1KYOKUTO KAIHATSU KOGYO CO., LTD.
AND CONSOLIDATED SUBSIDIARIESAnnual Report 2006
Years ended March 31,2006 and 2005

CONTENTSManagement Policy･･････････････････････････････････････････････2
Operating and Financial Review･･･････････････････････････････････2
Consolidated Statement of Income And Retained Earnings････････････17
Consolidated Balance Sheets･････････････････････････････････････18
Consolidated Statement of Cash Flows････････････････････････････20
Notes to Consolidated Financial Statements････････････････････････21
Report of Independent Certified Public Accountants････････････････35
Corporate information･････････････････････････････････････････36
Board of Directors and Statutory Auditors････････････････････････37

2Management Policy(1) Basic Management Policy of the Company

The basic management policy of Kyokuto Kaihatsu Group is “To work together making every
effort for the further development of the Company with strong emphasis on our unique
technological expertise and strong reliability, and providing considerable contribution to oursociety together with our group companies.”

Our ultimate goal of the management policy is to implement the corporate policy recognizing
the social role and its responsibility as the public company in the strong relationship withvarious stakeholders such as customers, business partners, as well as shareholders, employees,
and local societies.

In addition, by providing safe, effective and high quality products andservices through our fair and sound business activities, Kyokuto Kaihatsu Group seeks tobring about greater contribution to our society and maximization of the corporate value.

With this management policy, we devote ourselves to four major business domains including Specialty
Truck, Environmental Equipment and Systems, Automobile Sales, and Real Estate Leasing.

(2)

Basic Policy of Profit Distribution

The Kyokuto Kaihatsu Kogyo Group believes that both distribution policies of adequate
shareholder return reflecting the business performance and stable shareholder return are themost important management objective.

Therefore, the Company has strived to meet thestockholders' expectations by taking into the consideration of the business development andthe economic climate in the future while achieving stable growth of earnings and soundfinancial position.

Regarding the dividend for the fiscal year ending March 31, 2006, Kyokuto Kaihatsu Kogyo
announced per share dividend of ¥5, and the interim dividend at ¥5, bringing the total
dividend for the fiscal year to ¥10 per share. In November 18, 2005, the Company has split its
outstanding ordinary shares 1.5 for 1, therefore, embodied actual distribution value at ¥12.50,
excluding the effect of this stock splits (also excluding a special dividend of ¥2 per share for3commemoration of the 50th anniversary in the previous fiscal year). We are very pleased toreport the substantial increase of annual cash dividend by ¥2.50 compared with the ¥10.00 for
the previous fiscal year.

We would like to sincerely thank our shareholders and all otherstakeholders for their continued understanding and support during the course of our businessdevelopment.

Although the limitation on the frequency of profit distribution was eliminated in the new
Corporate Law of Japan (effective May 1, 2006), Kyokuto Kaihatsu Kogyo will not change
the frequency of dividend payment for the time being.

(3)

Concept and Policy for reduction of investment unit

The Company recognizes that improving the liquidity of its shares by reduction of investment
unit to encourage of participation of more diverse investors is a matter of the top management
priority.

Based on this concept, as of February 1, 1995, the Company changed its minimum

trading units of its shares from 1,000 shares to 100 shares. Furthermore, as explained above,
the Company has split its outstanding ordinary shares 1.5 for 1 in November 18, 2005.

Taking into considerations such factors as movement of number of shareholders, stock priceand market condition, the Company will carefully examine further commitment for reductionof investment units.

(4) Mid-to-Long Term Management Strategy and Major Challenges

As the period during the fiscal year began April 1, 2004 to the fiscal year ending March 31,
2007 was positioned for Kyokuto Kaihatsu Kogyo’s corporate reform initiatives; theCompany embarked on a review of the business plan formulating “Plan 2004” (3-year
Midterm Business Plan). The management teams of the Company and its subsidiaries haveconcentrated on carrying out the corporate strategies.

Details of the plan are as follows.

Basic policy of the “Plan 2004”
Basic policy of the Midterm Business Plan is to strengthen the management architecture,

4

thereby ensuring the further development of the corporate activities as well as the
maximization of the corporate value.
1.

To strengthen the Kyokuto Kaihatsu Kogyo’s brand power by enhancing the coretechnologies,

2.

To enhance the business activities aggressively into the global markets,

3.

To reconstruct business framework and enlarge the business opportunities into new areas
based on the “Screening and Concentration” concept.

<Major Strategies of Plan 2004>

1.

To strengthen the Kyokuto Kaihatsu Kogyo’s brand power

With the Plan 2004, Kyokuto Kaihatsu Kogyo, as the specialized integrated company of
manufacturing and marketing of specialty trucks and environmental related systems, willfurther leverage company’s advantages in the market by differentiating our products fromother competitors.

To this end, strengthen its brand power by enhancing the coretechnologies is vital.

Going forward, we will devote ourselves on new product development,at the same time, seek the optimal product mix of existing models.

We are rapidly

increasing the number of engineers in R&D division and integrating own educational program
for this purpose. By implementing such strategies, Kyokuto Kaihatsu Kogyo will be able toattain a goal of adding value to its hardware and expanding its market share, thereby leading
another revenue growth as well as enhancing overall profitabilities.

2.

Specialty Truck Business(Domestic)

In this core business, Kyokuto Kaihatsu Group has been engaged in the manufacturing,marketing and offering maintenance services for special purpose trucks including Dump
trucks, Tailgate lifters, Tank trucks, and Garbage collectors.

Demand for the specialty trucks in the domestic market had been depressed due to theslowdown in growth of both construction and logistic sectors until fiscal year ended March 31,

5

2003.

Subsequent fiscal years, however, the demand has recovered and replacement demand

for specialty trucks has rapidly promoted reflecting the tight regulation by the government
including new gaseous mission control enforcement on diesel trucks. In response with thisincreasing opportunity, the Company took a series of decisive actions to ensure sales such as
the realignment of sales force with strong emphasis on Tokyo Metropolitan areas where
potential demand should be considerable, as well as the new products development.

In

addition, the Company embarked on several strategic policies including cost cutting efforts byaccelerating global procurement project of raw materials from China, improvement of productquality, and reinforcement of service system by increasing number of directly operating
centers. We believe these company wide efforts to bring about dynamic change in Kyokuto
Kaihatsu Kogyo’s specialty truck business, thus enhancing earnings growth opportunity.

3.

Specialty Truck Business(Overseas)

Demand for the specialty trucks in overseas market has been steady especially in China where
investment for construction buildings continued to remain strong backed by the explosive
economic growth. This, in turn, has been generating demand for construction related trucks(Mixer trucks, Concrete pumps, and etc).

Although export to China has temporarily

declined due primarily to tight control of financial policy by the PRC government for the
fiscal year under review, the Company expects China will continue rapidly evolving inforeseeable future.

Accordingly, it is crucial to make constant efforts for the businessexpansion in China and other Asian countries, taking approaches of identifying the exact
needs in the market and introducing the unique products with solid price competitiveness andhigh quality.

Traditionally, products for export were manufactured in the domestic plants.

And, in April

2005, Kunshan Plant in Jiangsu, China, of Kyokuto Kaihatsu (Kunshan) Machinery Co., Ltd,
our 100% owned subsidiary, began its operation of specialty truck. Currently, the company isfocusing on manufacturing Mixer trucks in this plant, and it plans to begin manufacturing
Concrete pumps by March 2007. It aims to eventually increase the production items bytaking fully into account market conditions in its business environment.

6

We expect that Kunshan Plant will bring positive impact to expand business in overseas
market as well as strengthen the domestic operating base, contributing cost cutting measure tosupply parts or kits from the plant to Japan.

We believe promoting intra-group alliance will

maximize synergy effect on reinforcing the Kyokuto Kaihatsu Kogyo Group’s Specialty
Truck business, as a whole.

4.

Environmental Equipment and Systems Business

Kyokuto Kaihatsu Group has been actively expanding the business in this division byfocusing on manufacturing, marketing and offering comprehensive maintenance services forenvironmental infrastructure related systems, such as Recycle Plaza and Recycle Centers,
mainly for the local government.

While the Company assumes the potential growth for thisbusiness to be greater, competition has been extremely intensified.

The next challenge inthis business segment is to ensure the order received to improve profitabilities by powerfully
pushing ahead of building greater product mix combined with the enhancement of the existing
business. Based on this recognition, the Company will pursue to strengthen products mix
and marketing force in the mainline plant related systems such as Recycle plaza and Recycle
centers as well as RDF (Refuse Derived Fuel) plant.

At the same time, the Company will

strive to maintain both sales and earnings in this segment by expanding contracted businessfor maintenance and system operation.

In addition, we will actively working on enhancing product line and another order taking
activities of Refuse Gasification and Melting System, next generation incinerator whose
potential demand should be considerable. Leveraging its strength as a unique company
possessing technological expertise of launching new areas such as sales of Waste Carbonizing
System, etc. and Waste Processing System, Kyokuto Kaihatsu Kogyo will establish andenlarge the leading platform for environmental related business.

5.

Real Estate Leasing BusinessIn the Real Estate Leasing Division, Kyokuto Kaihatsu Group aims to establish the solid

7earning structure by effectively using our real estate property from the standpoint of using
capital more efficiently. At the same time, by focusing on the coin parking business, we willachieve earnings growth in our real estate business.

After all, Kyokuto Kaihatsu Kogyo’s goal is to maximize the corporate value by effectively
using asset and capital with concentrating management resources on the growth areas.
Focusing intently on the mainline Specialty Truck business and Environmental related
business, the Company will also continue to pursue the stable earnings in the Real Estatebusiness, thereby lead to higher growth for Kyokuto Kaihatsu Kogyo Group with effectively
using cost of capital.

<Progress Report of Plan 2004>

1. Measures taken for the regulation of controlling the gaseous mission

The gaseous mission control enforcement on diesel trucks including Environmental Protection
Ordinance was enacted by the Tokyo Metropolitan Government in October 2003.
Accordingly, the Company has carried out various strategies to meet replacement demand in
the Specialty Truck Division.

Such strategies then represent realignment of sales force,enhancement of service programs, and achievement of the optimal product mix.
Consolidated sales in the Specialty Truck Division rose by 5% or ¥1,858 million from theprevious fiscal year, as a result.

2.

Start-up operation in China plant

Kunshan Plant in Jiangsu, China, of Kyokuto Kaihatsu (Kunshan) Machinery Co., Ltd, began
its operation in April 2005.

At the present, production capacity of Mixer truck of new plantis 30 units per month, and it plans to start manufacturing Concrete pump truck by March 2007.
New plant set up the top priority on expanding local sales by establishing comprehensive
manufacturing base for the stable product supply and by enlarging cost competitiveness in theSpecialty Truck Division including export of parts or kits to Japan.

8

3.

Pricing policy changeWith respect to the pricing policy, the Company has conducted thorough review for thepricing policy, which has been negatively affected by the continuing hike in the raw material
cost including steel products since 2004.

In response to this growing cost, it is necessary toadjust our strategic price of almost all of our products: our target rise of the price is set about
5 to 10%, however, the Company announced approximately 2% rise for the fiscal year ending
March 2006.

We will ask our customers for their understanding and support to keep ourpolicy fair and consistent with its business environment.

4.

Cost cutting effort

In order to further improve price competitiveness, the Company recognizes that sweeping cost
cutting efforts are essential to encounter this drastically rising business cost.

It will focus on

2 critical tasks: establishing global procurement system of raw materials from China, andformulating/sharing corporate standard of parts.

By accelerating the global procurement system based on Kyokuto Special Automobile
Trading (Shanghai) Co., Ltd, combined with newly established Kunshan Plant, we will pursue
the efficiency therefore achieving a significant improvement in our cost strategy.

This willbe also supported by the formulating/sharing corporate standard of its parts along with
conducting review of the design process throughout the Kyokuto Kaihatsu Group.

5.

More emphasis on environmental related business

During the fiscal year under review, the Company purchased a part of environmental businessof Sumitomo Metal Industries, Ltd. to make progress in establishing a sound operating basefor the environmental business.

In March 2005, we have succeeded to launch the first model of Refuse Gasification andMelting System, next generation incinerator whose potential demand should be considerable.
And we are now actively working on order taking activities of this system to boost our9environmental related business.

6.

New product development and others

Targeting at optimal product mix in the mainline Specialty Truck Division, the Company has
succeeded to develop and launch 13 new models including Tailgate lifter and Detachable
body truck for the fiscal year under review.

In addition, the Company has aggressively expanded the parking business, another area ofsignificant growth potential, during the year.

Simultaneously, the Company has been

actively implementing the business tie-ups and seeking new business opportunities, to ensure
earnings growth of the entire group.

(5)

Management Target

We will work toward our consolidated milestone targets to reach for the year ending March 31,
2007, through the steady implementation of the core strategies outlined in above “Plan 2004”
for our principal business domains.

These targets are consolidated ROA of 3.1% andconsolidated ROE of 4.6%.

(6) Matters Concerning Parent Company

There is no pertinent matter.

Operating and Financial Review(1)

Operational Results

The domestic economy for the fiscal year under review showed increasing signs of recovery
due mainly to the strong capital investment in the private sector backed by the steady growthof earnings as well as modest recovery of personal consumption helped by the improvementof employment environment.

10

By segment, domestic demand in the Specialty Truck Division has increased supported by theplacement demand reflecting the tight regulation by the government such as new gaseous
mission control enforcement on diesel trucks including Environmental Protection Ordinanceenacted by the Tokyo Metropolitan Government in October 2005.

Overseas demand, on theother hand, declined temporarily due mainly to the negative effect of the tight control of thefinancial policy by the government and the change of the industrial standard of chassis in our
major oversea market, China .

In the Environmental Equipment and Systems Division, the competition has intensified
further due to buying restraint after the enforcement of anti-dioxin regulations and tightening
fiscal policies by the local governments since previous fiscal year.

Total orders received inthis division have continued to be adversely affected by these external factors, as a result.

Even amid these worsening market conditions, Kyokuto Kaihatsu Group has aggressively
implemented 2nd phase project of “Plan 2004” (3-year Midterm Business Plan), corporate
reform enacted in Aril 2004.

Here again, the ultimate goal of this plan is to strengthen the

management architecture, further developing the corporate activities, and maximizing thecorporate value.

Based on the Initiatives of the “Plan 2004”, especially “Screening andConcentration” concept, the management team has focused on both Specialty Truck Division
and Environmental Equipment and Systems Division with strong emphasis on concentrationof corporate resources to both divisions, thereby enhancing overall earnings.

As a result, consolidated sales for the fiscal year ended March 31, 2006 decreased by only 4%,or ¥2,432 million from the previous fiscal year to ¥58,138 million due mainly to the declineof the number of new plants in Environmental Equipment and Systems Division despite
steady growth in mainline Specialty Truck Division.

Consolidated ordinary income,however, rose by 4%, or ¥93 million from the previous fiscal year to ¥2,369 million becauseof the growth in the sales of Specialty Truck Division. Consolidated net income also rose by
98%, or ¥946 million to ¥1,910 million with contribution of extraordinary income from thesales of former Sagami Plant.

11

The summary of each business segment in the consolidated basis is reported below.

1 Specialty Truck Division

Domestic demand in this division posted strong growth due to the recovery mainly in Tokyo
Metropolitan area supported by the tight control of gaseous mission regulation.
Company has concentrated on enhancing total orders received.

The

Furthermore, with othertasks including introducing new pricing policy especially for the new products, reducing costby the global procurement of raw materials from China, strengthening products mix with thenew products development and enhancing marketing and service capabilities, the Company
has strived to ensure overall sales as well as profit.

Consolidated sales in the Specialty Truck Division rose by 5%, or ¥1,858 million from theprevious fiscal year to ¥42,300 million, as a result, despite decline of export affected by thesluggish demand in China.

Operating income in this division, on the other hand,dramatically rose by 41%, or ¥532 million from the previous fiscal years to ¥1,823 million
due largely to aforementioned cost cutting efforts combined with the impact of product mix
change, as well as introducing the new pricing policy .

From April 1, 2006, the Company established 100% owned subsidiary, Kyokuto Kaihatsu
Parking Co. Ltd., to integrate various parking business and offer comprehensive services andmaximize efficiencies.

Multilevel car parking tower business in the Specialty Truck

Division and coin parking business in the Real Estate Leasing Division were all realigned into
this subsidiary.

2 Environmental Equipment and Systems DivisionDuring the fiscal year under review, the Company purchased a part of environmental businessof Sumitomo Metal Industries, Ltd. to make progress in establishing a sound operating basefor the environmental business.

12

In the Environmental Equipment and Systems Division, Kyokuto Kaihatsu group has pursued
to ensure total order in the mainline plant related systems such as Recycle plaza and Recycle
centers as well as RDF (Refuse Derived Fuel) plant and Landfill leachate treatment plant in
the continued severe business circumstances.

At the same time, the Company strived tomaintain both sales and earnings with strong emphasis on expanding contracted business formaintenance and system operation.

In addition, we have been actively working on

reinforcement of product line along with order taking activities of Refuse Gasification andMelting System, next generation incinerator.

However, consolidated sales in the Environmental Equipment and Systems Division drop by
34%, or ¥3,918 million from the previous fiscal year to ¥7,558 million due mainly to thedecline of total orders received in the last fiscal year.

Operating income also decreased by

45%, or ¥170 million from the previous fiscal year to ¥209 million.

Nevertheless, total orders received in this division increased by 39%, or ¥2,581 million fromthe previous fiscal year to ¥9,266 million.

3 Automobile Sales Division

In the Automobile Sales Division, the Company has concentrated on ensuring both sales andearnings by strengthening marketing and service systems along with company-wide cost
cutting efforts.

In spite of above efforts, consolidated sales in the Automobile Sales Division

declined by 7%, or ¥407 million from the previous fiscal year to ¥5,804 million adversely
affected by the decline of number of unit sales of new vehicles. The Company posted
operating loss of ¥5 million despite above cost cutting efforts.

Consequently, as of April 1,

2006, the Company withdrew automobile sales business by selling equities holding of Toyota
Corolla Naniwa Co., Ltd.

4 Real Estate Leasing Division

In the Real Estate Leasing Division, consolidated sales rose by 2%, or ¥52 million from theprevious fiscal year to ¥2,962 million reflecting the steady revenue growth of coin parking

13business despite negative effect by the sales of leasing property. But, operating income
decreased by 4%, or ¥29 million from the previous fiscal year to ¥658 million.

(2)

Forecast for the fiscal year ending March 31, 2007

Regarding the forecast of consolidated results for the fiscal year ending March 31, 2007, theCompany anticipates that overall domestic economy will continue to show a steady recovery.
On the other hand, business environment is expected to be more demanding due to suchfactors as the rise in the raw material cost (crude oil and steel products), foreign exchange
fluctuations as well as rise in interest rate.

Under these circumstances, Kyokuto Kaihatsu Group will strive to implement the initiatives
under the last phase of “Plan 2004” to achieve sales and earnings growth in our three businessdomains: Specialty Truck Division, Environmental Equipment and Systems Division and Real
Estate Leasing Division.

And, Kyokuto Kaihatsu Group will work together to further

develop the corporate activities and maximize the corporate value, leveraged by the synergy
effect of the intra-group alliance in the year to come.

The management expects consolidated sales for the year ending March 31, 2007 to be at¥54,300 million with ordinary income and net income of ¥2,660 million and ¥1,520 million,
respectively.

Kyokuto Kaihatsu group’s automobile sales business has been facilitated by the Toyota
Corolla Naniwa Co., Ltd, and by the sales of equities holdings of Toyota Corolla Naniwa, theCompany will cease this business after March 31, 2007.

(3)

Financial Review

1 Assets, Liabilities and Stockholders’ Equity

Total assets at March 31, 2006 decreased by 0%, or ¥65 million to ¥87,234 million comparedwith the previous fiscal year-end.

14

Current assets decreased by 6%, or ¥2,680 million to ¥45,784 million. This decrease wasprimarily attributable to decrease in notes and account receivable.
Fixed assets increased by 7%, or ¥2,615 million to ¥41,450 million due to increase (¥1,825
million) in securities investment.

Current liabilities at March 31, 2006 decreased by 12%, or ¥2,737 million compared with theprevious fiscal year-end.
borrowings.

This decrease was primarily attributable to decrease in short-termLong-term liabilities increased by 1%, or ¥99 million due to increase indeferred tax liabilities, which offset decrease in long-term borrowings.

As a result, total

current and long-term liabilities at March 31, 2006 decreased by 8%, or ¥2,637 million to¥29,116 million compared with the previous fiscal year-end.

Stockholders’ equity at March 31, 2006 increased by 5%, or ¥2,571 million to ¥58,118 million
compared with the previous fiscal year-end.

This increase was primarily because of increasein both retained earnings and difference of evaluation of investment securities.
The ratio of stockholders’ equity to total assets at March 31, 2006 increased from 64% for theprevious fiscal year to 67%.

2 Cash Flows

Cash and Cash equivalents at March 31, 2006 increased by 2%, or ¥291 million to ¥12,661
million compared with the balance at the beginning of this fiscal year.

Details are as

follows.
・Cash flows from operating activities
Net cash provided by operating activities totaled ¥4,950 million, increased by ¥7,535 million
in the previous year due mainly to the decrease in notes and accounts receivables in Specialty
Truck Division and Environmental Equipment and Systems Division.
・Cash flows from investing activities
Net cash used in investing activities decreased by ¥471 million to ¥1,019 million comparedwith the previous year due to increase in purchases of fixed assets as well as securities

15

investment despite proceeds from sales of fixed assets.
・Cash flows from financing activities
Net cash used in financing activities decreased by ¥6,498 million to¥3,688 million comparedwith the previous year due primarily to the payment of short-term borrowings.

(4)

Risk Management

1 Risks related to unusual change in financial position, operating results and cash flow
position

The Company has no significant unusual change or significant factors which may cause thematerial impact in its financial position, operating results and cash flow position in future forthe fiscal year ended March 31, 2006.

2 Risks related to concentration in a particular customer, product, and technology

In our core business, Specialty Truck Division, our customer portfolio is comprised of thediversified domestic truck manufacturers or their affiliated sales companies or trading firms,
therefore, successfully reducing the risks related to concentration in a particular customer orparticular item.

In addition, we have built wide range of technological expertise for

manufacturing and marketing of each model in this product line.

As for the Environmental Equipment and Systems Division, the Company provides its
business (e.g. plant or system construction for Waste Disposal, maintenance service orcontracted business for maintenance and system operation) to most of the local governments
in Japan based on their needs.

3 Risks related to a particular regulation, law, business practice and management policy

In the Specialty Truck Division, enactment or amendment of particular law such as Road
Traffic Law, Road Trucking Vehicle Law, and Motor Vehicle Safety Standard generally and16materially affect the Company’s business performance.

The vehicle which may fall to meetthese regulations will not be allowed to use or hold by the government, this, in turn,
temporarily generate extra demand (usually called “last minutes buying”) before regulation
enactment or amendment.

Thereafter, overall demand will be adversely affected by thiscustomer’s behavior, shrinking rapidly in the following terms.
In the Environmental Equipment and Systems Division, as the business of plant constructionof Waste disposal for the local government is subject to the regulation under Construction
Industry Law, the Company conducts the business with the license of construction industry or
cleaning facilities construction industry which are authorized by the minister of land,
infrastructure and transportation.

Additionally, enactment or amendment of otherenvironmental related regulation or law, for example, anti-dioxin regulation, again may cause
additional renewal demand for the plant.

4 Risks related to material litigation

There was no material litigation which may bring the material impact on the businessperformance for the year ended March 31, 2006.

5 Substantive matters concerning directors, major shareholders, and affiliatedcompanies

There was no substantive matter relating to the Company’s directors, major shareholders, andaffiliated companies for the year ended March 31, 2006.

17

ＣＯＮＳＯＬＩＤＡＴＥＤ ＳＴＡＴＥＭＥＮＴＳ ＯＦ ＩＮＣＯＭＥ ＡＮＤ ＲＥＴＡＩＮＥＤ ＥAＲＮＩＮＧＳ
Thousands of
U.S. dollars(Note 1)Ｍｉｌｌｉｏｎｓ of ｙｅｎ
2006

2005

2006

Net sales…………………………………………

58,13860,570494,925

Cost of sales…………………………………………

45,917

48,775

390,891…………………………………………

12,22011,795104,034…………………………………………

9,524

9,480

81,079…………………………………………

2,696

2,314

22,955Gross profit
Selling, general andadministrative expenses
Operating income (loss)
Other income (expenses)
Interest and dividend income…………………………………………

67

64

570

Interest expenses…………………………………………

(104)

(114)

(890)

Gain (loss) on sales ofproperty and equipment…………………………………………

1,628

(13)

13,865Gain (loss) on sales of securities…………………………………………

158

533

1,347

Write-down of investment securites…………………………………………

Special research and development expenditures
Other-net-………………

(297)…………………………………………

(50)

0

(727)

(2,533)

(652)

(90)

(5,558)……………………………

3,495

1,915

29,756current…………………………………………

1,248

654

10,630deferred (prepaid),net…………………………………………

336

298

2,865

Total income taxes…………………………………………

1,585

952

13,495

Income (loss) before

income taxes

Income taxes (Note 12)…………………………………………

Minority interest
Net income (loss)

00…………………………………………

―
1,910

963

16,260Retained earnings：…………………………………………

31,20830,742

265,676…………………………………………

(338)

(308)

(2,879)Bonuses to directors and statutory auditors ……………………………
Adjustment of retained earnings

(50)

(48)

(429)

Balance at beginningof period

Cash dividends paid

for eliminations of treasury stock
Balance at endof period……………………………

(125)

(138)

(1,067)…………………………………………

32,604

31,208277,559

Yen

U.S. dollars

Per share of common stock：
Net income (loss)…………………………………………

43.46

32.42

0.37

Diluted net income (loss)…………………………………………

43.17

32.04

0.37

…………………………………………

10.00

12.00

0.09

Cash dividend,applicable toearnings of the year

The accompanying notes are an integral part of this statements.

18

ＣＯＮＳＯＬＩＤＡＴＥＤ ＢＡＬＡＮＣＥ ＳＨＥＥＴＳ
Thousands of
U.S. dollars(Note 1)
2006

Ｍｉｌｌｉｏｎｓ of ｙｅｎ
2005

2006
ASSETS
Current assets：
Cash and time deposits……………… ………………

5,030

6,007

42,820

Short-term investments (Note 3)……………… ………………

7,701

6,432

65,563………………

25,29028,250215,290………………

(194)

(184)

(1,657)……………… ………………

6,746

5,630

57,434

Deferred income taxes (Note 12)……………… ………………

766

671

6,529

Prepaid expenses……………… ………………

67

113

571

Other current assets……………… ………………

376

1,542

3,203

……………… ………………

45,784

48,464

389,756

57,561

Trade note and accounts receivable
Less：Allowance for doubtful accounts
Inventories

Total current assets
Investments and other assets：
Investments in securities (Note 3)……………… ………………

6,761

4,935

Deferred income taxes (Note 12)……………… ………………

336

324

2,866

Other

……………… ………………

3,220

3,367

27,411………………

10,318

8,627

87,839Land……………… ………………

13,31012,386113,312

Buildings and structures……………… ………………

26,685

26,104

227,169

Machinery and equipment……………… ………………

7,504

7,326

63,883

Construction in progress……………… ………………

83

736

714

Other

……………… ………………

2,020
49,604

2,310
48,863

17,197422,277

Less－Accumulated depreciation……………… ………………

(19,006)(19,035)(161,797)

Total property and equipment……………… ………………

30,59829,827

260,480……………… ………………

533

371

4,537

total intangible assets……………… ………………

533

379

4,537

Total assets……………… ………………

87,23487,300742,613

Total investments and other assets
Property and equipment：

Intangible assets
Cost in excess of net assets of subsidiaries
other………………

ー

8

ー

19

ＣＯＮＳＯＬＩＤＡＴＥＤ ＢＡＬＡＮＣＥ ＳＨＥＥＴＳ
Thousands of
U.S. dollars(Note 1)Ｍｉｌｌｉｏｎｓ of ｙｅｎ
2006

2005

2006

LIABILITIES AND SHAREHOLDERS'EQUITYCurrent liabilities：
Short-term bank loans(Note 4)……………… ………………

3,000

6,150

25,538………………

1,028

22

8,759

Trade note and account payable……………… ………………

10,965

12,43993,345

Accrued income and other taxes……………… ………………

1,388

738

11,818

Accrued expenses……………… ………………

2,036

1,957

17,332Current portion of long-term bank loans (Note 4)

Other current liabilities……………… ………………

1,523

1,370

12,968……………… ………………

19,942

22,679169,763

Long-term bannk loans (Note 4)……………… ………………

86

1,115

732

Accrued retirement benefits(Note 5)……………… ………………

1,837

1,894

15,640

303

249

2,582

Total current liabilities

Long-term liabilities：

Directors' and statutory auditors' retirement benefits
Deferred income taxes (Note 12)……………… ………………

2,205

1,064

18,773

Other long-term liabilities (Note 4)……………… ………………

4,742

4,750

40,372

Total long-term liabilities……………… ………………

9,174

9,074

78,100Minority interrests……………… ………………

―

ー

－

101,301

Shareholders' equity：
Common stock, no par value (Note 10)
Authorized ― 117,708,100 shares
Issued ― 28,469,779 shares in 2005 and………………

11,89911,892

Additional paid-in capital (Note 10)42,737,668 shares in 2006………………

11,718

11,71199,759Retained earnings………………

32,604

31,208277,559

Net unrealized holding gains on securities………………

2,105

1,089

17,925

Foreign currency translation adjustments………………

138

(74)

1,183

Treasury stock, at cost………………

(349)

(280)

(2,978)

Total shareholders' equity……………… ………………

58,11855,546494,749

Total liabilities
and shareholders' equity……………… ………………

87,23487,300742,613

20
CONSOLIDATED STATEMENT OF CASH FLOWS
Thousands of
U.S. dollars
Ｍｉｌｌｉｏｎｓ of ｙｅｎ
Operating activities：

2006

Net income before income taxes………………………………

(Note 1)

2005

2006

3,495

1915

29,756

1,511

1,434

12,870

28

58

245

(145)

(534)

(1,238)(13,270)

Adjustments to reconcile net income to net cash
provided by (used in) operating activities:………………………………

Dpreciation and amortization
Write-down of investment securites

Net gains (loss) on sales of marketable securities and investments(1,558)12………………

840

70Interest and dividend income……………………………………………

(67)

(64)

(570)

Interrest expenses……………………………………………

Net gains (loss) on sales of proparty………………………………

Provision (reversal) for accrued retiremennt benefits

Decreease (increase) in accounts receivable

104

114

890

………………………………

3,039(4,239)25,871(10,463)

Decrease (increase) in inventories………………………………

(1,229)1,538

Decrease (increase) in prepaid expenses………………………………

69

85

593

Decrease (increase) in accounts payable………………………………

(1,339)(775)(11,399)

Decrease (increase) in accrued expenses………………………………

12

(147)

106

Decrease (increase) in income taxes payable
Other,net………………………………

(140)

352

(1,194)…………………………………………………………

2,139

366

18,21050,478…………………………………………………………

5,929

158

Interest and dividend income received ……………………………………………

66

62

569

Interest expenses paid……………………………………………

(36)

(43)

(306)

Sub total……………………………………………

(459)(1,866)(3,908)…………………………………………………………

(551)

(895)

(4,692)

Net cash provided by operating activities ………………………………

4,950(2,584)

42,140(10,320)

Income taxes paid
Other,net

Investing activities：
Payment for purchase of marketable securities and investmen ………………

(1,212)(364)

Proceeds from sales of marketable securities and investments………………

566

1,171

4,819

(1,414)(25,110)
19,136

Payment for purchase of facilities……………………………………………

(2,949)Proceeds from sale of facilities……………………………………………

2,247

61

Disbursement of loan receivables……………………………………………

(7)

(39)

(66)

336

37

2,866

(1,019)(547)(8,674)(3,150)3,194(26,815)ーーーCollection of loan receivables
Net cash provided by (used in) investing activities………………

Fainancing activities：
Increase (decrease) in short-term debt………………………………

Proceeds from long-term debt……………………………………………

Payment on long-term debt……………………………………………

(22)

(32)

………………………………

15

99

130

……………………………………………

(396)

(560)

(3,379)………………………………

202

ー

1,725

…………………………………………………………

(337)

(308)

(2,873)(3,688)2,809(31,403)

48

(30)

416

291

(353)

2,478

Proceeds from issuance of common stock
Purchases of treasury stock

Proceeds from sales of treasury stock
Dividends paid

Net cash provided by (used in) financing activities
Effect of exchange rate change on cash and cash equivalents
Net increase in cash and cash equivalents………………
………………

………………………………

(191)

21

１．Basis of Presenting Consolidated Financial Statements

Kyokuto Kaihatu Co.,Ltd (the ”Company”) and its domestic subsidiaries maintain their accounts
and records in accordance with the provisions set forth in the Commercial Code of Japan (the“Code”) and the Securities and Exchange Law and in conformity with accounting principles andpractices generally accepted in Japan.
The accompanying consolidated financial statements are prepared based on the consolidated
financial statements of the Company and its subsidiaries (the “Group”) which were fi1ed with
the Director of Kanto Local Finance Bureau as required by the Securities and Exchange Law.
In preparing the accompanying consolidated financial statements, certain reclassifications andrearrangements have been made to the consolidated financial statements issued domestically inorder to present them in a form which is more familiar to readers outside Japan.
The translation of the Japanese yen amounts into U.S. dollars is included solely for theconvenience of the reader, using the approximate exchange rate at March 31, 2006, which was¥117.47 to US$1.00. These 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.
As permitted by the regulations under the Securities and Exchange Law of Japan, amounts ofless than one million yen have been omitted. As a result, the totals shown in theaccompanying consolidated financial statements (both in yen and in U.S.dollars) do notnecessarily agree with the sums of the individual amounts.

２．Summary of Significant Accounting Policies(a) Consolidation Principles
The consolidated financial statements include the accounts of the Company and its significant
subsidiaries in accordance with the Securities and Exchange Law and related regulations ofJapan. The minor differences arising from the cost of the companies’ investments in
subsidiaries and affiliates over the equity in their net assets at fair value are charged or credited
to income in the year of acquisition. Significant differences are, as a rule, amortized overperiods of 5 years. All significant inter-company accounts and transactions have been
eliminated.
Investments in associates are accounted for by the equity method whereby the Group includes in
net income its share of income or losses of these companies, and records its investments at costadjusted for its share of income, losses or dividends received.

22(b) Consolidated Statement of Cash Flows
In preparing the consolidated statements of cash flows, cash on hand, readily-available deposits
and short-term highly liquid investments with maturity of not exceeding three months at thetime of purchase are considered to be cash and cash equivalents.

(c) Short-term investments and Investments in Securities
For the Accounting Standards for Financial Instruments which was issued by the BusinessAccounting Deliberation Council, securities are classified into three categories: trading
securities, held-to-maturity debt securities, equity investments in associates and other securities.
Those classified as other would be reported at fair value with unrealized gains, net of related
taxes reported in equity. Under the Code, unrealized holding gains on securities, net of related
taxes is not available for distribution as dividends and bonuses to directors and corporate
auditors.
Other investments are carried at cost. The cost is determined by the moving average method.
(Trading securities)
Trading securities are held for resale in anticipation of short-term market movements.
securities, consisting of debt and marketable equity securities, are stated at fair value.
and losses, both realized and unrealized, are charged to income.

Trade
Gains

(Held-to-maturity debt securities and other securities)
Management determines the appropriate classification of debt securities at the time of purchaseand reevaluates the classification as of each balance sheet date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold the securities tomaturity. Held-to-maturity debt securities are stated at amortized cost adjusted for theamortization of premiums and the accretion of discounts to maturity.
Marketable equity securities and debt securities not classified as held-to-maturity are classified
as other securities. Other securities are carried at fair value with the unrealized gains and losses,
net of tax, reported in a separate component of shareholders’ equity. The amortized cost of debt
securities in this category is adjusted for the amortization of premiums and the accretion of
discounts to maturity. Realized gains and losses and declines in value judged to be other than
temporary on other securities are charged to income.
(Golf club membership）
An impairment loss on deposits for golf club membership is required to be recognized inaccordance with the new standard.
(d) Inventories
Merchandise inventories are stated at cost, determined by the specific identification method.
Materials and work in process are stated at cost, determined by the periodic average method.
Supplies are stated at cost, determined by the last purchase cost method.

23(e) Depreciation:
Depreciation is principally computed on the declining-balance method, based on the estimateduseful lives of assets which are prescribed by Japanese income tax laws. Buildings are
depreciated on a straight-line basis.
Amortization of intangible assets is computed by the straight-line method over periodsprescribed primarily by the Japanese Commercial Code or Japanese income tax laws.
Effective April 1, 2005, the Company and its domestic consolidated subsidiaries adopted the
new Japanese accounting standard for write-down of fixed assets.
The effect of this adoption was to decrease income before income taxes by ¥140 million ($1,199
thousand).
(f) Stock and bond issue expenses
Stock and bond issue expenses are charged to income as incurred.
(g) Accrued Retirement Benefits
To provide for the payment of retirement benefits and pension plans to employees, the Company
and certain consolidated subsidiaries have entered an amount into a reserve equivalent to theamount recognized as necessary at the end of the period under review based on the expected
retirement and severance obligations and the assets of pension plans at fiscal year-end.
The Company and its domestic subsidiaries provide for lump-sum severance benefits withrespect to directors and corporate auditors. While the Company has no legal obligation, it is acustomary practice in Japan to make lump-sum payments to a director or a corporate auditor
upon retirement. Annual provisions are made in the accounts for the estimated costs of thistermination plan, which is not funded. Any amounts payable to officers upon retirement are
subject to approval at the shareholders’ meeting.
(h) Revenue recognition
The percentage of completion method is applied to the construction works which take longer
than one year and exceed ¥200million ($1,703 thousand) in contract amount.
(i) Leases
In Japan finance leases other than those that are deemed to transfer the ownership of the leased
assets to lessees are accounted for by a method similar to that applicable to ordinary operatingleases.

24(j) Research and Development and Computer Software
Research and development expenditure is charged to income when incurred.
Expenditure relating to computer software developed for internal use is charged to income whenincurred, except if it contributes to the generation of income or to future cost savings. Suchexpenditure is capitalized as an asset is amortized using the straight-line method over its
estimated useful life which is in the range of 3 to 5 years.
(k) Income Taxes
Income taxes consist of corporation, inhabitants and enterprise taxes for domestic companies
and foreign income taxes.
Deferred income taxes are provided for the income tax expenses under the asset and liability
method. Deferred income tax assets and liabilities are determined based on temporary
differences between the financial statements and tax bases of assets and liabilities, using
enacted tax rates in effect during the years in which the differences are expected to reverse, andon available tax credits carryforward.
(l) Per Share Information
The computation of basic net income per share is based on the weighted average number ofshares of common stock outstanding during each period. The average number of shares used in
the computation was 42,353 thousand shares for 2006 and 28,148 thousand shares for 2005 (seeNote 10).
For the year ended 31, 2006 and 2005 fully diluted net income per share of common stock
assumes full exercise of right of the outstanding stock option plan at the beginning of the year.
Cash dividends per share shown in the statements of income are the amounts applicable to therespective years.

25

３．Short-term Investments, Investments in Securities and Investments inand advances to associates
Short-term securities at March 31, 2006 and 2005 consisted of the following:Thousands of
U.S. dollars
2006

Millions of yen
2006
2005
Market value available:
Trading securities
Market value not available:
M.M.F. and F.F.F.
Other investment trust
Total－¥ 7,701－¥ 7,701¥－101¥ 6,30130¥ 6,432$

65,563－65,563$

The following is a summary of other securities at March 31, 2006 and 2005:

Cost
Market value available:
Equity securities
Bonds and debentures
Other securities¥¥

Millions of yen
March 31, 2006
Other securities
Gross
Gross
unrealized
unrealized
gains
losses

2,059
－
－
2,059

－
－
－
－

¥ 3,548－－¥ 3,548

Market value not available:
Total

¥

¥
Market value not available:
Total

¥

5,607
－
－

¥

5,607
1,154
6,761

¥

Cost
Market value available:
Equity securities
Bonds and debentures
Other securities

Book Value(Estimatedfair value)

2,193
－
－
2,193

Millions of yen
March 31, 2005
Other securities
Gross
Gross
unrealized
unrealized
gains
losses

¥

¥

1,941
－
－
1,941

¥

¥

105
－
－
105

Book Value(Estimatedfair value)

¥

4,029
－
－

¥

4,029
906
4,935

¥

26

Thousands of U.S. dollars
March 31, 2006
Other securities
Gross
Gross
unrealized
unrealized
gains
losses

Cost
Market value available:
Equity securities
Bonds and debentures
Other securities$ 17,528－－$ 17,528

Book Value(Estimatedfair value)

－
－
－
－

$ 30,208－－$ 30,208

Market value not available:
Total

$

47,736－－$47,736
9,825
57,561$

４．Short-term bank loans and long-term debt
The annual average interest rates applicable to short-term bank loans at March 31, 2006, and2005 are 0.67％ and 0.66％, respectively.
Long-term debt at March 31, 2006 and 2005 consisted of the following:

0.58％ bank loans due 2007
0.48％ bank loans due 2013
1.50％ guarantee money due 2023

Millions of yen
2005
2006
¥ 1,028
¥
22
86
1,115
3,250
3,180
¥ 4,365¥ 4,317

Thousands of
U.S. dollars
2006$ 8,759732
27,667$ 37,159

Aggregate annual maturities of long-term debt subsequent to March 31, 2006 are as follows:Year ending March 31

Millions of yen
¥

2007
2008
2009
2010
2011 and thereafter
¥

1,028
261
260
244
2,569
4,365

Thousands of
U.S. dollars$ 8,759
2,230
2,217
2,078
21,873$ 37,159

27

５．Accrued Retirement Benefits
The following tables sets forth the changes in benefit obligation, plan assets and funded statusof the Company and its subsidiaries at March 31, 2006 and 2005.

Benefit obligation at end of year
Fair value of plan assets at end of year
Funded status:
Benefit obligation in excess of plan assets
Unrecognized net transition obligation at date of adoption
Unrecognized prior service cost
Unrecognized actuarial loss
Prepaid expenses for plan assets at end of year
Accrued pension liability recognizedin the consolidation balance sheets

Millions of yen
2006
2005
¥ 5,230¥ 5,259
3,361
2,852

Thousands of
U.S. dollars
2006$ 44,530
28,616

1,869
―
―
32
(―)

2,407
―
―
524
(11)

15,914
―
―
274
(―)

1,837

1,894

15,640Note: Some domestic subsidiaries have adopted allowed alternative treatment of the accounting
standards for retirement benefit for small business entity.
Severance and pension costs of the Company and its subsidiaries included the following
components for the year ended March 31, 2006 and 2005.

Service cost
Interest cost
Expected return on plan assets
Amortization:
Transition obligation at date of adoption
Prior service cost
Actuarial losses
Net periodic benefit cost

Millions of yen
2006
2005
¥ 268
¥ 271
102
109
( 78)
( 62)
―
―
107
¥ 400

―
―
146
¥ 465

Thousands of
U.S. dollars
2006$ 2,288874( 670)

$

―
―
919
3,411

Assumption used in the accounting for the defined benefit plans for the year ended March 31,
2006 and 2005 is as follows:
2006
2005
Method of attributing benefit to periods of service
straight –line basis straight –line basis
Discount rate
2.0 %
2.0 %
Long-term rate of return on fund assets
2.0 %
2.0 %
Amortization period for transition obligation at date of adoption――
Amortization period for prior service cost――
Amortization period for actuarial losses
10 years
10 years

28

６．Contingencies
At March 31, 2006 and 2005, the Group was contingently liable as follows:
Thousands of
US dollars
2006

Millions of yen
2006
2005
As an endorser of notes discounted or endorsed
As a guarantor of indebtedness of :Associates
Others¥ 2,069

¥

2,079

$

17,620¥ 5,795
43¥ 5,838

¥

5,015
52
5,067

$

49,332367
49,698¥$

７．Cash and cash equivalents
Cash and cash equivalents at March 31, 2006 and 2005 are as follows:
Thousands of
U.S. dollars
2006

Millions of yen
2005
2006
Cash and time deposits¥ 5,030¥ 6,007

7,701

6,432

65,563

( 70)
―

( 70)
―

¥12,661¥ 12,370( 596)―$ 107,788

Short-term investment
Less-Time deposits with original maturities
more than three months
Less-Stock$

42,820８．Leases
The Group leases certain machinery and equipment, and other assets. Total lease payments
under these leases were ¥ 477 million ($ 4,065 thousand) , and ¥ 437 million for the years ended
March 31, 2006 and 2005, respectively.
Pro forma information relating to acquisition costs, accumulated depreciation and future
minimum lease payments for property held under finance leases which do not transfer
ownership of the leased property to the lessee on an “as if capitalized” basis for the years ended
March 31, 2006 and 2005, are as follows:
Millions of yen
2006

Acquisition costs
Accumulated
Depreciation
Net leased property

MachineryandEquipment¥ 1,806

¥

Other
628

¥

Total
2,434

1,078
727

¥

435
192

¥

1,513
920

¥

29

Millions of yen
2005

Acquisition costs
Accumulated
Depreciation
Net leased property

Acquisition costs
Accumulated
Depreciation
Net leased property

MachineryandEquipment
¥
1,875

¥

Other
¥
689

979
895

¥

432
257

Thousands of U.S. dollars
2006
MachineryandEquipment
Other$ 15,375$ 5,349

$

9,179
6,196

$

3,708
1,641

Total
¥ 2,564

¥

1,412
1,152

$

Total
20,724$

12,887
7,837

Future minimum lease payments under finance leases as of March 31, 2006 and 2005 were as
follows:
Thousands ofMillions of yen
U.S. dollars
2006
2005
2006
Due within one year
¥
418
¥
422
$ 3,567
Due after one year
501
729
4,270
Total
¥
920
¥ 1,152$ 7,837
The acquisition costs and future minimum lease payments under finance leases include theimputed interest expense portion.
Depreciation expense, which is not reflected in the accompanying consolidated statements ofincome, computed by the straight-line method, would have been ¥477 million ($4,065 thousand)for the year ended March 31, 2006.

９．Derivatives and Hedging Activities
Derivative financial instruments are utilized by the Company principally to reduce interest rate
and foreign exchange rate risks. The Company has established a control environment which
includes policies and procedures for risk assessment and for the approval, reporting andmonitoring of transactions involving derivative financial instruments. The Company does nothold or issue derivative financial instruments for trading purposes.
At March 31, 2006 and 2005, all forward exchange contracts outstanding were entered into inorder to hedge receivables and payables denominated in foreign currencies which have beentranslated and reflected at the corresponding contracted rates in the accompanying consolidatedbalance sheets at March 31, 2006 and 2005.

30

１０．Shareholders’ Equity(1) Changes in common stock and additional paid-in capital have resulted from the following.

Number of
SharesMillions of yen
Additional
Commonpaid-inStockcapitalBalance of March 31, 2004……

28,326,779

11,842

11,661Retirement of stock during 2005……

143,000

49

49

Balance of March 31, 2005……

28,469,779

11,892

11,711

14,245,889――

Stock split
Retirement of stock during 2006……

22,0007

7Balance of March 31, 2006……

42,737,668

11,89911,718

Thousands of
U.S.dollars
Additional
Commonpaid-inStockcapitalBalance of March31, 2005……

101,236

99,694Retirement of stock during 2006

……

65

65

Balance of March31, 2006……

101,301

99,759The Company adopted 100 shares of common stock as “low unit”. A holder of shares
representing less than one unit cannot exercise any voting rights with respect to such shares.
However, the holder is entitled to receive dividends and other distributions. A holder of afraction of a unit may at any time require the Company to purchase such shares at the prevailingmarket price. Shares so purchased must be sold or otherwise transferred to a third party within areasonable time.
(2) Stock split
On November 18, 2005, the Company made a stock split at the rate of 0.5 shares for each
outstanding shares and 14,245,889 shares were issued to shareholders of record on September
30, 2005.

１１．Research and Development and Computer Software
Research and development expenditure charged to income was ¥ 1,100 million ($ 9,364
thousand) and ¥ 1,505 million for the years ended March 31, 2006 and 2005, respectively.

31

１２．INCOME TAXESThe Company and its domestic subsidiaries are subject to several taxes based on income, whichin the aggregate resulted in statutory tax rates of approximately 40.6％ and 40.6 % for theyears ended March 31, 2006 and 2005, respectively. Foreign subsidiaries are subject to income
taxes of the countries in which they operate.
The effective rate for the two years ended March 31, 2006 differs from the Company’s statutory
tax rate for the following reasons:Statutory tax rate
Dividend income ……………………………………
Expenses not deductible for income tax purposes ……
Per capital inhabitant tax
Other …………………………………………………

2006
40.6
(0.3)
1.8
1.8
1.5

2005
40.6
(0.3)
2.7
3.3
3.4

…………………………………………

45.4

49.7

Effective tax rate%%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets
at March 31, 2006 and 2005 are presented below:

Deferred tax assets:
Accrued expenses¥

Millions of yen
2005
2006

Thousands of
US dollars
2006

425

$

¥

418

3,620

Accrued retirement benefits
Depreciation
Unrealized profits
Tax loss carryforwards
Other
Total gross deferred tax assets
Less valuation allowance

860
233
302
129
488
2,439
(266)

818
194
302
53
402
2,190
(189)

7,326
1,984
2,576
1,104
4,155
20,766( 2,265)

Net deferred tax assets

2,173

2,001

18,501

Deferred tax liabilities:
Special tax-purpose reserve for condensed
booking of fixed assets
Unrealized gains of other securities
Total gross deferred tax liabilities(1,831)(1,323)

15,595 )(1,442)( 3,274)(746)(2,069)(12,283)(27,878)

Net deferred tax assets¥ (1,101)¥ (68)$ (9,377)

In assessing the realizability of deferred tax assets, management of the Company considers
whether it is more likely than not that some portion or all of the deferred tax assets will not berealized. The ultimate realization of deferred tax assets is entirely dependent upon thegeneration of future taxable income in specific tax jurisdictions during the periods in which32

those temporary differences become deductible.
Although realization is not assured,
management considered the projected future taxable income in making this assessment. Basedon these factors, management believes it is more likely than not that the Company will realize
the benefits of these deductible differences, net of the existing valuation allowance as of March
31, 2006.
Tax loss carryforwards will expire between 2007 and 2009.

１３．Segment Information
Information about operations in different industry segments of the Group for the years ended
March 31, 2005 and 2004, are as follows:
Industry Segments
a. Sales and Operating Income
Millions of yen
2006
Eliminations/
Industry D Corporate
Consolidated

Industry A

Industry B

Industry C

Sales to customers
Intersegment¥42,2945¥ 7,558－¥5,804－¥2,481
481

Total sales

42,300

7,558

5,804

Operatingexpenses

40,477

7,348

5,810

Operating income¥ 1,823

¥

209

¥

( 5)

¥

－
( 487)

58,138－2,962( 487)

58,1382,303( 497)

55,442

658

¥

¥

10

¥

¥

2,696

Millions of yen
2005
Industry A

Industry B

Industry C

Eliminations/
Industry D Corporate
Consolidated

Sales to customers
Intersegment¥40,438
4¥11,477－¥ 6,212－¥ 2,443466

Total sales

40,442

11,477

6,212

Operatingexpenses

39,152

11,095

6,274

Operating income¥ 1,289

¥

381

¥

(62)

¥

－
( 470)¥ 60,570－

2,909( 470)

60,5702,221( 488)

58,256

687

¥

¥

17

¥

2,314

33

Sales to customers
Intersegment

Thousands of U.S. dollars
2006
Eliminations/
Industry A Industry B Industry C Industry D Corporate
Consolidated$360,046$64,342$49,417$21,121$－$494,926
50
－
－
4,098
( 4,149 )－Total sales

360,097

64,342

49,41725,219( 4,149 )494,926

Operatingexpenses

344,578

62,55749,463

19,611( 4,239 )471,970

Operating income$15,519$ 1,785$ ($ 5,608

$

b.

46)

90

$

22,955

Assets, Depreciation and Capital Expenditures
Millions of yen
2006

AssetsDepreciation
Capitalexpenditure

Eliminations/
Industry D Corporate
Consolidated

Industry A

Industry B

Industry C¥46,566¥ 5,068¥5,859¥9,177¥ 20,564¥ 87,234

853

66

107

316

－

1,344

2,426

199

112

59

－

2,797

Millions of yen
2005

AssetsDepreciation
Capitalexpenditure

AssetsDepreciation
Capitalexpenditure

Industry A

Industry B

Industry C

Eliminations/
Industry D Corporate
Consolidated¥43,773¥ 9,755¥ 6,062¥ 9,609¥ 18,098¥ 87,300

807

43

116

332

－

1,299

1,195

39

90

51

－

1,377

Thousands of U.S. dollars
2006
Eliminations/
Industry A Industry B Industry C Industry D Corporate
Consolidated$396,413$43,143$49,877$78,122$175,058$ 742,613
7,268

563

915

2,694

－

11,441

20,652

1,697

957

505

－

23,812

34

Notes: Industry A consists of special equipment car.
Industry B consists of environmental equipment and systems.
Industry C consists of car sales business.
Industry D consists of real estate business.
Corporate assets consist primarily of cash and cash equivalents, investment in andadvances to affiliates, investments in securities and the corporate headquarters assets.

１４．Subsequent Event(1) The following appropriations of the Company’s retained earnings in respect of the year
ended March 31, 2006 were as proposed by the Board of Directors and approved by theshareholders at the annual general meeting held on 29 June, 2006:

Appropriations
Cash dividends (¥10 per share)
Bonuses to directors
Total appropriations

Millions of yen
¥
211
26
¥
237

Thousands of
U.S. dollars
$
1,802
223
$
2,025

(2) Sales of a subsidiary
On April 1, 2006, Kyokuto Kaihatu Co.,Ltd sold a subsidiary.
The estimated profit on the sales of ¥195 million (U.S.$1,660 thousand) will be recorded
in fiscal 2006.

35

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the S h are h o ld er s andBoard of D ir ecto rsof K yoku to K a ihatsu Kog yo Co., Ltd.
We have audited the accompanying consolidated balance sheets of Kyokuto Kaihatsu Co.,
Ltd. and subsidiaries as of March 31, 2005 and 2006, and the related consolidated
statements of income, stockholders’ equity and cash flows for each of the years in the
two-year period ended March 31, 2006. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion onthese consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted inJapan. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Kyokuto Kaihatsu Kogyo Co.,Ltd. and subsidiaries asof March 31, 2005 and 2006, and the results of their operations and their cash flows for each of
the years in the two-year period ended March 31, 2006 in conformity with accounting principles
generally accepted in Japan, except at noted in the following paragraph.
As explained in Note 2 (d), in the year ended March 31,2006,Kyokuto Kaihatsu Kogyo
Co.,Ltd. and subsidiaries adopted the new Japanese accounting standard for write-down of
fixed assets.
The accompanying consolidated financial statements as of and for the year ended March
31, 2006 have been translated into United States dollars solely for the convenience of thereader. We have recomputed the translation and, in our opinion, the consolidated financial
statements expressed in yen have been translated into dollars on the basis set forth in note 1
to the consolidated financial statements.

Yukoh Aud it Corpor ation

Os ak a, J ap an
Jun e 29 , 2006

36

・CORPORATE INFORMATION
Kyokuto Kaihatsu Kogyo Co.,Ltd.
Established: June,1955
Paid-in Capital: ¥11,899 million (at March 31,2006)
Number of Shares Issued: 42,737,668shares (at March 31,2006)
Number of Employees:1,385 (at March 31,2006)

Head Office:1-45,Koshienguti 6-chome,Nishinomiya City,
Hyogo Prefecture,663-8545 Japan
Tel.+81-798-66-1000, Fax.+81-798-66-8146
Tokyo Office:
1-1,Asahicho,Haneda,Ota-ku,Tokyo,144-0042,Japan
Tel.+81-3-5737-2271, Fax+81-3-5737-7791
Plants:Yokohama Plant
Occupies 51,890 ㎡, Since March,1962
Located in Yamato,Kanagawa
Nagoya Plant
Occupies 132,537 ㎡, Since June,1970
Located in Komaki,Aichi
Miki Plant
Occupies 98,274 ㎡, Since October,1979
Located in Miki,Hyogo
Fukuoka Plant
Occupies 66,832 ㎡, Since September,1970
Located in Iizuka,Fukuoka
Hachinohe Plant
Occupies 57,600 ㎡, Since April,1999
Located in Hacinohe,Aomori

37

BOARD OF DIRECTOR AND STATUTORY AUDITORS
Katsushi Tanaka,
President and Representative of the Board of Directors, CEO
Tadao Yasuda,Vice President and Representative of the Board of Directors, CEO
Takaaki Hudetani ,Director, Senior Managing Executive Officer
Yukinori Matsuhashi,
Director, Managing Executive Officer
Motohachi Hashimoto ,Director, Managing Executive Officer
Akira Yamashita, Director, Executive Officer
Syunji Nakamura, Director, Executive Officer
Tomoki Ueyama, Executive Officer
Rikio Sagawa, Executive Officer
Kozo Ueda, Executive Officer
Masatoshi Yosida, Executive Officer
Hiroharu Kobayashi, Executive Officer
Taro Okamoto, Executive Officer
Kazuyoshi Nakai, Executive Officer
Norihiro Kumazawa, Executive Officer
Yasuhiko Tamaki, Standing Auditor
Yoshikazu Kira, Auditor
Rikuyuki Tentaku, Auditor
Yasuo Mizuno, Auditor