2006

Semiannual Report

For the six months ended September 30, 2006

Consolidated Financial Highlights
Kawasaki Heavy Industries, Ltd. and Consolidated Subsidiaries
For the six months ended September 30, 2006 and 2005

Thousands of
U.S. dollars

Millions of yen
2006

For the period:
Net sales.................................................................................................................................................. ¥0,645,852
Operating income ..................................................................................................................................
25,562
Net income..............................................................................................................................................
11,414
Research and development expenses..................................................................................................
14,300Depreciation and amortization..............................................................................................................
14,879Net cash provided by (used for) operating activities ..........................................................................
(10,767)
Per share (in yen and U.S. dollars):
Net income.............................................................................................................................................. ¥Cash dividends .......................................................................................................................................

7.33
—

2005

2006

¥0,593,579
12,577
5,233
11,20014,384
11,216$05,478,429
216,829
96,819121,300
126,211(91,331)

¥

$

3.63
—

0.06
—

At end of the period:
Total assets.............................................................................................................................................. ¥1,319,100
Total shareholders’ equity .....................................................................................................................
244,170¥1,193,901
207,499$11,189,244
2,071,168

Orders received and outstanding:
Orders received during the period ....................................................................................................... ¥0,763,844
Order backlog at end of the period ..................................................................................................... 1,424,960¥0,516,694
1,191,717$06,479,294
12,087,200

Number of employees .........................................................................................................................

29,461

29,024

Notes: 1. This semiannual report has been prepared in conformity with generally accepted accounting principles and practices in Japan.
2. All dollar figures herein refer to U.S. currency. Yen amounts have been translated, for convenience only, at ¥117.89 to $1.00, the approximate rate ofexchange at September 30, 2006.

Net Sales(Billions of yen)

Apr. 2006—Mar. 2007

593.6

Apr. 2004—Mar. 2005

537.7

Apr. 2003—Mar. 2004

523.3

Apr. 2002—Mar. 2003

539.7
0

500
First half

(Billions of yen)

Apr. 2006—Mar. 2007

645.9

Apr. 2005—Mar. 2006

Net Income (Loss)

Apr. 2005—Mar. 2006

728.9

637.0
699.9

Second half

5.2

Apr. 2004—Mar. 2005

703.9

1,000

11.4

1,500

11.3

3.4

Apr. 2003—Mar. 2004

(3.4)

Apr. 2002—Mar. 2003

(3.5)
–5

8.1
9.7
16.5

0
First half

510Second half

15

20

To Our Shareholders
New Medium-Term Business Plan “Global K”
Targeting Before-Tax ROIC of 14% and Recurring Profit of ¥90 Billion
Further Gains in Operating Income and Net Income
The Japanese economy continued on an expansionary trend
during the interim period under review, ended September 30,
2006, propelled by growth in personal consumption andexports as well as by increases in private capital investment
driven by an improvement in corporate earnings. Outside
Japan, although some sectors in the U.S. economy slowed,
the world economy continued to be generally strong, driven
especially by expansion in Europe, China, and the rest of Asia.
Nevertheless, the operating environment for the Kawasaki
Heavy Industries (KHI) Group continued to present challenges.
Lackluster conditions prevailed in the domestic public works
market, and prices of raw materials, such as steel and crude oil,remained at high levels, while prices of more costly materials,
such as aluminum and titanium, rose sharply and shortages
emerged.
Amid these conditions, the KHI Group maintained its proactive
posture of confronting the challenges and aggressively pursuing market opportunities in the operating environment. As aconsequence, the Group’s net sales grew ¥52.3 billion, or 8.8%
from the interim period of the previous year, to ¥645.9 billion,
led especially by higher sales in the Aerospace and Consumer
Products & Machinery segments.
Profitability showed further improvement, as a consequenceof active measures to increase earnings in all aspects of theGroup’s operations. Operating income rose ¥13.0 billion, up
103.2% over the interim period of the previous year, to ¥25.6
billion. Net income for the period rose ¥6.2 billion, up 118.1%,
to ¥11.4 billion.

Preparation of a New Medium-Term Business Plan
and Emphasis on Compliance
Under its previous medium-term business plan, which was
based on the fundamental policy of “Quality Followed by
Quantity,” the KHI Group has exercised selectivity and focus in
its allocation of resources. As a consequence, the Group has
been able to restore the profitability of its activities, improve
its financial position, and steadily improve the soundness of its
business base. To move up to the next stage in growth anddevelopment, we have prepared a new medium-term businessplan entitled “Global K.” The new plan will begin in the current fiscal year and extend through the fiscal year ending
March 31, 2011 and targets before-tax return on invested
capital (ROIC)*1 of 14% and recurring profit*2 of ¥90 billion.
As we implement this new plan, we will be working to greatly
improve the quality of our management activities. This will
include strengthening our internal control systems, placingstrong emphasis on compliance, and endeavoring to fulfill
our responsibilities to society. With these goals in mind, in
October 2006, we formed a specialized unit, the Corporate
Social Responsibility (CSR) Department, which has the
responsibility for driving our CSR activities.
The KHI Group is steadily implementing various policies tostrengthen profitability in all its business activities and reform
its business portfolio, with the objective of enhancing its corporate value. We would like to take this opportunity to ask
you, our shareholders, for your renewed support and cooperation.

December 2006
Our basic policy is to pay dividends appropriate to earnings
performance, while giving careful attention to increasing
retained earnings. After giving due consideration to the uncertainties in the operating environment for the full fiscal year
ending March 31, 2007, we have decided not to pay a cash
dividend for the interim period under review.

Tadaharu Ohashi
President*1, *2 See page 6

1Medium-Term Business Plan

Medium-Term Business Plan “”“Global Kawasaki”—The Next Exciting Stage
KHI’s new Medium-Term Business Plan “Global K” will begin in fiscal 2007, ending March 31, 2007, and extend throughfiscal 2011. The first step in preparing this plan was to create a vision for the KHI Group and each of its business domains
a decade into the future. Looking toward this vision of the future, KHI then developed this medium-term plan for growth
for the next five years. The plan will be revised as necessary in fiscal 2009.

1. CORPORATE VISION

Enriching Lifestyles and Helping Safeguard the Environment: Global Kawasaki
KHI aims to become a leading global enterprise that enriches lifestyles and helps safeguard the environment through its businesses,
which encompass land, sea and air transportation systems, as well as the energy and environmental engineering sectors.

What Each Business Should Be 10 Years in the Future
Rolling StockEnergy & Environmental Engineering

A world-class maker of rolling stock systems that draws on

A global leader in energy and environmental engineering withleading-edge technologies and feature top quality

a reputation built on superb, proprietary technologies

AerospaceIndustrial Robots

A leader in Japan’s aerospace industry, with solid competitive-

A world-leading industrial robot manufacturer with a reputation

ness internationally in aircraft manufacturingbuilt on key and systems technologies for high-performance

Gas Turbines & Machineryand multifunctional robots

A prime mover manufacturer with world-class technologies

Shipbuildingin the transportation equipment and energy fields

A shipbuilder with world-class profitability that draws on

Consumer Products & Machinery
A leisure vehicle and engine manufacturer with a top brandrecognized for high quality and high performanceadvanced technologies and a production site in China towithstand market swings

Industrial Hydraulic Products
One of the world’s top five hydraulic equipment manufacturers, with outstanding technologies and product quality22. BASIC OBJECTIVESKHI should make major leaps forward to become a highly profitable,
globally recognized enterprise by

Quality Followed by Quantity(1) Implementing ongoing reforms to establish a sustainable growth cycle
Selectivity and Concentration(2) Achieving steady growth in keeping with the Global Kawasaki Vision(3) Building a solid Kawasaki brand by leveraging consumer trust

Stronger Non-Price Competitiveness(4) Reinforcing the CSR organization to enhance corporate quality

3. SELECTIVITY AND CONCENTRATION
1. Positioning of KHI Businesses
Four Core Businesses
Rolling Stock, Aerospace, Gas Turbines & Machinery, andConsumer Products & Machinery
Industrial Robots, Shipbuilding,and Industrial Hydraulic Products

Energy & Environmental Engineering

Consumer Products & Machinery

Gas Turbines & Machinery

Aerospace

Rolling Stock“Global Kawasaki”

Should be operating globally as earnings drivers of the KHI Group
Developing Business
Energy & Environmental Engineering(Redirecting the Plant & Infrastructure Engineering business toward energy-related
and environmental-related activities to achieve further growth and development)

Should be nurtured as a new earnings driver of the Group by implementing
various measures, including redirection of businesses and M&A
Self-Sufficient Businesses
Industrial Robots, Shipbuilding, and Industrial Hydraulic ProductsShould establish a position as a specialist in each business field and securestable earnings

FourCore Businesses

Developing Self-Sufficient
Business
Businesses

32. Positioning of Business Units/Products

Rolling Stock

Aerospace

Gas Turbines& Machinery

Consumer Products& Machinery

Priority
Businesses

Developing
Businesses

Businesses with
Stable Earnings

Will drive sustainablegrowth. Expand earnings
through focused investments

Strengthen competitivenessthrough focused investments

Achieve consistent returns

Railcars foroverseas markets

Railway systems
Gigacell-powered LRVs

Railcars forJapanese market

Defense aircraft
Commercial aircraft

Convert P-X and C-X tocommercial aviation use
Commercial helicopters

Guidance systems

Engines forcommercial aircraft

Gas turbine power
generation systems
Gas engines

Engines for defense sector(for aircraft and ships)
Steam turbines for marine andindustrial applications
Aerodynamic machinery

Motorcycles forindustrialized markets

Motorcycles forindustrializing markets

General-purpose
gasoline engines

Gigacells®
Biomass power generation
systems
Treatment of harmful
substances
LNG tanks
Energy and environment
related facilities

Energy &Environmental
Engineering

Industrial plants

Businesses Requiring
Structural Reform

Policies will be decided
going forward and focus
will be on public-sector
investment related areasin Japan.

Industrial robots

Industrial Robots

Shipbuilding

Industrial
Hydraulic Products

Merchant vessels(production in China)

For construction machinery

Naval vessels
Merchant vessels(production in Kobe and Sakaide)
For industrial equipment
and ships

Note: Meaning of terms highlighted in red, which indicate new products under development, are as follows: (a) Gigacells®: Nickel-metal hydride batteries,
Note: (b) LRV: Light rail vehicle, tram car with super-low floor, (c) P-X: Next maritime patrol aircraft, (d) P-X: Next transport aircraft

44. PLANS FOR ALLOCATION OF MANAGEMENT RESOURCES

KHI will place emphasis on allocating management resources to priority businesses
and developing businesses to ensure future growth.
Capital investment plan

Invest ¥300 billion over five years, or ¥60 billion annually(This compares with an average of ¥47 billion over the past three years.)

R&D investment plan

Invest ¥200 billion over five years, or ¥40 billion annually(This compares with an average of ¥27 billion over the past three years.)Personnel plan

To compensate for the increased number of employees reaching
mandatory retirement age and to facilitate implementation of
KHI’s expansion plans, KHI will hire 5,000 new staff over five
years, or 1,000 people annually. This will result in an estimatedincrease in the number of employees to 31,000 at the end of
fiscal 2011, 2,000 higher than at the end of fiscal 2006.

5. PRIORITY INITIATIVES
1) Strengthen technological capabilities
With renewed awareness that technology is a key sourceof earnings, reinforce technological development capabilities, production technology capabilities, and intellectual
asset strategies.
2) Encourage market-oriented thinking and action
Become more market-focused to strengthen non-pricecompetitiveness. Keep in mind that profits are generated
from the market. All thinking and action in all processes ofbusiness operations should stem from the market.
3) Accelerate global business development
Aimed at future growth, accelerate global business development in sales, production, and procurement, while
cooperating with partner companies.
4) Create and cultivate new products and business
Cultivate next-generation core businesses throughout the
duration of the Global K plan by upgrading technologies
and creating new businesses fulfilling high-priority social
needs.

5) Strengthen Group management capabilities
While maintaining the advantages of the internal company
system of management efficiency and flexibility, reinforce
the Companywide strategy development and Group management/oversight functions at headquarters aimed atincreasing the centripetal force of the KHI Group and harmonizing the optimization of the Company’s individual
parts and the Group as a whole.
Create a smaller, strong, and more agile headquarters
and selectively reinforce the operations of subsidiaries
and affiliates.
6) Promote Corporate Social Responsibility (CSR)
Improve management quality by promoting CSR with afocus on enhancing internal control systems and compliance, increase management transparency (commitment
and accountability), strengthen risk management capabilities, and conduct environment-friendly business operations.

56. QUANTITATIVE TARGETS• Strengthen profitability• Reinforce financial position

Targets for
Fiscal 2011
• Increase ROIC
• Increase the ratio of recurring• profit to net sales• Before-tax ROIC*1: 14%• Recurring profit*2 to net sales ratio: 5.8%
• Net sales: ¥1,560 billion• Operating income: ¥100 billion• Recurring profit: ¥90 billion• Debt-to-equity ratio*3: 100% or less
• Shareholders’ equity ratio: 30% or more

*1: Before-tax ROIC: Earnings before interest and taxes (EBIT) divided by invested capital*2: Recurring profit is used in accounting standards generally accepted in Japan. It is the sum of*2: operating income, net interest income (expenses), dividend income, and other non-operating*2: but recurring items.
*3: Debt-to-equity ratio: Ratio of interest-bearing debt to total shareholders’ equity

Policy for Shareholder Return: Gradually increase dividends in line with improvement in profitability. Set a medium- to long-term
Policy for Shareholder Return: target payout ratio of 30%, with dividends set based on financial projections and the progress
Policy for Shareholder Return: toward the implementation of the business plan.
Cautionary Statement
The performance outlook and forecasts stated in these materials were prepared by Kawasaki Heavy Industries, Ltd. (hereinafter, KHI),
based on the circumstances as of the release date, and include potential risks and uncertain factors that relate to economic conditions,foreign currency exchange rates, tax rules, regulations, and other factors. Accordingly, please note that the actual operating results,financial position, and business development of KHI may sometimes differ considerably from the descriptions in the present projections.

Enriching lifestyles and helping safeguard the environment“Global Kawasaki”

6Review of Operations

ShipbuildingThis segment secured orders amounting to ¥69.5 billion, ¥31.0 billion, or
80.7% higher than in the same periodof the previous year. Orders wereobtained for 10 new vessels in total:
one LNG carrier, seven bulk carriers,
and two LPG carriers. This compared toorders a year earlier for three new vessels in total: two LNG carriers and one
LPG carrier.

Sales showed a decline of ¥11.6 billion,
down 21.6%, to ¥42.1 billion, due tolower sales of newbuildings. The segment reported an operating loss of¥2.1 billion, mainly because of increases
in prices of materials.

Rolling Stock & Construction Machinery
This segment continued to secure large
orders for commuter train cars from
North America. As a result, orders leaped¥78.4 billion, or 101.0%, to ¥156.1 billion.

Operating income climbed ¥3.9 billion,
up 171.1%, to ¥6.1 billion, owing to
an improvement in the profitability ofoverseas projects.

Sales were up ¥2.6 billion, or 3.1%, to¥86.9 billion. Although sales of rollingstock in Japan decreased, deliveries foroverseas customers, including the Taiwan
High Speed Rail Corporation increased.

Aerospace
Orders received increased ¥20.8 billion,or 42.1%, to ¥70.2 billion, because ofhigher demand from the commercial aircraft sector, principally orders from The
Boeing Company for component parts
for the Boeing 777 passenger aircraft.
Sales rose ¥23.2 billion, or 25.4%, to¥114.5 billion, due to the contributionof sales for the development of the P-X

next maritime patrol aircraft and C-X
next transport aircraft for the Japan
Defense Agency, an increase in sales ofcomponent parts for the Boeing 777
passenger aircraft, and other factors.
Operating income declined ¥0.5 billion,
or 9.0%, to ¥5.1 billion, owing to theadverse impact of higher material costs.

7

Gas Turbines & Machinery
Orders won by this segment increased¥2.2 billion, or 2.2%, to ¥99.3 billion, asa consequence of higher demand forindustrial gas turbines and other factors.
Sales climbed ¥11.4 billion, or 16.5%, to¥80.5 billion, mainly due to an increasein sales for component parts for jet
engines for commercial aircraft.
Operating income rose a marked ¥3.5
billion, up 258.4%, to ¥4.8 billion, driven
by growth in sales, favorable movements in foreign exchange rates, andother factors.

Plant & Infrastructure Engineering
This segment reported a sharp rise inorders of ¥68.8 billion, up 261.8%, to¥95.1 billion, on the strength of major
orders from overseas customers. These
included a cement plant in Vietnam anda ferronickel plant in Korea.

previously by overseas customers. This
segment reported an operating loss of¥3.7 billion, which was a ¥1.9 billion
improvement from a larger operating
loss in the same period of the previous
fiscal year, owing to better operating
results in the industrial plant business.

Sales declined ¥16.5 billion, down
24.0%, to ¥52.1 billion, owing to a
decline in sales of plants ordered

Consumer Products & Machinery
Sales increased ¥23.6 billion, up 14.2%,
to ¥189.9 billion, boosted by higher revenues generated from motorcycles inNorth America and Europe. Operating
income rose sharply by ¥5.8 billion, up
112.0%, to ¥10.9 billion, supported byexpansion in profits of the industrial

robot business and the favorable
impact of movements in foreignexchange rates.

Other
Sales came to ¥79.8 billion, a gain of¥19.6 billion, or 32.6%, over the same
period of the previous fiscal year, as
sales of the hydraulic machinery business8

to customers in China increased.
Operating income climbed ¥1.4 billion,
up 47.5%, to ¥4.4 billion.

Review by Geographic Segment
Sales in Japan rose ¥14.6 billion, up 3.3% in comparison
with the interim period of the previous year, to ¥459.8 billion, mainly because of an increase in sales of the parent
company. Operating income climbed ¥9.9 billion, up
92.5%, to ¥20.5 billion.
In North America, sales jumped ¥22.4 billion, up 23.0%,
to ¥119.6 billion, boosted by robust sales of motorcycles
and other factors. Operating income rose ¥0.8 billion,
up 345.0%, to ¥1.1 billion.

In Asia, sales declined ¥2.1 billion, down 18.9%, to ¥9.2
billion, owing to lower sales of motorcycles in Indonesia
and other factors. Operating income dropped ¥0.3 billion,or 43.9%, to ¥0.4 billion.
In other areas, sales grew ¥3.0 billion, up 93.5%, to ¥6.3
billion, while operating income amounted to ¥0.1 billion,
an improvement from an operating loss of ¥0.2 billion forthe same period a year earlier.

Sales in Europe expanded ¥14.4 billion, up 39.2%, to¥51.0 billion, because of strong sales of motorcycles
in this region. Operating income rose ¥1.1 billion, up
155.8%, to ¥1.8 billion.

Financial Position
Total assets at the end of the interim period were¥1,319.1 billion, ¥35.0 billion higher than at the end of
the previous fiscal year (ended March 31, 2006), mainly
because of an increase in inventories accompanying therise in orders. Interest-bearing debt rose ¥29.9 billion, to¥349.7 billion, accompanying the increase in the scale of
the Group’s operations.
Among cash flows, net cash flows from operating activities amounted to a net outflow of ¥10.8 billion, primarily
as a consequence of the previously mentioned increase
in inventories, compared with a net inflow of ¥11.2 billion
in the same period of the previous fiscal year.

period of the previous fiscal year. As a result, free cash
flow amounted to a net outflow of ¥37.5 billion.
Net cash provided by financing activities amounted to¥24.8 billion, due mainly to an increase in short-termborrowings which was partially offset by an increase in
the repayment of corporate bonds. This compared witha net outflow of ¥15.5 billion in the same period of theprevious fiscal year.
As a result of these movements in cash flows, cash andcash equivalents at the end of the interim period underreview were ¥24.9 billion, ¥12.6 billion lower than at theend of the previous fiscal year.

Net cash used for investing activities amounted to ¥26.7
billion, reflecting capital expenditures and other factors,
compared with a net outflow of ¥7.7 billion in the same9

Condensed Consolidated Balance Sheets
Kawasaki Heavy Industries, Ltd. and Consolidated Subsidiaries
As of September 30 and March 31, 2006 and September 30, 2005

Thousands of
U.S. dollars

Millions of yen
September 30, 2006
(unaudited)

March 31, 2006

September 30, 2005
(unaudited)

Assets:Current assets:
Cash on hand and in banks...........................................
Receivables, less allowance ..........................................
Inventories ......................................................................
Other current assets ......................................................
Total current assets ...................................................
Investments and long-term loans, less allowance ..........
Net property, plant and equipment.................................
Intangible and other assets ..............................................
Total assets.............................................................

¥0,025,006
429,542425,754
57,832
938,134
86,015249,200
45,751¥1,319,100¥0,037,650
438,204
383,01757,028915,899
76,757
246,219
45,210¥1,284,085¥0,032,685
375,420375,367
53,533
837,005
84,250239,731
32,915¥1,193,901

212,113
3,643,583
3,611,451
490,559
7,957,706
729,621
2,113,835
388,082$11,189,244

Liabilities and shareholders’ equity:
Current liabilities:
Short-term borrowings and current
portion of long-term debt...........................................
Payables..........................................................................
Advances from customers.............................................

¥0,182,746
404,909111,846¥0,162,746
409,942
98,590¥0,145,614
331,495
132,533$ 1,550,140
3,434,634
948,732

122,631
822,132

131,381802,659

91,006700,648

1,040,215
6,973,721

167,00385,795
252,798—

157,057
81,273
238,330
5,508

194,296
86,601
280,897
4,857

1,416,600
727,755
2,144,355—

92,106
42,110107,457
12,720(3,698)(11,620)(43)
5,138
244,170¥1,319,100

92,08542,094
100,776
14,097—(11,426)(38)—
237,588¥1,284,085

81,42731,39090,135
19,155—(14,467)(141)—
207,499¥1,193,901

781,288357,197
911,502
107,897(31,368)(98,566)(365)
43,5832,071,168$11,189,244

Other current liabilities..................................................
Total current liabilities...............................................
Long-term liabilities:
Long-term debt, less current portion...........................
Others .............................................................................
Total long-term liabilities ..........................................
Minority interests ...............................................................
Shareholders’ equity:
Common stock...............................................................
Capital surplus ...............................................................
Retained earnings..........................................................
Net unrealized gains on securities ...............................
Gain (loss) on hedging items ........................................
Foreign currency translation adjustments ...................
Treasury stock ................................................................
Minority interests ...........................................................
Total shareholders’ equity ........................................
Total liabilities and shareholders’ equity .............

10

September 30, 2006
(unaudited)$

Condensed Consolidated Statements of Operations and Retained Earnings
Kawasaki Heavy Industries, Ltd. and Consolidated Subsidiaries
For the six months ended September 30, 2006 and 2005 (unaudited)

Millions of yen
2006

Thousands of
U.S. dollars

2005

2006

Net sales ........................................................................................................................................................ ¥645,852
Cost of sales .................................................................................................................................................. 555,715
Gross profit............................................................................................................................................
90,137
Selling, general and administrative expenses............................................................................................
64,575
Operating income ................................................................................................................................
25,562Other income (expenses):
Interest and dividend income..................................................................................................................
1,891
Equity in income of unconsolidated subsidiaries and affiliates............................................................
855
Interest expense .......................................................................................................................................
(2,912)Other, net ..................................................................................................................................................
(5,156)
Income before income taxes and minority interests .........................................................................
20,240
Income taxes .................................................................................................................................................
(8,577)
Minority interests in net income of consolidated subsidiaries .................................................................
(249)
Net income............................................................................................................................................ ¥ 11,414
Retained earnings:
Balance at beginning of the period ........................................................................................................ ¥—Net income for the period .......................................................................................................................
—Cash dividends..........................................................................................................................................
—
Bonuses to directors and statutory auditors ..........................................................................................
—
Reduction due to change of consolidation period of subsidiaries ......................................................
—¥593,579
518,619
74,96062,383
12,577$5,478,429
4,713,843
764,586
547,757
216,829

2,014
(103)
(2,678)(3,617)
8,193(2,832)(128)¥ 5,233

16,0407,253(24,701)(43,736)
171,685(72,754)(2,112)$ 96,819¥ 88,704
5,233(3,606)(84)—$

Other..........................................................................................................................................................
Balance at end of the period ....................................................................................................................... ¥(112)¥ 90,135

—
—

$

—
—
—
—
—
—
—

11

Condensed Consolidated Statements of Cash Flows
Kawasaki Heavy Industries, Ltd. and Consolidated Subsidiaries
For the six months ended September 30, 2006 and 2005 (unaudited)Thousands of
U.S. dollars

Millions of yen
2006

Cash flows from operating activities:
Income before income taxes and minority interests ............................................................................ ¥20,240
Adjustments to reconcile net income before income taxes and minority
interests to net cash provided by operating activities:
Depreciation and amortization........................................................................................................... 14,879
Increase in assets ................................................................................................................................. (34,449)
Increase in liabilities............................................................................................................................. 12,935
Other..................................................................................................................................................... (24,372)
Net cash provided by (used for) operating activities...................................................................... (10,767)

2005

2006

¥ 8,193$ 171,685

14,384(6,771)
2,150(6,740)11,216126,211(292,213)
109,721(206,735)(91,331)

Cash flows from investing activities:
Acquisition of tangible and intangible assets .......................................................................................
Acquisition of investments in securities.................................................................................................
Other.........................................................................................................................................................
Net cash used for investing activities.................................................................................................

(15,909)(11,850)
1,024(26,735)(15,305)
(425)
8,038
(7,692)(134,948)(100,517)
8,686(226,779)

Cash flows from financing activities:
Increase (Decrease) in short-term borrowings ......................................................................................
Proceeds from long-term debt...............................................................................................................
Repayment of long-term debt................................................................................................................

39,51318,355(28,289)(4,055)
15,503(23,189)

335,168
155,696(239,961)

Other.........................................................................................................................................................
Net cash provided by (used for) financing activities .......................................................................

(4,807)
24,772(3,717)(15,458)(40,775)
210,128

Effect of exchange rate changes.................................................................................................................

118

173

1,001

Net decrease in cash and cash equivalents...............................................................................................

(12,612)(11,761)(106,981)

Cash and cash equivalents at beginning of the period...........................................................................

37,50644,385318,144

Decrease in cash and cash equivalents arising from exclusion of consolidated subsidiaries...........

—

(111)

—

Cash and cash equivalents at end of the period ...................................................................................... ¥24,894¥32,513$ 211,163

12

Consolidated Statements of Shareholders’ Equity
Kawasaki Heavy Industries, Ltd. and Consolidated Subsidiaries
For the six months ended September 30, 2006 (unaudited)Thousands
Number ofshares ofcommon stock

Balance at March 31, 2006 ....................... 1,557,715
Net income for the interim period......
—
Issue of new shares...............................
224
Cash dividends .....................................
—
Treasury stock purchased, net.............
—
Bonuses to directors andstatutory auditors..............................
—
Other ....................................................
—
Balance at September 30, 2006 ......... 1,557,939

Millions of yen
2006
Foreign currencytranslation
adjustments

Treasurystock

Minority
interests

—
—
—
—
—

¥(11,426)
—
—
—
—

¥(38)
—
—
—
(5)

¥5,508—————(3,698)¥(3,698)—(194)¥(11,620)

—
—
¥(43)

—
(370)
¥5,138Foreign currencytranslation
adjustments

Treasurystock

Minority
interests$357,062 $854,831 $119,578 $—$(96,921)—
96,819
—
—
—
127
—
—
—
—
—
(39,639)
—
—
—
8
—
—
—
—
—
(119)
—
—
—
—
(390)
(11,680)(31,368)(1,646)$357,197 $911,502 $107,897 $(31,368) $(98,566)$(322)
—
—
—
(42)
—
—
$(365)$46,722—————(3,139)$43,583

Commonstock

CapitalsurplusRetainedearnings

Net unrealized
gains onsecurities¥92,085—21——¥42,094—15—
1¥100,776
11,414—(4,673)—¥14,097
—
—
—
—

¥

—
—
¥92,106——¥42,110(14)(46)¥107,457—(1,377)¥12,720

Gain (loss) on
hedging items

Thousands of U.S. dollars
2006
Commonstock

Balance at March 31, 2006 ............................................... $781,110
Net income for the interim period ..............................
—
Issue of new shares .......................................................
178
Cash dividends..............................................................
—
Treasury stock purchased, net .....................................
—
Bonuses to directors and statutory auditors ..............
—
Other .............................................................................
—
Balance at September 30, 2006............................... $781,288

CapitalsurplusRetainedearnings

Net unrealized
gains onsecurities

Gain (loss) on
hedging items

13

Segment Information
Kawasaki Heavy Industries, Ltd. and Consolidated Subsidiaries
For the six months ended September 30, 2006 and 2005 (unaudited)(a) Information by industry segment
Millions of yen
2006

Shipbuilding ...............................................................................................
Rolling Stock & Construction Machinery .................................................
Aerospace...................................................................................................
Gas Turbines & Machinery ........................................................................
Plant & Infrastructure Engineering ...........................................................
Consumer Products & Machinery.............................................................
Other...........................................................................................................
Total ....................................................................................................
Eliminations ................................................................................................
Consolidated total .............................................................................

External
sales

Intersegment
sales

Total
sales

Operatingexpenses

Operatingincome (loss)¥ 42,107
86,925
114,452
80,50952,114
189,928
79,817645,852—¥645,852¥ 1,296
260
614
7,941
9,068
4,318
20,22443,721(43,721)¥ 000—¥ 43,403
87,185
115,066
88,45061,182
194,246
100,041
689,573(43,721)¥645,852¥ 45,456
81,040109,968
83,62964,910183,342
95,611
663,956(43,666)¥620,290¥ (2,053)
6,145
5,098
4,821
(3,728)
10,9044,430
25,617(55)¥25,562

Total
sales

Operatingexpenses

Operatingincome (loss)¥ 54,325
84,79692,24476,24374,730168,634
82,024
632,996(39,417)¥593,579¥ 53,561
82,52986,64374,89880,395
163,490
79,021
620,537(39,535)¥581,002

Millions of yen
2005
External
sales

Shipbuilding ...............................................................................................
Rolling Stock & Construction Machinery .................................................
Aerospace...................................................................................................
Gas Turbines & Machinery ........................................................................
Plant & Infrastructure Engineering ...........................................................
Consumer Products & Machinery.............................................................
Other...........................................................................................................
Total ....................................................................................................
Eliminations ................................................................................................
Consolidated total .............................................................................

¥ 53,736
84,331
91,29369,09368,609166,339
60,178593,579—¥593,579

Intersegment
sales

¥

589
465
951
7,150
6,121
2,295
21,846
39,417(39,417)¥ 000—

¥

764
2,267
5,601
1,345
(5,665)
5,144
3,003
12,459118¥12,577

Thousands of U.S. dollars
2006
External
sales

Shipbuilding ............................................................................................... $ 357,172
Rolling Stock & Construction Machinery .................................................
737,340
Aerospace...................................................................................................
970,837
Gas Turbines & Machinery ........................................................................
682,916
Plant & Infrastructure Engineering ...........................................................
442,056
Consumer Products & Machinery............................................................. 1,611,061
Other...........................................................................................................
677,047
Total .................................................................................................... 5,478,429
Eliminations ................................................................................................
—
Consolidated total ............................................................................. $5,478,429

14Intersegment
sales$ 10,993
2,205
5,208
67,36076,91936,628
171,550
370,863(370,863)$ 0,000—

Total
sales

Operatingexpenses$ 368,165 $ 385,580
739,545
687,420
976,045932,802750,276
709,382
518,975
550,598
1,647,689
1,555,195
848,597
811,019
5,849,292
5,631,996(370,863)(370,396)$5,478,429 $5,261,600

Operatingincome (loss)$ (17,415)
52,12543,24340,894(31,623)
92,49437,578217,296(467)$216,829

(b) Information by geographic area
Millions of yen
2006Japan...........................................................................................................
North America............................................................................................
Europe ........................................................................................................
Asia..............................................................................................................
Other areas.................................................................................................
Total ....................................................................................................
Eliminations ................................................................................................
Consolidated total .............................................................................

External
sales

Intersegment
sales

Total
sales

Operatingexpenses

Operatingincome¥459,768
119,598
51,0159,171
6,300
645,852—¥645,852¥ 120,560
8,130
2,049
8,685
77
139,501(139,501)¥ 000—¥580,328
127,728
53,064
17,856
6,377
785,353(139,501)¥645,852¥559,793
126,669
51,291
17,447
6,254
761,454(141,164)¥620,290¥20,535
1,059
1,773
409
123
23,8991,663¥25,562

Millions of yen
2005

Japan...........................................................................................................
North America............................................................................................
Europe ........................................................................................................
Asia..............................................................................................................
Other areas.................................................................................................
Total ....................................................................................................
Eliminations ................................................................................................
Consolidated total .............................................................................

External
sales

Intersegment
sales

Total
sales

Operatingexpenses

Operatingincome¥445,137
97,241
36,63811,307
3,256
593,579—¥593,579¥ 99,957
6,997
1,888
8,708
54
117,604(117,604)¥ 000—¥545,094
104,238
38,52620,015
3,310
711,183(117,604)¥593,579¥534,427
104,000
37,833
19,286
3,479
699,025(118,023)¥581,002¥10,667
238
693
729
(169)
12,158419¥12,577

Operatingexpenses

OperatingincomeThousands of U.S. dollars
2006
External
sales

Intersegment
sales

Japan........................................................................................................... $3,899,975 $1,022,648
North America............................................................................................ 1,014,488
68,963
Europe ........................................................................................................
432,734
17,381
Asia..............................................................................................................
77,79373,670
Other areas.................................................................................................
53,439653
Total .................................................................................................... 5,478,429 1,183,315
Eliminations ................................................................................................
— (1,183,315)
Consolidated total ............................................................................. $5,478,429 $ 0000—

Total
sales

$4,922,623 $4,748,435
1,083,451
1,074,468
450,115
435,075
151,463
147,994
54,09253,0496,661,744
6,459,021(1,183,315) (1,197,421)$5,478,429 $5,261,600$174,188
8,983
15,0403,469
1,043
202,723
14,106$216,82915

(c) Overseas sales
Millions of yen

Thousands of
U.S. dollars

Overseas
sales

% of
net sales

Overseassales¥125,730
51,991
105,594
46,077¥329,392

21.2%
8.8
17.8
7.7
55.5%

$1,314,946
491,407817,321510,824$3,134,498

Millions of yen

Overseas
sales

% of
net sales¥155,019
57,932
96,35460,221¥369,526

24.0%
8.9
15.0
9.3
57.2%

2006

North America ...................................................................................
Europe ................................................................................................
Asia .....................................................................................................
Other areas ........................................................................................
Total............................................................................................

%

%

2005

2006

Changes in Accounting Policies

Effective April 1, 2006, Kawasaki Heavy Industries, Ltd., and its consolidated subsidiaries adopted a new accounting standard for“Presentation of Net Assets in the Balance Sheet” issued by the Accounting Standards Board of Japan. As a result of adopting thestandard, “Minority interests” and “Gain (loss) on hedging items” are presented in Shareholders’ equity.

16

Net Sales, Orders and Order Backlog by Industry Segment
For the six months ended September 30, 2006 and 2005 (unaudited)Thousands of
U.S. dollars

Millions of yen
2006

2005

2006

Net sales:
Shipbuilding ................................................................................................................................................ ¥ 42,107
Rolling Stock & Construction Machinery ..................................................................................................
86,925
Aerospace ................................................................................................................................................... 114,452
Gas Turbines & Machinery.........................................................................................................................
80,509Plant & Infrastructure Engineering ............................................................................................................
52,114
Consumer Products & Machinery.............................................................................................................. 189,928
Other............................................................................................................................................................
79,817
Total ......................................................................................................................................................... ¥645,852¥ 53,736
84,331
91,29369,09368,609166,339
60,178¥593,579$ 357,172
737,340
970,837
682,916442,056
1,611,061
677,047$5,478,429

Orders received:
Shipbuilding ................................................................................................................................................ ¥ 69,507
Rolling Stock & Construction Machinery .................................................................................................. 156,102
Aerospace ...................................................................................................................................................
70,175
Gas Turbines & Machinery.........................................................................................................................
99,313
Plant & Infrastructure Engineering ............................................................................................................
95,093
Consumer Products & Machinery.............................................................................................................. 189,928
Other............................................................................................................................................................
83,726
Total ......................................................................................................................................................... ¥763,844¥ 38,469
77,67849,371
97,161
26,285
166,339
61,391¥516,694$ 589,592
1,324,133
595,258
842,421806,625
1,611,061
710,204$6,479,294

Thousands of
U.S. dollars

Millions of yen

Order backlog:
Shipbuilding .......................................................................
Rolling Stock & Construction Machinery .........................
Aerospace ..........................................................................
Gas Turbines & Machinery................................................
Plant & Infrastructure Engineering ...................................
Consumer Products & Machinery.....................................
Other...................................................................................
Total ................................................................................

As of
September 30, 2006

As ofMarch 31, 2006

As of
September 30, 2005

As of
September 30, 2006

¥ 315,263
412,985
256,954
214,002
187,030—
38,726¥1,424,960¥ 289,227
346,310
301,599
195,108
144,147—
34,053¥1,310,444¥ 252,825
297,326
247,671
194,754
169,345—
29,796¥1,191,717$ 2,674,213
3,503,139
2,179,608
1,815,268
1,586,479—
328,493$12,087,200

17

Kawasaki Corporate Data
(As of September 30, 2006)
Kawasaki Heavy Industries, Ltd.
Kobe Head Office:
Kobe Crystal Tower,
1-3, Higashikawasaki-cho 1-chome,
Chuo-ku, Kobe, Hyogo 650-8680, JapanTokyo Head Office:World Trade Center Bldg.,
4-1, Hamamatsu-cho 2-chome,
Minato-ku, Tokyo 105-6116, JapanFounded: 1878
Incorporated: 1896

Stock Exchange Listings:
Tokyo, Osaka, Nagoya
Newspaper in Which Public Notices Are Made:
Nihon Keizai Shimbun
Transfer Agent:
The Chuo Mitsui Trust and Banking Company, Limited
33-1, Shiba 3-chome,
Minato-ku, Tokyo 105-8574, Japan
Handling Office:
The Chuo Mitsui Trust and Banking Company, Limited
Osaka Branch Office
2-21, Kitahama 2-chome,
Chuo-ku, Osaka 541-0041, Japan

Paid-in Capital: ¥92,106,094,655
Number of Shares Issued: 1,557,939,285
Number of Shareholders: 153,691

Independent Auditors:
KPMG AZSA & Co.
Kobe Crystal Tower,
1-3, Higashikawasaki-cho 1-chome,
Chuo-ku, Kobe, Hyogo 650-8680, Japan

Number of Employees: 29,461
ADR Facility:
KHI has a sponsored American Depository Receipt (ADR) facility.
ADRs are traded in the over-the-counter (OTC) market in the
United States under CUSIP number 486 359 20 1 with each ADR
representing four ordinary shares.
ADR Depository:
The Bank of New York
101 Barclay St., 22 West,
New York, NY 10286, U.S.A.
Phone: 1-212-815-2042
U.S. Toll Free: 888-269-2377(888-BNY-ADRS)
http://adrbny.com
KHI Web Site at: http://www.khi.co.jp
This report was printed on 100% recycled paper with a whitenessdegree of 85% using the waterless printing process, which emits noharmful chemicals, and soy-based ink, which is made from plantmaterial that emits only low levels of volatile organic chemicals.
Printed in Japan