1,896,753

1,807,072

39,650,728

Net income

3,305,749

3,305,749－

3,305,749

Cash dividends paid

(420,837)(420,837)－(420,837)

Bonuses paid to directors(18,000)(18,000)－(18,000)

Other

18,421

18,421－

18,421

(166)

－

(166)

(84,844)(84,844)

205,483

205,483

Purchases of treasury
stock

(166)

Decrease due to changes
in fair market values ofavailable-for-sale securities－

Adjustments fromtranslation of foreign
currency financial
statements
Increase in minority
interests in consolidated
subsidiaries
Balance at December 31,
2006(84,844)－

205,483－

12,391,600

13,121,672

13,319,511(713)

38,832,070

780,351

1,237,041－(434,059)(434,059)

2,017,392

1,373,013

42,222,475

The accompanying notes are an integral part of these statements.

Thousands of USD
Accumulated gains from valuation and transaction
adjustments

Shareholders' equity

Commonstock

Balance at December
31, 2005

104,026

Capitalsurplus110,155

Retainedearnings

87,594

Treasurystock at
cost

Total
shareholders'equityNet unrealized
holding gains
on securities

Foreigncurrencytranslation
adjustments

Totalvaluationtransaction
and otheradjustments(4)

301,771

7,263

8,660

15,923

Minority
interests inconsolidated
subsidiaries

15,170Total net assets

332,864

Net income

27,751

27,751－

27,751

Cash dividends paid

(3,533)(3,533)－(3,533)

(151)

(151)

－

(151)

155

155

－

155

(2)

－

(2)

(712)

(712)

1,725

1,725

Bonuses paid to
directors
Other
Purchases oftreasury stock(2)

Decrease due tochanges in fair market
values of available-forsale securities－

Adjustments fromtranslation of foreign
currency financial
statements－

Increase in minority
interests inconsolidated
subsidiaries－

Balance at December
31, 2006

104,026

110,155

111,816(6)

325,991

(712)

1,725

6,551

10,385－(3,644)(3,644)

16,936

11,526354,453

The accompanying notes are an integral part of these statements.

MODEC, INC. and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWSFor the years ended December 31, 2006 and 2005

Thousands of Japanese yen
2005
2006
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 consolidation goodwill
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 (gain) loss
Equity in earnings of affiliates
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 paid
Net cash provided by operating activities

Thousands of
U.S. dollars
2006¥ 4,705,339¥ 5,408,058$39,501

743,185
26,486

1,116,419
26,486

6,239
222(3,605)(2,379)(30)

11,755

10,73099

68,727283,263(3,552,577)
2,555,538(38,533)(1,132,458)

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

577
2,378
(29,824)
21,453(323)(9,507)

9,513,599(247,482)
34,7001,407,818(2,072,878)(51,674)

79,866(2,078)291(2,992,121)(18,000)
2,637,461
12,595,277
2,593,165(2,478,193)(994,213)
11,716,036

7,614,825(13,000)
1,424,803
14,366,641
1,132,849(1,513,965)(2,107,517)
11,878,008(25,119)(151)
22,142
105,736
21,769(20,804)(8,346)
98,355The accompanying notes are an integral part of these statements.

Thousands of Japanese yen
2005
2006

Thousands of
U.S. dollars
2006

CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment andintangible assets
Purchases of investments in affiliates
Disbursement of short-term loans receivable
Decrease (Increase)in short-term loans
receivable
Disbursement of long-term loans receivableCollection of long-term loans receivable
Purchases of investment in subsidiaries
Other, net
Net cash used in investing activities¥(1,384,713)(2,535,886)(12,572,739)¥(4,399,785)(2,613,862)－$(11,625)(21,288)(105,547)

6,124,975(32,315,137)
28,476,911(5,836,635)
0(20,043,224)

10,699,185(25,660,021)
426,203－(1,500)(21,549,780)

51,419(271,282)
239,061(48,998)(1)(168,261)

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

5,963,515
10,010,576(3,052,688)－(632,527)(420,837)(166)
11,867,873

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

50,06384,038(25,627)－(5,310)(3,533)(1)
99,630223,651

1,668,696

1,877

3,764,336

11,000,021

31,601

25,061,948

14,061,927

210,392

1,077

－

10

¥28,827,361¥25,061,948$242,003

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 ADDITIONAL
EXCLUSION OF CONSOLIDATEDSUBSIDIARIESCASH AND CASH EQUIVALENTS AT END
OF YEARThe accompanying notes are an integral part of these statements.

MODEC, Inc. and Consolidated 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,
2006, which was ¥119.12 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, 2006 and 2005. Material intercompany balances, transactions and profits have been eliminated in consolidation.
Investments in all of significant unconsolidated subsidiaries and affiliates, which were 14
companies for the year ended December 31, 2006 and 10 companies for the year ended
December 31, 2005, 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) Consolidation Goodwill
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
consolidation goodwill and amortized using the straight-line method over estimated useful
lives, except that goodwill recognized in a consolidated subsidiary in the U.S.A. is treated inaccordance 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 System (“FPSO”) and Floating Storage & Offloading System (“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) 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.
(j) Accrued Employees’ Bonuses
The Company accrues employees’ bonuses based on the estimated amounts to be paid in thesubsequent period.
(k) Provision for Product Warranty
Provision for product warranty is provided based on the estimated amounts for covering theprobable product warranties.
(l) 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.
(m) 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.
(n) 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.
(o) 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.
(p) 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.
(q) 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.
(r) 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.

(s) 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, 2006
and 2005 were as follows:
Thousands ofJapanese Yen
Cash and time deposits
Cash and cash equivalents

2006¥28,827,361¥28,827,361

2005¥25,061,948¥25,061,948

Thousands of
U.S. dollars
2006$242,002$242,002(t) Accounting Changes in Basic of Presenting Consolidated Financial Statements
1) ACCRUED BONUSES TO DIRECTORS AND CORPORATE AUDITORS
Effective the year ended December 31, 2006, the Company has adopted an accounting
standard for directors’ bonuses.
The standard requires that directors’ bonuses be accounted for as an expense of the accounting
period in which such bonuses were accrued.
As a result, operating profit, income before income taxes and minority interests and net
income decreased by ¥18,000 thousand ($151 thousand) compared with the amounts which
would have been recorded under the previous method.
2) PRESENTATION OF NET ASSETS IN THE BALANCE SHEET
Effective the year ended December 31, 2006, the Company has adopted an accounting
standard for presentation of net assets in the balance sheet.
The amount corresponding to total net assets for the year ended December 31, 2006 and 2005
under the previous standards were ¥40,849,462 thousand ($342,927 thousand) and¥37,843,656 thousand, respectively. However, the adoption of this standard had no material
effect on the statement of income for the year ended December 31, 2006.
This standard requires that balance sheets be presented as follows;

1. The balance sheet is divided into “Assets,” “Liabilities,” and “Net assets” section. “Netassets” is divided into “Shareholders’ equity,” “Accumulated gains from valuation andtransaction adjustments,” and “Minority interests in consolidated subsidiaries.”
2. “Shareholders’ equity” is divided into “Common stock,” “Capital surplus,” “Retained
earnings” and “Treasury stock, at cost.”
3. “Accumulated gains from valuation and transaction adjustments” is divided into
“Unrealized holding gain on securities,” “Deferred losses on derivative financial
instruments used for hedge accounting” and “Foreign currency transaction adjustments.”(u) Reclassification
Certain reclassifications have been made to the previously reported fiscal 2005 amounts toconform to fiscal 2006 presentation. These reclassifications had no effect on previously
reported net income or total shareholders’ equity.
2. Inventories
Inventories as of December 31, 2006 and 2005 consisted of the following:Thousands ofJapanese Yen
Raw materials
Costs of uncompleted contracts

2006¥2,039,603
478,596¥2,518,199

2005¥1,836,861
401,133¥2,237,994

Thousands of
U.S. dollars
2006$17,122
4,018$21,140

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, 2006 and 2005

2006
Available-for-sale securities:
Securities with book values
exceeding acquisition costs:
Equity securities
Total

Thousands of Japanese Yen
Acquisition
Book value
Differencescost¥310,587¥310,587¥1,633,216¥1,633,216¥1,322,629¥1,322,629

Thousands of Japanese Yen
Acquisition
Book value
Differences
cost

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

2006：
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 U.S. dollars
Acquisition
Book value
Differencescost$2,607$2,607$13,711$13,711$11,103$11,103(b) The following table summarizes book values of securities with no available fair values as ofDecember 31, 2006 and 2005

Thousands of Japanese Yen
2005
2006
Available-for-sale securities:
Unlisted equity securities
Investments in non-consolidated
subsidiaries and affiliates:
Total

Thousands of
U.S. dollars
2006¥ 200,111¥ 200,000$ 1,680

9,293,885¥9,493,996

6,486,459¥ 6,686,459

78,021$79,701

4. Consolidation Goodwill
Consolidation goodwill included in intangible assets as of December 31, 2006 and 2005 were
¥7,238,064 thousand ($60,763 thousand) and ¥3,866,433 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 6.1% and 5.1% as of December 31, 2006 and 2005,
respectively.
Long-term loans payable as of December 31, 2006 and 2005 are summarized below:

Thousands of
U.S. dollars

Thousands ofJapanese Yen

Loans from banks and others,
at average rate of 5.9% due through 2008
Less: Current portion included in current
liabilities

2006

2005

2006

¥15,777,929¥9,585,485$132,454(2,955,844)(3,107,316)(24,814)¥12,822,085¥6,478,169$107,640

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

Thousands ofJapanese Yen

Thousands of
U.S. dollars¥ 2,955,844
12,822,085¥15,777,929$ 24,814
107,640$132,454

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, 2006 is $116,092
thousand.

7. Net Assets
Japanese Corporate Law (“the Law”) became effective on May 1, 2006, replacing the JapaneseCommercial Code (“the Code”).
Under the Japanese laws and regulations, the entire amount paid for new shares is required to be
designated as common stock. However, a company may, by a resolution of the Board of Directors,
designate an amount not exceeding one-half of the price of the new shares as additional paid-in
capital, which is included in capital surplus.
Under the Law, in cases where dividend distribution of surplus is made, the smaller of an amountequal to 10% of the dividend and the excess, if any, of 25% of common stock over the total of
additional paid-in-capital and legal earnings reserve must be set aside as additional paid-in-capitalor legal earnings reserve. Legal earnings reserve is included in retained earnings in theaccompanying consolidated balance sheets.
Under the Code, companies were required to set aside an amount equal to at least 10% of cash
dividends and other cash appropriations as legal earnings reserve until the total of legal earnings
reserve and additional paid-in-capital equaled 25% of common stock.
Under the Code, legal earnings reserve and additional paid-in capital could be used to eliminate or
reduce a deficit by a resolution of the shareholders’ meeting or could be capitalized by a resolutionof the Board of Directors. Under the Law, both of these appropriations generally require aresolution of the shareholders’ meeting.
Additional paid-in capital and legal earnings reserve may not be distributed as dividends. Under
the Code, however, additional paid-in capital and legal earnings reserve may be transferred toretained earnings by the resolution of the shareholders’ meeting as long as the total amount oflegal earnings reserve and additional paid-in capital remained equal to or exceeded 25% ofcommon stock. Under the Law, all additional paid-in capital and all legal earnings reserve may betransferred to other capital surplus and retained earnings, respectively, which are potentiallyavailable for dividends.
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 Law.
At the annual shareholders’ meeting held on March 29, 2007, the shareholders resolved cash
dividends amounting to ¥233,798 thousand ($1,963 thousand). Such appropriations have not been
accrued in the consolidated financial statements as of December 31, 2006, and are recognized in
the period in which they were resolved.

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, 2006 and 2005.

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 andpension 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, 2006 and 2005 consisted of the following:Thousands of Japanese Yen

Projected benefit obligation
Severance and retirement benefits for
employees

Thousands of
U.S. dollars

2006

2005

2006

¥125,594¥113,839$1,054¥125,594¥113,839$1,054

Severance and retirement benefit expenses included in the consolidated statements of income forthe years ended December 31, 2006 and 2005 were comprised of the following:Thousands of Japanese Yen

Thousands of
U.S. dollars

2006

2005

2006

Service costs – benefits earned during the year

¥23,099¥22,638$193

Others27,346¥50,445

11,180¥33,818

230$423

Severance and retirement benefit expenses

10. Research and Development Costs
Costs relating to research and development activities charged to income for the years ended
December 31, 2006 and 2005 are ¥18,586 thousand ($156 thousand) and ¥17,108 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, 2006 and 2005.
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, 2006 and 2005:
2006

2005

41.0%

41.0%

Non-deductible expenses for tax purposes

0.3

0.3

Additional payment or refund based on tax examination
Offset of dividends from overseas consolidated subsidiaries
Taxation on revenue basis of foreign subsidiaries
Non-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
Undistributed profits in a tax heaven
Others

–
10.1
–
(4.9)
(3.5)

0.1
6.2
4.8
–
1.9

(3.8)
(6.5)
2.6
(9.9)
–
0.2
(1.7)

(8.9)
(5.9)
1.8
(5.8)
(2.1)
–
0.8

23.9%

34.2%

Statutory tax rate

Effective tax rateSignificant components of deferred tax assets and liabilities as of December 31, 2006 and 2005
were as follows:
Thousands ofJapanese Yen
2005
2006
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¥ 146,366
29,717286,307－－－
93,03876,623632,051－¥ 19,469
31,152－
194,534
156,440
22,07728,318451,990

Thousands of
U.S. dollars
2006$1,229
249
2,404
－
－
－
781
643
5,306

Valuation Allowance
Offset to deferred tax liabilities (short-term)
Total
Fixed assets:
Unrealized inter-company profit on fixed
assetsTax loss carry forward
Depreciation
Severance and retirement benefits for
employees
Severance and retirement benefits for
directors and corporate auditors
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
Others
Sub total
Offset to deferred tax assets (long-term)
Total
Total deferred tax liabilities
Net deferred tax liabilities(27,397)(269,649)
335,005－(295,795)
156,195(230)(2,264)
2,812

1,339,169
488,310
20,549868,100
273,698
280,649

11,242
4,099
173

51,49444,807432

77,765145,527
2,122,814(508,859)(274,786)
1,339,169¥1,674,174－
270,467
1,737,721(295,886)(96,323)
1,345,512¥1,501,707

653
1,223
17,822(4,272)(2,307)
11,243$14,055¥ (7,941)－(269,649)－(277,590)
269,649(7,941)¥ (121,229)(81,412)(606,263)(212,610)(1,021,514)
295,795(725,719)$(67)－(2,264)－(2,331)2,264(67)(691,522)(2,140,375)(542,278)(67,748)(3,441,923)
274,786(3,167,137)(3,175,078)¥(1,500,904)(962,548)－(601,237)(80,720)(1,644,505)
96,323(1,548,182)(2,273,901)¥(772,194)(5,805)(17,968)(4,552)(570)(28,895)
2,307(26,588)(26,655)$(12,600)

12. Contingent Liabilities and Commitments
As of December 31, 2006 and 2005, the Company was contingently liable for the following:Thousands ofJapanese Yen
Guarantees of bank loans and otherindebtedness

Thousands of
U.S. dollars

2006

2005

2006

¥3,762,137¥510,450$31,583

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, 2006 and 2005, were as follows:

2006:
Acquisition cost
Accumulated depreciation
Net leased property

2005:
Acquisition cost
Accumulated depreciation
Net leased property

2006:
Acquisition cost
Accumulated depreciation
Net leased property

Thousands of Japanese Yen
Buildings
andTotal
equipment¥9,700(8,873)¥ 827¥9,700(8,873)¥ 827

Thousands of Japanese Yen
Buildings
andequipment
Total¥9,700(8,070)¥ 1,630¥9,700(8,070)¥ 1,630

Thousands of U.S. dollars
Buildings
andequipment
Total
$81
(74)
$ 7

$81
(74)
$ 7

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

2006

2005

¥ 707
412
¥1,119¥ 906
942¥1,848

Thousands of
U.S. dollars
2006
$6
3
$9

iii) Annual lease payments and depreciation equivalent:Thousands ofJapanese Yen

Thousands of
U.S. dollars

2006

2005

2006

¥906
803
65

¥3,094
2,820
174

$8
7
1

Annual lease payments
Depreciation equivalentInterest expense equivalent

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, 2006 and 2005,
were as follows:
Thousands ofJapanese Yen

Thousands of
U.S. dollars

2006

2005

2006

Due within one year
Due after one year

¥920,559－$7,728－

Total¥920,559¥1,474,165
9,731,307¥11,205,472$7,728

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, 2006 and 2005 of
derivative transactions for which hedge accounting has not been applied:

2006:
Currency related derivatives:
Forward contracts:
To sell U.S. dollars

Thousands of Japanese Yen
Notional amountDue after
Marketone year
value
Total

¥18,686,396–¥18,693,247

Unrealized
gain (loss)¥6,851¥6,851

Thousands of Japanese Yen
Notional amountDue after
Marketone year
value
Total

2005:
Currency related derivatives:
Forward contracts:
To sell U.S. dollars¥5,316,056–¥5,348,855

2006:

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

Currency related derivatives:
Forward contracts:
To sell U.S. dollars$156,870–

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

Unrealized
gain (loss)

$58
$58

$156,928

15. Segment Information
Industry segment information for the years ended December 31, 2006 and 2005 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, 2006 and 2005 is asfollows:
Thousands of Japanese Yen

Japan

Asia

CentralandSouth
America

Sales:
Outside customers
Inter segment¥27,524,177
1,375,504¥ 6,969,218–¥ 2,204,392–¥62,451,547
1,152,685

Total

28,899,681

6,969,218

2,204,392

63,604,232–

101,677,523(2,528,189)

99,149,334

Operating expenses

27,001,126

6,667,815

1,451,382

63,133,327¥ 47,962

98,301,612(2,646,682)

95,654,930

Operating profit¥ 1,898,555

301,403753,010

470,905(47,962)

3,375,911

118,4933,494,404

Assets¥85,264,440¥8,357,130¥8,909,224¥31,359,747 ¥4,188,855¥138,079,396¥ (14,729,144)¥123,350,252

2006:

North
America

Total

Corporate
andElimination

Consolidated––¥99,149,334
2,528,189–¥ (2,528,189)¥ 99,149,334–

Others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

Japan

Asia

CentralandSouth
America

Sales:
Outside customers
Inter segment$231,063
11,547$58,506–$18,505–$524,274
9,677

Total

242,61058,506

18,505

Operating expenses

226,672

55,976

12,184

Operating profit$ 15,938$2,530$ 6,321$

Assets$715,786$70,157$74,792

2005:

North
America

Total

Corporate
andElimination

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

OthersThousands of U.S. dollars

2006:

North
America

Others

Total

Corporate
andElimination

Consolidated––$832,348
21,224–$(21,224)$832,348–

533,951–

853,572(21,224)

832,348

529,998$ 402

825,232(22,219)803,0133,953$(402)$ 28,340$ 995$ 29,335$263,262$35,165$1,159,162$(123,649)$1,035,513

The overseas sales of the Company and its consolidated subsidiaries for the years ended December
31, 2006 and 2005 consisted of the following:Thousands of Japanese Yen

2006:
Overseas sales

Asia¥11,530,157

Oceania

North
America

Total¥5,535,961 ¥22,366,557 ¥45,345,362 ¥14,353,053 ¥99,131,090

－

－

－

－

11.6%

5.6%

22.6%

45.7%

Consolidated sales
The ratio of consolidated
sales

AfricaCentralandSouth
America－ ¥99,149,334
14.5%

100.0%

Thousands of Japanese Yen

2005:
Overseas sales
Consolidated sales
The ratio of consolidated
sales

Asia

AfricaOceania

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

－

－

－

11.0%

29.1%

18.8%

40.3%

North
America

Total¥588,397 ¥71,589,376－ ¥71,614,166
0.8%

100.0%

Thousands of U.S. dollars

Asia

AfricaOceania

CentralandSouth
America

Overseas net sales$96,794$46,474$187,765$380,670$120,492$832,195

Consolidated sales

－

－

－

－

－

$832,348

11.6%

5.6%

22.6%

45.7%

14.5%

100.0%

2006:

The ratio of consolidated
sales

North
America

Total

16. Related Party Transactions
Significant related party transactions and corresponding balances between the Company andunconsolidated subsidiaries and affiliates for the year ended December 31, 2006 and 2005 are as
follows:
Thousands ofJapanese Yen

Thousandsof U.S.
dollars

Related party

Transactions

2006

2005

2006

Jasmine FPSO PTE LTD.
MODEC FPSO B.V.
MODEC FPSO B.V.
Rong Doi MV12 PTE LTD.
Rong Doi MV12 PTE LTD.
Rong Doi MV12 PTE LTD.
Espadarte MV14 B.V.
Espadarte MV14 B.V.
PRA-1 MV15 B.V.
PRA-1 MV15 B.V.
Stybarrow MV16 B.V.
Stybarrow MV16 B.V.
IMC-MODEC JV 1 INC.
Rang Dong MV17 B.V.

Plant and Equipment Investment
Construction of FPSO
Guarantees of bank loans
Construction of FSO
Plant and Equipment Investment
Guarantees of bank Loans
Construction of FPSO
Plant and Equipment Investment
Construction of FSO
Plant and Equipment Investment
Construction of FPSO
Plant and Equipment Investment
Plant and Equipment Investment
Construction of FSO¥606,321
27,178347,213
4,155,358
2,480,642
3,414,923
275,7632,757,952
221,645
3,281,342
20,386,042
6,735,806
392,500
1,729,317－¥53,643
－
－
－
－
－
－
－
－
8,458,765－－－$5,090228
2,915
34,884
20,82528,6682,315
23,153
1,861
27,547
171,139
56,546
3,295
14,517

Thousandsof U.S.
dollars

Thousands ofJapanese Yen
Related party
Jasmine FPSO PTE LTD.
MODEC FPSO B.V.
MODEC FPSO B.V.
MODEC VENTURE 10 B.V.
MODEC VENTURE 11 B.V.
Rong Doi MV12 PTE LTD.
Rong Doi MV12 PTE LTD.
Espadarte MV 14 B.V.
Espadarte MV14 B.V.
PRA-1 MV 15 B.V.
PRA-1 MV 15 B.V.
Stybarrow MV16 B.V.
Stybarrow MV16 B.V.
IMC-MODEC JV 1 INC.
LTD.
Rang Dong MV17 B.V.

Balances

2006

2005

2006

Long-term loans receivable
Accounts receivable - tradeLong-term loans receivable
Long-term loans receivable
Long-term loans receivable
Accounts receivable - trade
Short-term loans receivable
Short-term loans receivable
Long-term loans receivable
Short-term loans receivable
Long-term loans receivable
Accounts receivable - tradeLong-term loans receivable
Short-term loans receivable¥1,368,370
1,890,290
1,995,260
2,382,400
1,300,790
17,11730,76914,268,398－
12,000,926－
617,060
6,735,806
1,274,703¥1,957,285
2,477,603
1,977,673
2,361,400
1,289,324－－－
11,408,986－
8,642,724
7,029,790－－$11,487
15,86916,75020,00010,920144
258
119,782－
100,747－
5,180
56,546
10,701

Accounts receivable - trade

1,729,317－

14,517