1KYOKUTO KAIHATSU KOGYO CO., LTD.
AND CONSOLIDATED SUBSIDIARIESAnnual Report 2005
Years ended March 31,2005 and 2004

CONTENTS
Primary Management Policy of the Company
Basic Policy of Profit Distribution
Mid-to-Long Term Management Strategy and Major Challenges
Review of the Past Year and Operational Results
Basic Concept of Corporate GovernanceConsolidated Statement of Income And Retained Earnings
Consolidated Balance Sheets
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
Corporate information
Board of Directors and Statutory Auditors

2
2
3
4
7
10
11
13
14
28
29
30

2

1. Primary Management Policy of the Company

The primary 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 technologicalexpertise and strong reliability, and providing considerable contribution to our society together with
our group companies.”

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

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

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

2. Basic Policy of Profit Distribution

Kyokuto Kaihatsu Group believes that both distribution policies of adequate shareholder returnreflecting the business performance and stable shareholder return are the most important management
objective. Therefore, the Company has strived to meet the stockholders' expectations by taking into
the consideration of the business development and the economic climate in the future while achieving
stable growth of earnings and sound financial position.

Regarding the dividend for the fiscal year ending March 31, 2005, Kyokuto Kaihatsu Kogyo

3maintained per share dividend at the previous year level of ¥5, and the interim dividend at ¥5. In
June 2005, we have cerebrated the 50th anniversary of Kyokuto Kaihatsu Kogyo’s founding.
Therefore, the Company also paid a special dividend of ¥2 per share (the year-end dividend at ¥7), in
commemoration of the 50th anniversary, bringing the total dividend for the fiscal year to ¥12 per shareto express our sincere appreciation to all our shareholders, for their continued understanding andsupport.

3. Mid-to-Long Term Management Strategy and Major Challenges

As the period during the fiscal year ended March 31, 2004 to the fiscal year ended March 31, 2007
was positioned for the next phase of 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 have concentrated oncarrying out the corporate strategies as follows. Basic policy of the Midterm Business Plan is tostrengthen the management architecture, thereby ensuring the further development of the corporate
activities as well as the maximization of the corporate value.

Basic Policy of the “Plan 2004”(1) To strengthen the Kyokuto Kaihatsu Kogyo’s brand power by enhancing the core technologies,(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.

4. Review of the Past Year and 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 export and4

improvement of the corporate financial structure, as well as modest recovery of personal consumption.
Meanwhile, uncertainty around the business environment has remained because of the drastic rise in
raw material price including steel products and crude oil, outbreak of large scaled natural disasters andinstability of international affairs.

By segment, domestic demand in the Specialty Truck Division declined negatively affected by thecompletion of the initial replacement demand especially in the Metropolitan areas, which was causedby the gaseous mission control enforcement on diesel trucks including Environmental Protection
Ordinance enacted by the Tokyo Metropolitan Government in October 2003. Overseas demand, on
the other hand, was strong supported by the stable construction demand especially in China, theCompany is now focusing on, despite major concerns of tight control of the financial policy by the
PRC government.

In the Environmental Equipment and Systems Division, the competition has intensified due to buying
restraint after the enforcement of anti-dioxin regulations and tightening fiscal policies by the local
governments. Total orders received in this division have continued to be adversely affected by theseexternal factors, as a result.

Even amid these worsening market conditions, Kyokuto Kaihatsu Group enacted corporate reform in
Aril 2004, named “Plan 2004” (3-year Midterm Business Plan). Here again, the ultimate goal of thisplan is to strengthen management bases, further developing the corporate activities, and maximizing
the corporate value.

Initiatives of the “Plan 2004”(1) To strengthen the Kyokuto Kaihatsu Kogyo’s brand power by enhancing the core technologies,(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

5the “Screening and Concentration” concept.

As a result of taking these decisive actions, consolidated sales for the fiscal year ended March 31,
2005 rose by 5% or ¥3,142 million from the previous fiscal year to ¥60,570 million due mainly to thesteady growth in mainline Specialty Truck Division and Environmental Equipment and Systems
Division. Consolidated ordinary income, however, declined by 22% or ¥642 million from the previous
fiscal year to ¥2,275 million mainly because of the drastic rise of steel product price. Consolidated
net income also declined by 28%, or ¥365 million to ¥963 million.

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

[Specialty Truck Division]
Domestic demand in this division was sharply declined reflecting negative effect by the completion of
initial replacement demand especially in Tokyo Metropolitan area, which offset the steady demand in
Chubu and Kansai Metropolitan areas supported by the expanding effect of gaseous mission control
regulation into these areas. To cope with a challenging operating environment, the Company hasconcentrated on enhancing total orders received and sales as well as improving overall profitability bystrengthening product portfolio, marketing and service capabilities. Consequently, overseas sales in
the Specialty Truck Division posted strong growth by mainly focusing on the marketing of
construction vehicles in China with empowered sales force although domestic sales remained almost
same level of previous fiscal year.

Consolidated sales in the Specialty Truck Division rose by 4% or ¥1,383 million to ¥40,442 million, asa result. However, operating income declined by 32% or ¥606 million to ¥1,289 million due largely
to rise in raw material cost including steel product price combined with the impact of product mix
change.

6

Kunshan Plant in Jiangsu, China, of Kyokuto Kaihatsu (Kunshan) Machinery Co., Ltd, our firstoverseas plant, began its operation in April 2005. We will place priority on expanding sales by
establishing comprehensive marketing, manufacturing and servicing base and by enlarging costcompetitiveness in China, where the demand for the construction vehicle including mixer truck andconcrete pump truck is expected to be strong. We believe that Kunshan Plant will bring positive
impact to reinforce the domestic operating base, contributing cost cutting measure as a whole.

[Environmental Equipment and Systems Division]
In the Environmental Equipment and Systems Division, Kyokuto Kaihatsu group has pursued toensure total order in the mainline plant related systems such as recycle plaza and recycle centers in thesevere business circumstances. At the same time, the Company strived to maintain both sales andearnings with strong emphasis on expanding contracted business for maintenance and system
operation. In addition, we have been actively working on R&D for the full scale ofcommercialization and order taking activities of Refuse Gasification and Melting System, next
generation incinerator whose potential demand should be considerable. We have succeeded to launch
the first model in March 2005.

Consolidated sales in the Environmental Equipment and Systems Division rose by 12% or ¥1,230
million from the previous fiscal year to ¥11,477 million due mainly to the steady progress of plant
construction received in the last fiscal year, and stable performance of contracted business formaintenance and system operation. However, operating income decreased by 29% or ¥152 million
from the previous fiscal year to ¥381 million reflecting the decline of profitability in the plant
construction business due to drop in unit price caused by the intensified competition.

Total orders received in this division decreased by 38% or ¥4,150 million to ¥6,685 million affectedby the tightening fiscal policies in the local governments as well as negative impact of buying restraint
after the enforcement of anti-dioxin regulations.

7[Automobile Sales Division]
In the Automobile Sales Division, the Company has concentrated on ensuring both sales and earnings
by expanding market share along with improving customer satisfaction through strengthened
marketing and service systems. As a result, consolidated sales in the Automobile Sales Divisionrose by 2% or ¥125 million from the previous fiscal year to ¥6,212 million. On the other hand, theCompany posted operating loss of ¥62 million, decreased by ¥79 million from the previous fiscal year
reflecting the rise of SG&A expenses.

[Real Estate Leasing Division]
In the Real Estate Leasing Division, consolidated sales rose by 18% or ¥453 million from the previous
fiscal year to ¥2,909 million with full contribution of leasing revenue of Kanagawa Ryutsu Center inAtsugi city, which commenced the leasing operation in September 2003 as well as steady revenue
growth of coin parking business. But, operating income decreased by 1% or ¥5 million from theprevious fiscal year to ¥687 million due mainly to the initial cost associated with the coin parking
business.

5 . Basic Concept of Corporate GovernanceKyokuto Kaihatsu group has been fully committed to management strategy with the view tomaximizing the corporate value. To this end, we have reinforced the management platform
facilitating swifter decision-making to meet with dynamically changing business environment, andimplementing the policy or strategy promptly and timely.

Furthermore, we have conducted stronger internal audit and supervisory system to keep sweeping
compliance with each standards or code of obligation in the process involved in the decision making to8enforcement. And, the group regards the establishment of a strong relationship with shareholders,customers, bushiness partners, local societies and employees as vital for the management. To
embody this objective, we have been promoting ethic al evolution, and recognizing the social
responsibility or role of the Company as the public company or member of society through organic
business activities. Based on this recognition, we will take decisive actions to improve or develop
not only internal rules including company code but also legal function or system of annual
shareholders meeting, meeting of board of directors, meeting of auditors, and audit companies formaintaining the sustainable growth as the public company in the years to come.

6. Commitment to Compliance and Risk Management

Regarding commitment to compliance, the Company has formulated “Kyokuto Kaihatsu Kogyo Codeof Conduct” as a guideline for the activities of employees. Through “Code of Conduct”, we provide
each employee with tools in order to reach a solid level of understandings – ensuring each employee
not only recognize the social responsibility as the public company but also conduct business inadherence to the relevant policy. In addition, we have named directors in charge of CSR activities.
Kyokuto Kaihatsu Kogyo will consistently promote the compliance strategy by means of internal
educational or awareness programs for the employees to maintain high ethical standards of businessconduct and observation of the laws.

Regarding risk management, the Company also formulated “Code of Risk Management“ to give theemployees clear direction for addressing any concerns of management environment including
contingency matters adequately and promptly. It is comprehensively including the provisions of
information management or decision making at the special task force to supervise these tasks. Goingforward, we will enhance Kyokuto Kaihatsu Kogyo’s entire risk management system by evaluating
risks using this “Code of Risk Management“.

9

7. Compensation: Directors and Auditors

Compensation for directors and auditors of the Company, and compensation for the audit company are
as follows;<Directors’ Compensation>
Annual compensation for directors¥223 million

Annual compensation for auditors¥40 million

Total compensation value listed above includes directors’ bonuses (directors ¥26 million) andretirement benefits (directors ¥136 million and auditors ¥15 million).

<Auditors’ Compensation>
Compensation based on the article 2-1, Certified Public Accountant Law ¥16 million

There is no compensation based on the duties other than the above listed.

10

ＣＯＮＳＯＬＩＤＡＴＥＤＳＴＡＴＥＭＥＮＴＳＯＦ

ＩＮＣＯＭＥＡＮＤ

ＲＥＴＡＩＮＥＤ

Ｍｉｌｌｉｏｎｓ of ｙｅｎ
2005

2004

Thousands of
U.S. dollars(Note 1)
2005

Net sales………………
………………
………………

60,57057,428564,028

Cost of sales………………
………………
………………

48,77544,687454,193

Gross profit………………
………………
………………

11,795

12,741

109,834

Selling, general andadministrative expenses………………
………………
………………

9,480

9,577

88,277………………
………………
………………

2,314

3,163

21,556

Operating income (loss)
Other income (expenses)
Interest and dividend income………………
………………
………………

64

62

597

Interest expenses………………
………………
………………

(114)

(96)

(1,066)

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

(13)

(114)

(123)

Gain (loss) on sales of securities………………
………………
………………

533

290

4,970

Write‑down of investment securites………………
………………
………………

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

(50)

(1)

(472)

(727)

(539)

(6,776)………………
………………
………………

(90)

(257)

(845)

………………

1,915

2,507

17,838current………………
………………
………………

654

1,560

6,094

deferred (prepaid),net………………
………………
………………

298

(375)

2,775

Total income taxes………………
………………
………………

952

1,185

8,870

Income (loss) before

income taxes

Income taxes (Note 12)

Minority interest………………
………………
………………

Net income (loss)

―

(5)

0

………………
………………
………………

963

1,328

8,968

………………
………………
………………

30,742

29,642286,267………………
………………
………………

(308)

(194)

(2,875)

Bonuses to directors and statutory auditors………………
………………
Adjustment of retained earnings

(48)

(34)

(454)

Retained earnings：
Balance at beginningof period

Cash dividends paid

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

(138)

0(1,292)………………
………………
………………

31,20830,742

290,613

Yen

U.S. dollars

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

32.42

46.05

0.30

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

32.04

45.73

0.30

………………
………………
………………

12.00

10.00

0.11

Cash dividend,applicable toearnings of the year

The accompanying notes are an integral part of this statements.

ＥAＲＮＩＮ

11

ＣＯＮＳＯＬＩＤＡＴＥＤＢＡＬＡＮＣＥＳＨＥＥＴＳ
Thousands of
U.S. dollars(Note 1)
2005

Ｍｉｌｌｉｏｎｓ of ｙｅｎ
2005
2004
ASSETS
Current assets：
Cash and time deposits……………… ………………

6,007

5,961

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

6,432

6,832

59,899………………

28,25023,945

263,060

Trade note and accounts receivable
Less：Allowance for doubtful accounts

55,945………………

(184)

(181)

(1,717)

Inventories……………… ………………

5,630

7,169

52,434

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

671

993

6,252

Prepaid expenses……………… ………………

113

91

1,056

Other current assets……………… ………………

1,542

1,246

14,365……………… ………………

48,46446,057451,297

Investments in securities (Note 3)……………… ………………

4,935

5,417

45,962

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

324

284

3,021

Other

……………… ………………

3,367

3,579

31,358

8,627

9,281

80,342

Total current assets
Investments and other assets：

Total investments and other assets
Property and equipment：Land……………… ………………

12,386

12,386

115,337

Buildings and structures……………… ………………

26,10426,029243,081

Machinery and equipment……………… ………………

7,326

7,111

68,218Construction in progress……………… ………………

736

215

6,855

Other

……………… ………………

2,310
48,863

2,257
48,00021,519455,012Less−Accumulated depreciation………………

(19,035)(18,044)(177,258)

Total property and equipment………………

29,827

29,955

277,753………………

82474……………… ………………

371

246

3,456

………………

379

270

3,531

……………… ………………

87,30085,566

812,925

Intangible assets
Cost in excess of net assets of subsidiaries
other
total intangible assets

Total assets

12

ＣＯＮＳＯＬＩＤＡＴＥＤＢＡＬＡＮＣＥＳＨＥＥＴＳ
Thousands of
U.S. dollars(Note 1)Ｍｉｌｌｉｏｎｓ of ｙｅｎ
2005

2004

2005

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

6,150

2,955

57,267………………

22

32

209

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

12,43913,101

115,833

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

738

1,597

6,881

Accrued expenses……………… ………………

1,957

1,946

18,230

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

1,370

1,653

12,761……………… ………………

22,67921,287211,184

Long‑term debt (Note 4)……………… ………………

1,115

1,137

10,382

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

1,894

1,802

17,644

249

301

2,320

Current portion of long‑term debt (Note 4)

Total current liabilities

Long‑term liabilities：

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

1,064

1,145

9,912

Other long‑term liabilities……………… ………………

4,750

4,719

44,240………………

9,074

9,106

84,501

Total long‑term liabilities

Minority interrests……………… ………………

―

0

−

Shareholders' equity：
Common stock, no par value (Note 10)
Authorized ― 117,708,100 shares
Issued ― 28,469,779 shares in 2004 and………………

11,892

11,842

110,738

Additional paid‑in capital (Note 10)28,326,779 shares in 2004………………

11,711

11,661109,051

Retained earnings………………

31,20830,742

290,613

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

1,089

1,231

10,145

Foreign currency translation adjustments………………

(74)

(28)

(693)

Treasury stock, at cost………………

(280)

(276)

(2,616)

Total shareholders' equity………………

55,54655,172517,239

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

87,30085,566

812,925

13
CONSOLIDATED STATEMENT OF CASH FLOWS
Thousands of
U.S. dollars
Ｍｉｌｌｉｏｎｓ
Operating activities：

2005

Net income before income taxes

of

ｙｅｎ

2004

(Note 1)
2005………………
………………

1,915

2507

17,838………………
………………

1,434

1,373

13,357

58

45

540

(534)

(290)

12

57

………………

40

38

377

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

(64)

(62)

(597)

Interrest expenses………………
………………
………………

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

Provision (reversal) for accrued retiremennt benefits(4,973)
114

114

96

1,066

Decreease (increase) in accounts receivable………………
………………

(4,239)576(39,478)

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

1,538(1,741)

14,322

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

85

230

799

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

(775)

991(7,222)

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

(147)

248(1,372)

Decrease (increase) in income taxes payable………………
………………

352

(406)

3,281

………………
………………
………………
………………

366

780

3,416

Sub totalInterest and dividend income received ………………
………………
………………

158

4,446

1,471

62

61

578

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

(43)

(31)

(405)

Other,net

Income taxes paid………………
………………
………………

(1,866)(262)(17,377)………………
………………
………………
………………

(895)

(926)

(8,335)………………
………………

(2,584)

3,287(24,069)

Payment for purchase of marketable securities and investments

(364)

(367)

(3,389)Proceeds from sales of marketable securities and investments

1,171

770

10,904

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

(1,414)(2,551)(13,168)

Proceeds from sale of facilities………………
………………
………………

61

66

576

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

(39)

(22)

(368)

37

8

345

Other,net

Net cash provided by operating activities
Investing activities：

Collection of loan receivables
Net cash provided by (used in) investing activities………………

(547)(2,096)(5,099)330

29,750Fainancing activities：
Increase (decrease) in short-term debt………………
………………

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

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

Proceeds from issuance of common stock
Purchases of treasury stock………………
………………

………………
………………
………………

3,194
‑

1,068

0

(32)

(107)

(305)

99

111

925

(560)

(112)

(5,219)(194)(2,874)

Proceeds from sales of treasury stock ………………

417

Dividends paid

(308)………………
………………
………………
………………

‑

3,888

14

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, 2005, which was¥107.39 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.

15(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 secur ities.
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. Tradesecurities, consisting of debt and marketable equity securities, are stated at fair value. Gains
and losses, both realized and unrealized, are charged to income.
(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 classifie das 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

16(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.
(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
For the year ended March 31,2003 and prior years, if the construction work takes longer than
one year and the contract amount exceeded ¥ 0.5 billion ($4,656 thousand), the percentage ofcompletion method was applied.
Effective April 1,2004, the Company changed the criteria for the application of the percentage
of completion method. The percentage of completion method is applied to the construction
works which take longer than one year and exceed ¥0.2 billion ($1,862 thousand) in contract
amount.
As a result of the adoption of the new criteria, the net sales and the cost of sales for the year
ended March 31, 2004, are greater than would have been on the prior criteria by ¥147 million($1,369 thousand) and ¥163 million ($1,518 thousand), respectively.

17(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.
(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 28,484 thousand shares for 2005 and 27,784 thousand shares for 2004.
For the year ended 31, 2005 and 2004 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.

18

3. Short-term Investments, Investments in Securities and Investments inand advances to associates
Short-term securities at March 31, 2005 and 2004 consisted of the following:Thousands of
U.S. dollars
2005

Millions of yen
2005
2004
Market value available:
Trading securities
Market value not available:
M.M.F. and F.F.F.
Other investment trust
Total

¥

101

¥ 6,30130¥ 6,432

¥

101

$

942

¥ 6,70130¥ 6,832$

58,678279
59,900$The following is a summary of other securities at March 31, 2005 and 2004:

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

¥

¥

2,193
−
−
2,193

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

¥

¥

1,941
−
−
1,941

¥

¥

105
−
−
105

Market value not available:
Total

Market value available:
Equity securities
Bonds and debentures
Other securities
Market value not available:
Total

Cost

Millions of yen
March 31, 2004
Other securities
Gross
Gross
unrealized
unrealized
gains
losses¥ 2,292――¥ 2,292¥ 2,118――¥ 2,118

¥

¥

43
―
―
43

Book Value(Estimatedfair value)¥ 4,029−−¥ 4,029906¥ 4,935

Book Value(Estimatedfair value)¥ 4,367――¥ 4,367
1,050¥ 5,417

19

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

20,428――20,428

Thousands of U.S. dollars
March 31, 2005
Other securities
Gross
Gross
unrealized
unrealized
gains
lossesBook Value(Estimatedfair value)$$

37,526――$37,526
8,437
45,963$18,083――18,083

$

$

986
―
―
986

Market value not available:
Total

$

4. Short-term bank loans and long-term debt
The annual average interest rates applicable to short-term bank loans at March 31, 2005, and2004 are 0.86％ and 0.67％, respectively.
Long-term debt at March 31, 2005 and 2004 consisted of the following:

0.46% bank loans due 2006
0.57％ bank loans due 2009
1.50％ guarantee money due 2023

Millions of yen
2005
2004
¥
22
¥
32
1,115
1,137
3,180
3,111
¥ 4,317¥ 4,282

Thousands of
U.S. dollars
2005
$
209
10,382
29,613$ 40,206

Aggregate annual maturities of long-term debt subsequent to March 31, 2005 are as follows:Year ending March 31

Millions of yen

2006
2007
2008
2009
2010 and thereafter

¥

22
1,028
261
260
2,743
¥ 4,317

Thousands of
U.S. dollars
$
209
9,581
2,439
2,425
25,549$ 40,206

20

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, 2005 and 2004.

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
2005
2004
¥ 5,259¥5,3502,852
2,846

Thousands of
U.S. dollars
2005$ 48,979
26,564

2,407
―
―
524
(11)

2,504
―
―
712
(10)

22,415――4,880( 109)

1,894

1,802

17,644

Note: 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, 2005 and 2004.

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
2005
2004
¥ 271
¥ 257
109
131
( 62)
( 99)
―
―
146
¥ 465

―
―
162
¥ 452

Thousands of
U.S. dollars
2005$ 2,5291,018( 578)

$

―
―
1,368
4,337

Assumption used in the accounting for the defined benefit plans for the year ended March 31,
2005 and 2004 is as follows:
2005
2004
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 %
2.5 %
Amortization period for transition obligation at date of adoption ――Amortization period for prior service cost――
Amortization period for actuarial losses
10 years
10 years

21

6. Contingencies
At March 31, 2005 and 2004, the Group was contingently liable as follows:

As an endorser of notes discounted or endorsed
As a guarantor of indebtedness of :Associates
OthersMillions of yen
2005
2004
¥
2,079
¥ 2,084
¥
¥

5,015
52
5,067

¥
¥

1,715
37
1,752

Thousands of
US dollars
2005$ 19,368$$

46,699489
47,187

7. Cash and cash equivalents
Cash and cash equivalents at March 31, 2005 and 2004 are as follows:

Cash and time deposits
Short-term investment
Less-Time deposits with original maturities
more than three months
Less-StockMillions of yen
2005
2004
¥ 6,007¥ 5,961
6,432
6,832

Thousands of
U.S. dollars
2005$ 55,945
59,900( 70)―¥ 12,370( 652)―$ 115,193( 70)―¥ 12,724

8. Leases
The Group leases certain machinery and equipment, and other assets. Total lease payments
under these leases were ¥ 437 million ($ 4,071 thousand) , and ¥ 402 million for the years ended
March 31, 2005 and 2004, 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, 2005 and 2004, are as follows:
Millions of yen
2005
MachineryandEquipment
Other
Total
Acquisition costs
¥
1,875
¥
689
¥ 2,564
Accumulated
Depreciation
979
432
1,412
Net leased property
¥
895
¥
257
¥ 1,152

22

Millions of yen
2004

Acquisition costs
Accumulated
Depreciation
Net leased property

Acquisition costs
Accumulated
Depreciation
Net leased property

MachineryandEquipment¥ 1,010
¥

522
488

Other
¥ 1,060

¥

Total
2,071

556
504

¥

1,079
992

¥

Thousands of U.S. dollars
2005
MachineryandEquipment
Other$ 17,460$ 6,421
$

9,122
8,338

4,027
$ 2,394$

Total
23,882

13,149$ 10,733

Future minimum lease payments under finance leases as of March 31, 2005 and 2004 were as
follows:
Thousands ofMillions of yen
U.S. dollars
2005
2004
2005
Due within one year
¥
422
¥
391
$ 3,938
Due after one year
729
601
6,795
Total
¥ 1,152¥992$ 10,733
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 ¥437 million ($4,071 thousand)for the year ended March 31, 2005.

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, 2005 and 2004, 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, 2005 and 2004.

23

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

Number of
SharesMillions of yen
Additional
Commonp a i d -in
StockcapitalBalance of March 31, 2003……

28,165,779

11,786

11,508Retirement of stock during 2004……

161,000

56

153

Balance 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

11,711Thousands of
U.S.dollars
Additional
Commonp a i d -in
StockcapitalBalance of March31, 2004……

110,275

108,590

Retirement of stock during 2005

……

463

462

Balance of March31, 2005……

110,739

109,052

The 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.

11. Research and Development and Computer Software
Research and development expe nditure charged to income was ¥ 1,505 million ($ 14,023
thousand) and ¥ 1,284 million for the years ended March 31, 2005 and 2004, respectively.

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 42.0 % for theyears ended March 31, 2005 and 2004, respectively. Foreign subsidiaries are subject to income
taxes of the countries in which they operate.

24

The effective rate for the two years ended March 31, 2005 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 …………………………………………………

2005
40.6
(0.3)
2.7
3.3
3.4

2004
42.0
(0.3)
2.5
2.5
0.6

Effective tax rate …………………………………………

49.7

47.3

%

%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets
at March 31, 2005 and 2004 are presented below:
Millions of yen
2005
2004
Deferred tax assets:
Accrued expenses
Accrued retirement benefits
Depreciation
Unrealized profits
Tax loss carryforwards
Other
Total gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Special tax-purpose reserve for condensed
booking of fixed assets
Unrealized gains of other securities
Total gross deferred tax liabilities
Net deferred tax assets¥

Thousands of
US dollars
2005

418
818
194
302
53
402
2,190
(189)

¥ 426
773
210
302
42
725
2,479
(159)

$ 3,896
7,617
1,815
2,818
501
3,750
20,398( 1,764)

2,001

2,320

18,634(1,323)(1,344)(12,320)(746)(2,069)(843)(2,187)(6,952)(19,272)¥ (68)

¥ 132

$

(638)

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 whichthose 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, 2005.
Tax loss carryforwards will expire between 2006 and 2008.

25

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
2005
Industry A Industry B

Eliminations/
Industry C Industry D Corporate
Consolidated

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

Total sales
Operatingexpenses

40,442

11,477

6,212

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

Millions of yen
2004
Industry A Industry B

Eliminations/
Industry C Industry D Corporate
Consolidated

Sales to customers
Intersegment¥39,058
0¥10,246−¥6,086−¥2,036419

Total sales
Operatingexpenses

39,058

10,246

6,086

37,162

9,712

6,068

Operating income¥1,896

¥

534

¥

17

¥

−
( 419)¥57,428−2,456( 419)

57,4281,763( 442)

54,264

692

¥

¥

¥

22

3,163

Thousands of U.S. dollars
2005
Industry A Industry B

Eliminations/
Industry C Industry D Corporate
Consolidated−( 4,382)$ 564,028−

27,095( 4,382)

564,028

58,42820,690( 4,548)

542,472$ (578)$ 6,405$

Sales to customers $376,554
Intersegment
38$106,873−$57,850−$22,751
4,344

Total sales

376,592

106,873

57,850Operatingexpenses

364,585

103,316

Operating income$ 12,007

3,557

$

$

166

$

21,557

26b.

Assets, Depreciation and Capital Expenditures
Millions of yen
2005

AssetsDepreciation
Capitalexpenditure

Industry A Industry B

Eliminations/
Industry C Industry D Corporate
Consolidated¥43,773¥ 9,755¥ 6,062¥ 9,609

807

43

116

1,195

39

90

18,098¥ 87,300

332

−

1,299

51

−

1,377

¥

Millions of yen
2004

AssetsDepreciation
Capitalexpenditure

Industry A Industry B

Eliminations/
Industry C Industry D Corporate
Consolidated¥44,850¥ 7,386¥ 6,051¥ 9,693

749

43

110

945

26

230

17,584¥ 85,566

334

−

1,238

1,072

−

2,275

¥

Thousands of U.S. dollars
2005

AssetsDepreciation
Capitalexpenditure

Industry A Industry B

Eliminations/
Industry C Industry D Corporate
Consolidated$407,616$90,843$56,456$89,480$168,528$ 812,925

7,502

401

1,088

3,092

−

12,107

11,134

368

842

482

−

12,827

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.

27

14. Subsequent Event
The following appropriations of the Company’s retained earnings in respect of the year ended
March 31, 2005 were as proposed by the Board of Directors and approved by the shareholders at
the annual general meeting held on 29 June, 2005:

Appropriations
Cash dividends (¥ 8.0 per share)
Bonuses to directors
Total appropriations

Millions of yen
¥
197
22
¥
219

Thousands of
U.S. dollars$ 1,839
208
$
2,047

28

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders andBoard of Directorsof Kyokuto Kaihatsu Kogyo Co., Ltd.

We have audited the accompanying consolidated balance sheets of Kyokuto Kaihatsu Co.,
Ltd. and subsidiaries as of March 31, 2004 and 2005, 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, 2005. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion onthese consolidated financial statements bas ed 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, inall material respects, the fina ncial position of Kyokuto Kaihatsu Kogyo Co.,Ltd. andsubsidiaries as of March 31, 2004 and 2005, and the results of their operations and their
cash flows for each of the years in the two -year period ended March 31, 2005 in conformity
with accounting princ iples generally accepted in Japan.
The accompanying consolidated financial statements as of and for the year ended March
31, 2005 have been translated into United States dollars solely for the convenience of thereader. We have recomputed the translation a nd, 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 Audit Corporation

Osaka, Japan
June 29, 2005

29

CORPORATE INFORMATION

Kyokuto Kaihatsu Kogyo Co.,Ltd.
Established: June,1955
Paid-in Capital: ¥11,892 million (at March 31,2005)
Number of Shares Issued: 28,469,779 shares(at March 31,2005)
Number of Employees:1,382
Head Office:1- 45,Koshienguti 6-chome,Nishinomiya City,
Hyogo Prefecture,663-8545 Japan
Tel.0798-66-1000, Fax.0798-66-8146
Tokyo Office:
1-1,Asahicho,Haneda,Ota-ku,Tokyo,144-0042,Japan
Tel.03-5737-2271, Fax03-5737-7791
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

30

BOARD OF DIRECTOR AND STATUTORY AUDITORS
Katsushi Tanaka,
President and Representative of the Board of Directors, CEO
Tadao Yasuda,
Senior Managing Director, Senior Managing Executive Officer
Hiroki Uoi,
Managing Director, Managing Executive Officer
Yukinori Matsuhashi, Director, Managing Executive Officer
Takeshi Kunisada, Director, Executive Officer
Takaaki Hudetani, Director, Executive Officer
Syunji Nakamura, Director, Executive Officer
Kiyosi Urasaka, Executive Officer
Yukitoshi Masumura, Executive Officer
Tomoki Ueyama, Executive Officer
Motohachi Hashimoto, Executive Officer
Rikio Sagawa, Executive Officer
Kozo Ueda, Executive Officer
Daisuke Nagumo, Executive Officer
Akira Yamashita, Executive Officer
Masatoshi Yosida, Executive Officer
Yasuhiko Tamaki, Standing Auditor
Yoshikazu Kira, Auditor
Rikuyuki Tentaku, Auditor
Yasuo Mizuno, Auditor