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Annual Report 2006 Annual Report 2006 [2.7 MB]

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ANNUAL REPORT 2006
Transcript
Page 1: Annual Report 2006 Annual Report 2006 [2.7 MB]

annual report 2006

Page 2: Annual Report 2006 Annual Report 2006 [2.7 MB]

Change.

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1 | Review2006

KONE in Brief ____________________________________________________________ 4

Year in Brief _____________________________________________________________ 6

For Our Shareholders _____________________________________________________ 8

CEO’s Review ____________________________________________________________ 9

Business Review _________________________________________________________ ��

Personnel _______________________________________________________________22

Environment ____________________________________________________________25

Corporate Governance ___________________________________________________27

Board of Directors ______________________________________________________32

Executive Board _________________________________________________________34

Shares and Shareholders _________________________________________________36

Global References _______________________________________________________ 42

2 | FinancialStatementS

Board of Directors’ Report ________________________________________________50

iFRSFinancialStatements

Consolidated Statement of Income ________________________________________55

Consolidated Balance Sheet_______________________________________________56

Consolidated Statement of Changes in Equity _______________________________58

Consolidated Statement of Cash Flow ______________________________________ 59

Notes on the Consolidated Financial Statements ____________________________60

Calculation of Key Figures ________________________________________________86

Summary in Figures ______________________________________________________ 87

Board of Directors’ Dividend Proposal______________________________________88

Auditors’ Report _________________________________________________________89

3 | pROFORmacOmpaRaBleData

In order to facilitate the evaluation of the financial performance and status

of the company, pro forma comparable data for 2005 have been included.

Review 2006 with Pro Forma Comparison Figures ___________________________90

Consolidated Statement of Income with Pro Forma Comparison Figures _______93

Consolidated Balance Sheet with Pro Forma Comparison Figures ______________94

Consolidated Statement of Cash Flow with Pro Forma Comparison Figures _____95

Quarterly Key Figures ____________________________________________________96

Summary in Figures 2003–2006 ___________________________________________ 97

4 | inveStORinFORmatiOn

KONE as an Investment __________________________________________________98

Information for Shareholders ____________________________________________�00

CONtENtS

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2 REvIEw 2006

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3

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41

5965

13

22

4 KONE IN BRIEF

KONE is one of the world’s leading elevator and escalator companies. It provides its customers with industry-leading elevators and escalators and innovative solutions for their maintenance and modernization. KONE also provides maintenance of automatic building doors. In 2006, KONE had annual net sales of EUR 3.6 billion and about 29,000 employees. Its class B shares are listed on the Helsinki Stock Exchange in Finland.

StrategyKONE gives a performance edge to its customers with innovative services and

solutions. Simultaneously, KONE’s products and services are cost-competitive and

its processes characterized by globally aligned operational excellence.

In 2006, KONE continued to successfully implement its strategy, which was

revised early 2005. the key development programs in the implementation of

the strategy are; increasing the customer focus, broadening and improving the

product and service portfolio, improving business processes and productivity,

utilizing sourcing power, and strengthening KONE’s position in the Asian market.

In 2006, sales growth, healthy sales margins, extended product portfolios and

improved productivity contributed to strengthening KONE’s market position and

positive progress in profitability.

customersKONE’s most important customer groups are building owners, constructors, and

facility management companies. Architects, elevator consultants, development

companies, and designers are key parties in the decision-making process regard-

ing elevators and escalators.

KONE has approximately 250,000 customers globally, of which the majority

are maintenance customers. Customer segments and maintenance contracts vary

from one-elevator residential buildings with yearly contracts to large international

accounts with long-term performance-based maintenance agreements.

SAlES BY mARKEt, %

Europe, middle East, Africa (EmEA)

Americas

Asia-Pacific

SAlES, %

New equipment

Service

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moline, Il

Kunshan

Chennai

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Keighley

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5

marketSizeandKOne’spositionthe annual size of the market for elevator installation, maintenance, repair and

modernization is estimated to exceed EUR 30 billion. the corresponding escalator

market is nearly EUR 3 billion, and the market for door service amounts to roughly

EUR 5 billion annually.

As one of the leading elevator and escalator companies, KONE has production

in all major continents. It has operations in all key markets through some 800

service centers worldwide. In Europe, sales correspond to approximately 65

percent of total net sales. the North American sales correspond to approximately

22 percent and the Asia-Pacific sales to �3 percent. However, the importance of

Asia-Pacific is continuously increasing.

In mature markets such as Europe and North America the modernization

market is increasingly becoming more important. the main driver behind this

development is safety (regulatory) and the need for upgrading. In emerging

markets, the new equipment market is mainly driven by urbanization and

economic growth.

KONE’s share of the global market is approximately �0 percent.

KONE is present

Head Office

Global R&D centers

Production units

Head Office, Helsinki

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1 2 3 4 5 6

6 YEAR IN BRIEF

A yearly summary of all KONE’s releases in 2006 is available on the Internet at www.kone.com.KeyReleases

31January

KONE booked an order to

provide all elevators for the old

london Stock Exchange Building.

the value of the order was

approximately EUR 9 million.

6February

KONE secured

major orders in Italy

and Qatar with a

combined value

of approximately

EUR 27 million.

28February

KONE and

Hewlett-Packard

signed a global

It infrastructure

agreement.

19april

KONE won three

orders from the madrid

metro. the combined

value of the contracts

was approximately

EUR 22 million.

26april

KONE won two orders

to deliver all elevators

for Beijing’s National

Stadium, which will

host the 2008

Olympic Games.

11may

KONE won a major service

contract for the london

Underground. the value of

the contract over the �2-year

period will be approximately

EUR �95 million.

13June

KONE won a

major order for

the vienna

International

Airport.

netSalesandprofitincreased(proForma)KONE’s net sales progressed well. Net sales grew by

�� percent, amounting to EUR 3,60� million. Net sales

increased in the EmEA region by approximately 8

percent. the corresponding increases in the Americas

and Asia-Pacific were �6 percent and 20 percent

respectively.

Orders increased by �8 percent in 2006 and the

order book stood at a record high level of EUR 2,762

million at the end of 2006.

Operating income was EUR 360 million, or �0

percent of net sales. this is the best result in the

company’s history

KONE distributed a dividend of EUR 0.99 per class

A share and �.00 per class B share from the profit for

2005, and the Board of Directors proposes to the

Annual General meeting that EUR �.00 per class B

share be distributed as a dividend for the year 2006.

KONE’s market capitalization*) increased from EUR

4,26� million to EUR 5,382 million during 2006.

*) market capitalization is calculated based on both the unlisted class A and the listed class B shares.

StrengthenedmanagementandcontinuedprogressinDevelopmentprogramsChanges took place in key managerial posts relating

to business process development and It systems and

development of the quality of KONE’s solutions and

operations from the customer’s perspective. top

management and the whole group continued to focus

on the development programs, which started to

contribute to the strengthening of KONE’s market

position and positive profitability performance.

acquisitionofmainlySmallServicecompaniesKONE continued its active acquisition policy during

the year and strengthened its market position in all

key markets. A total of over 20, mainly service

companies were acquired.

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7 8 9 10 11 12

7

KeyFigures2006

2006proforma

2005 change%Sales mEUR 3,60� 3,242 ��Orders received mEUR 3,��6 2,639 �8Order book as of 3� December mEUR 2,762 2,327 �9Operating income mEUR 360 272 �) 32Income before taxes mEUR 356 �78Net income mEUR 234 �09total assets mEUR 2,292 2,�45Basic earnings per share 2) EUR �.86 0.87Equity/share 2) EUR 5.55 5.24Return on equity 2) % 34.3 �5.6 Return on capital employed 2) % 35.4 �8.3 total equity/total assets 2) % 30.5 3�.2 Gearing 2) % �7.9 �4.8 Number of employees as of 3� December 29,32� 27,238

�) Excluding mEUR 89,2 provision for the development and restructuring program.2) the principles of calculating key figures can be found on page 86.

21July

KONE acquired

Evin SAS, an

elevator company

located in lille,

France.

14august

KONE won a contract

to design, supply and

install all the elevators

on Celebrity Cruises’

three new cruise

ships.

18December

Antti Herlin’s title was changed

into Chairman of the Board of

KONE Corporation, and matti

Alahuhta’s title to President &

CEO of KONE Corporation.

28november

KONE Corporation and KmZ

Karacharovo mechanical

Factory agreed to withdraw

from their plans to set up a

joint venture elevator

company in Russia.

3november

KONE and marimekko

entered into cooperation

on elevator car interiors.

26October

KONE introduced the world’s

flattest technology for autowalks.

the first KONE Innotracktm units

will be installed at Amsterdam

Airport Schiphol.

9October

It was announced that KONE’s new factory

in mexico would deliver all elevators for the

North American markets.

15September

KONE signed a contract with Aker Yards for

the design, supply and installation of all the

elevators on a mega-cruise ship. the new

ship type has been developed under the

project name “Genesis” for Royal Caribbean

International (RCl).

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8 FOR OUR SHAREHOlDERS

the year 2006 was a successful one for KONE and its shareholders. KONE’s

change was systematically carried forward during the year. the stock markets also

showed confidence in the company’s revised strategy.

the performance of KONE’s share price reflects the confidence that shareholders

have in the company’s sharpened strategy and in the progress of the develop-

ment programs created to fulfil it. During the last year and a half – i.e. from the

demerger until the present day – KONE’s market capitalization increased from

approximately EUR 2.8 billion to EUR 5.4 billion, and KONE is counted among the

most highly valued companies on the Helsinki Stock Exchange. the number of

shareholders has increased steadily, and KONE now has almost �4,000 owners.

I want to thank the shareholders for their trust.

I am very proud of the fact that, during the past year, we made excellent progress

in winning orders and especially in increasing our profit in very competitive

markets. Our strong order book and earnings ability create a solid platform from

which to further develop KONE towards the targets laid out in the strategy. I want

to express my heartfelt thanks to the personnel whose work has been integral in

changing the company, and to the President & CEO who has successfully piloted

it to its present success.

late in the year, a change was made in the titles of our corporate executives, as a

result of which the title of CEO, previously used by me, was transferred to the

President, matti Alahuhta. the new practice reflects the nature of our collabor-

ation and the division of tasks that is already in place. Simultaneously, it conveys

my own confidence in the future of KONE.

January 2007

anttiHerlin

Chairman of the Board

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9CEO’S REvIEw

two years ago we revised our strategy and initiated significant development

programs. we also set our business targets at a clearly higher level.

Our achievements in 2006 show that we are on the right track. Our business

growth, in terms of both sales and especially orders, outperformed the market

growth. Our profitability improvement in the past year surpassed even our own

forecasts to some extent. Also our cash flow developed positively.

In parallel with these results, we succeeded in making our company more

customer-driven and sharper and more effective in terms of product

competitiveness.

During the year, we strengthened our sales network and sales management,

while applying new tools in support of our customer activities. One of our major

projects has been the introduction of a globally common customer relationship

management system, which we will complete in the spring of 2007. we also

made rapid progress in the application of e-business solutions.

we continued to develop our product and service portfolio. we not only

improved the cost competitiveness of our products, but also increased their

flexibility, which allowed us to better respond to local market requirements.

we also undertook a major redevelopment of our product design, an area in

which we accomplished the first results last year.

the strengthening of the product portfolio positively influenced our order intake,

especially in the Asia-Pacific region and North America, but also in Europe. As well

as making new product launches on the equipment markets, we increasingly

began to develop new products for Europe’s rapidly growing modernization

markets. we also made good progress in industrializing the delivery and installa-

tion functions within modernization.

KONE is known for its innovation. last year we presented a completely new kind

of autowalk solution, the KONE Innotracktm. the new technology benefits the

customer by making the installation of autowalks easier and more flexible, and

more economical in terms of building costs. we demonstrated once again that

radical technological innovations are possible even in a rather mature business

area.

Our logistics development projects also progressed well, and in the future we will

be able to better respond to variations in demand. In the service business, we

began to streamline our ways of working. In addition, the introduction of a new

modular based maintenance method will increase both customer satisfaction and

our own productivity.

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�0

In purchasing, the development of our new component category based sourcing

method advanced according to plan. we also expanded the responsibilities

of our global purchasing team to cover local purchasing in different countries.

By developing and centralizing purchasing in this way, we have been able to

build successful supplier co-operation - and strengthen our purchasing power.

the contribution of the Asia-Pacific region to our order backlog has grown

quickly, and will gradually be reflected in the sales figures. I am especially pleased

with the strengthening of our position in China and India. Our market position is

now substantially better than still two years ago in Asia’s fast growing and large

markets.

As a result of the above-mentioned development programs, KONE is changing in

many ways. we apply common global processes whenever this offers economies

of scale or better promotes the achievement of quality in our operations. On the

other hand, we are striving to deepen our knowledge of the requirements of local

markets and to solve the related challenges through a more flexible product

offering. I am happy that our employees have enthusiastically taken up these

challenges. A well-motivated, committed and competent personnel is our greatest

strength!

In 2007, our objective is to continue growing faster than the market, while also

further improving the profitability of our operations. Our long-term goal is to

systematically develop a KONE that will be as strong as possible in terms of both

market position and profitability.

January 2007

mattialahuhta

President & CEO

CEO’S REvIEw

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��BUSINESS REvIEw

In 2006, KONE continued to implement the change that was necessitated by the revised strategy. Systematic implementation of development programs started to produce concrete results. KONE continued to strengthen its customer focus and improve its product and service offering, which took significant steps forward in all market areas.

Extensive measures to raise productivity continued. Among others, the industrialization of moderniza-tion, the renewal of a module-based maintenance method and efficient route capacity planning for field operations started to show first results. KONE also continued to optimize its logistics network and centralize its sourcing.

elevatorandescalatormarketsGrowinginchinathe global elevator and escalator market has changed significantly in the 2�st

century due to strong growth in China. Over half of the world’s elevators and

escalators are currently located in Europe, nearly 20 percent in the U.S. and the

rest in Asia and elsewhere in the world. However, it is Asia where new equipment

sales are heavily concentrated, with more than 25 percent of new elevators and

half of new escalators being installed in China. On the other hand, the growth

potential for repairs and modernizations is concentrated in Europe and North

America.

Urbanization and economic growth are continuing to increase the demand for

new elevators and escalators and the related service in Asia, while economic

growth and the need to modernize equipment and cater for aging populations

is driving demand along with economic growth in Europe and North America.

the industry is also affected by trends towards more efficient space and energy

utilization, the use of new technologies, the requirement for better, more versatile

services and the tightening of safety norms and regulations.

ResidentialconstructionandmodernizationwereDriversofDemandintheemeaRegionIn Europe, the middle East and Africa (EmEA), the business environment contin-

ued to be favorable. KONE was successful despite the tough competition.

In Europe, the residential market was the main driver of Europe’s new equip-

ment business. Although commercial construction still progressed at a fairly lively

rate in the U.K., it was residential construction that was the dominating factor in

most European countries. In the Southern European market, demand slowed

down towards the end of the year.

the middle East market continued to be buoyant due to energetic construc-

tion growth in most segments. the tourism industry is fuelling growth in demand

for hotel and entertainment building projects, while infrastructure is being

improved through projects such as airport extensions and the construction of a

light train system in Dubai. As in Dubai’s case, Qatar, Saudi Arabia and Abu Dhabi

were also enjoying strong construction activity in most segments in 2006.

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�2

increasedFocusonDesignOptionsto better fulfill customer needs, KONE introduced a new product

concept in Europe. the key idea is to provide customers with a wider

range of alternatives in choosing their elevator car interiors and

performance features. the preferred offerings consist of a broad set

of harmonized packages of different options.

By predefining the product packages, KONE aims to provide

the customer with greater flexibility and a shorter response time.

the preferred packages have been applied to the new release of the

machine-room-less elevator, KONE monoSpace®.

Improved customization is also offered by the KONE Deco™

solution, which makes it possible to decorate elevator car interiors

with different patterns. As part of this solution, the designs of the

Finnish design company, marimekko, were added to the decoration

portfolio in 2006.

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�3

Russia also exhibited healthy market growth. while construction activity

continued to accelerate in all construction segments, it was the retail market that

was the main driver of demand.

there was harsh price competition in the market for new elevators and

escalators in all market areas. In addition, increasing escalator imports from China

continued to press down the market prices of standard equipment in the EmEA

region.

the maintenance market progressed well, although tough price competition

continued. It is estimated that around two-thirds of the elevators in service in

Europe are over 20 years old, which increases the need for both maintenance and

modernization.

the European Safety Norms for Existing lifts (SNEl) continued to create a

favorable environment for the modernization business. modernization orders

continued to increase particularly in countries that have adopted SNEl in their

legislation. the rapidly growing modernization business is increasingly attracting

the attention of both global and local players. For KONE, the modernization

business was active especially in France, the U.K., Germany and the Nordic

countries.

In 2006, KONE won several major contracts from the public transportation

segment. the most significant orders concerned a modernization of the escalators

and walkways in the Roman metro system, several major projects for the madrid

metro, an order for the vienna International Airport and a service contract for the

london Underground.

KONE also signed a contract to supply all elevators for the old london Stock

Exchange Building and won a major order in the retail sector from tesco PlC to

supply ramps and elevators for stores across the U.K.

KONE also won a major contract to design, supply and install all the elevators

on Celebrity Cruises’ three new cruise ships, and signed a contract with Aker

Yards for the design, supply and installation of all the elevators on a mega-cruise

ship.

In the middle East, KONE products were delivered to the 300-meter-high

Doha Sports City tower, which was the symbolic landmark of the 2006 Asian

Games.

GoodOrderintakeGrowthcontinuedinthenewequipmentBusinessinnorthamericaIn North America, the new equipment and modernization markets continued to

be strong. the market for hotel and leisure building solutions was especially

active, whereas growth in the U.S. residential segment slowed down towards the

end of the year. the development efforts initiated by KONE in 2005 showed

concrete results by boosting sales of new equipment.

the success of the KONE extended machine-room-less (mRl) elevators and the

encouraging escalator demand in the public transportation segment resulted in

good order intake growth. the product offering for the North American machine-

room-less market has been systematically expanded, and KONE’s mRl solutions

now cover most hydraulic elevator segments.

the modernization business advanced well as a result of the additional

solutions developed and released. In particular, the public transportation and

high-rise building sectors showed increasing interest in KONE’s new moderniza-

tion solutions.

BUSINESS REvIEw

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�4

KOne’spositioncontinuedtoStrengthenintheasia-pacificRegionthe Asia-Pacific region continued to develop well, with most markets maintaining

a high level of activity. the market for new equipment continued to be good,

especially in China, India and Australia. the Southeastern Asian markets of

malaysia, Singapore and vietnam also showed positive progress. Rapid urbaniza-

tion and economic growth were the main factors affecting the new equipment

and modernization markets in the region.

the Chinese market was characterized by increased investment in urban real

estate. the demand for new equipment was strong, especially in the residential

sector which constitutes approximately two-thirds of the construction segment.

KONE was able to further strengthen its market position in the residential

segment due to its new elevator offering customized for Chinese residential

buildings.

the central government made several consecutive controlling actions particu-

larly to guide residential construction towards more affordable housing for people

moving into cities, which temporarily slowed down growth somewhat.

the Indian market developed well. Although the residential building sector

remained the engine of growth, all segments performed well. KONE continued to

enjoy good order intake growth in India.

Despite the fact that the service business is still young in the growing Asian

markets, demand is expanding rapidly in line with new equipment installation.

the Australian market progressed steadily. As a result of the active demand for

modernizations, KONE succeeded in winning several significant modernization

contracts. market activity was also high for new equipment in the office and

commercial segments and, contrary to expectations, did not slow down signifi-

cantly in the residential segment.

In 2006, KONE won the order for all elevators for the National Stadium in

Beijing, which will host the 2008 Olympic Games. the order follows KONE’s

previous successes in China, including equipment deliveries for the new terminal

at the Beijing Capital Airport, the Capital museum and the National Grand

theater.

aYearofinnovationsDuring 2006, several product improvement initiatives were turned into concrete

solutions. KONE’s order intake was boosted by the positive reception given to its

renewed offering for the Chinese market, the success of its extended machine-

room-less range in the U.S. and the improved product portfolio in Europe.

KONE also made several gains as a result of the increased focus on design in all

business areas.

KONE has continuously improved its service business offerings in order to

provide the best possible service to its customers throughout the life cycle of the

equipment. In 2006, KONE continued to implement new service concepts and

started the rollout of a renewed global maintenance method.

In 2006, KONE also introduced new internet-based tools to support its

business operations.

BUSINESS REvIEw

Further information on KONE’s financial performance:

Financial Statements, page 50 Pro Forma Comparable Data, page 90

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�5

Demandforenergy-efficientSolutionsGrowinginchinaIn 2006, KONE won an order to deliver new KONE monoSpace® and

miniSpace™ elevators to the “water Front”, the largest residential

community in Qin Huangdao. the coastal city with over 2.6 million

residents is located about 300 kilometers east of Beijing. the buildings in

the area are designed to save 50 percent energy and incorporate the latest

housing features and technology.

KONE’s solutions offered energy efficiency and the most environmen-

tally-friendly design in line with the project’s themes of energy saving,

safety, efficiency, accessibility and sustainability. this was an especially

important aspect now that the State Construction Commission of China

has issued a ‘Construction Energy-saving management Rule’, which

requires real estate developers to disclose their ‘residential energy-savings

index’ in all future projects.

KONE will continue to scan local product and service requirements to

create improved solutions for local needs. In China, the demand for energy

efficiency is growing alongside the requirement for space efficiency.

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�6

newRevolutionaryautowalk:KOneinnotracktmthe development of KONE’s new autowalk solution originated from inter-

views of some of KONE’s leading customers regarding people flows in the

future. After evaluating the customer views, KONE started to develop a

revolutionary new autowalk solution together with one of its public transpor-

tation customers, Amsterdam Airport Schiphol. One of the key requirements

set for the product was adjustability to a changing environment.

In September 2006, KONE released the new KONE Innotrack™ autowalk,

whose name derives from its key features. “Inno” stands for innovation, the

key element and driver of the new autowalk, while “track” stands for the

new modular design of the truss, which differs from the traditional one-piece

rigid format.

the key features of the new product culminate in its modular structure,

with no need for a pit, which enables its easy installation, relocation and

modification.

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�7

newFlatautowalktechnologyintroducedineuropethe most significant innovation in 2006 was new autowalk technology which sets

a totally new standard for escalator solutions. the KONE Innotrack™ technology

makes it considerably easier to design locations for and install autowalks. Due to

the innovative pallet return mechanism and a new kind of motor solution, the

KONE Innotrack™ autowalk can be installed on a finished floor without any need

for a pit. Sale of the new solution will commence in 2007.

In the European new equipment market, KONE released a range of preferred

offerings, which apply to the new release of the KONE monoSpace® elevators.

these predefined product packages offer customers added value by providing

more flexibility, improved performance features (e.g. a destination control system)

and shorter delivery times. they include a broad range of visual options for

elevator car interiors, ranging from wall decoration to lighting.

A roll out of an elevator car decoration solution KONE Deco™ started in

Europe in 2006. the solutions range from predefined solutions to fully customized

solutions and can be applied to both new and existing elevators. the KONE

Deco™ solution comes with full service, from decoration planning to material

installation and replacement.

Following the KONE Deco™ release, KONE and the Finnish design company,

marimekko, signed an agreement to start cooperation under license, concerning

the decoration of elevator car interiors. marimekko’s designs are now part of the

KONE Deco™ solution, offering high-quality design alternatives to supplement

other KONE Deco™ designs.

New legislation requirements based on the European Safety Norms for Existing

lifts (SNEl) continued to create lot of demand for modernizations in Europe.

During 2006, KONE developed and released several modernization solutions,

including the new innovative KONE ReGenerate™ modernization package. this

solution covers the hoisting, electrification and signalization of elevators, and is

optimally suited to old residential buildings.

the sale of KONE maxiSpace™ elevators was extended to most European

countries. this modernization solution, which in many cases enables elevator

cabins that are as much as one-third larger than traditional cabins to be installed

in the same hoistway space, strengthens KONE’s portfolio of full replacement

solutions.

machine-room-lessOfferingexpandedinnorthamericaIn North America, KONE extended its machine-room-less KONE monoSpace®

product family (known as KONE EcoSpace® in the U.S.) to offer more space

efficiency and energy savings. In 2006, further performance improvements, such

as the capability for bigger loads, were released. KONE’s mRl product offering

for the North American market now covers most hydraulic elevator segments.

KONE also developed elevator and escalator modernization solutions tailored for

the North American market.

BUSINESS REvIEw

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�8

Space-efficientelevatorSolutionaSuccessinasiaIn the Asian market, KONE continued to increase the flexibility of its product

offerings and the coverage of visual options. the new KONE miniSpace™

elevator, which is customized for the Chinese market, was well-received especially

in the residential segment. the new elevator is based on the KONE monoSpace®

machine-room-less technology platform, but it has a small machine room. Due to

the space-efficient features, the KONE miniSpace™ elevator is especially well-

suited to high-rise office and residential buildings. Both the new KONE mini-

Space™ elevator and a new monoSpace® elevator released for the Chinese

market in 2006 offer a broader range of visual alternatives, space efficiency and

flexibility.

In 2006, the first escalator product from KONE’s subsidiary KONE tElC

Industries Co., ltd was released to most Asian markets, including India, and to

the South African and European markets. the new escalator, called KONE

travelmaster™, is targeted at commercial use in shopping and entertainment

centers and in other commercial buildings.

KONE also introduced another escalator product, which was released for sale

in all market areas. the KONE transitmaster™ escalator is based on KONE’s

proven heavy-duty escalator technology, which has been developed to further

optimize engineering, manufacturing, installation and maintenance processes.

customerFocusSupportedbynewServiceimprovementsthe service concepts, KONE Proximity and KONE Care for life, were further

developed in 2006. KONE Proximity is a real-time service concept, which supports

customer focus by improving the access to and amount of real-time customer

information and communication. the KONE Care for life concept focuses on

long-term, customer-specific needs covering the whole life cycle of the equip-

ment. KONE aims to be the preferred partner of its customers, fulfilling their

needs throughout the equipment’s entire life cycle.

In 2006, KONE Proximity was supported by the rollout of a renewed prevent-

ive maintenance method based on eight maintenance modules which have been

harmonized in KONE’s maintenance operations globally. the new maintenance

method was developed to improve end user safety, and also to ensure that

maintenance methods are similar in all market areas. the new maintenance

method has been implemented in most KONE countries globally.

Following a pilot project in 2005, a customer extranet service, KONE

eOptimum™, was introduced globally to provide real-time information relating to

callout and equipment status, as well as reports related to performance, main-

tenance, repairs and invoicing. the new web-based solution offers customers easy

access to a centralized source of customer-specific information and improves

customer communication.

KONE continued to implement the global KONE Care for life concept to help

customers identify accessibility, safety, aesthetics and performance opportunities.

the tools of the KONE Care for life concept make it possible to analyze equip-

ment with respect to potential safety risks, usability problems, technological

obsolescence and quality of appearance.

BUSINESS REvIEw

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�9

newHarmonizedmaintenancemethodintroducedIn 2006, KONE introduced a new maintenance practice. the new

preventive maintenance method not only improves end user safety, but

also upgrades the maintenance service by ensuring that maintenance

methods are similar in all market areas.

the new approach was developed by reviewing and evaluating the

best practices employed in KONE’s existing maintenance operations.

the renewed harmonized method, modular-based maintenance, is

based on eight modules, which are performed systematically and in line

with optimized maintenance planning.

the new method has been implemented in over 30 KONE countries

around the world. to ensure harmonized maintenance and high quality

service, training of maintenance technicians was started in 2006, and

this process will be continued during the first half of 2007.

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20

customerRelationshipmanagementSystemSupportstheKOnecareforlifeapproachIn 2006, KONE continued to deepen the customer focus orientation of its

operations. As a result of internal and external surveys, a revised profile of

different customer groups was created to enable KONE to better respond

to customer-specific needs and expectations.

One of the main customer management tools implemented in 2006 was

a Customer Relationship management (CRm) system, which enables better

and more efficient customer service and sharing of customer information in

the KONE organization.

the CRm application, which is currently beeing introduced in most KONE

country organization, supports the KONE Care for life concept introduced in

2005. According to this approach, KONE aims to provide its customers with

systematic and preventive service throughout the equipment’s life cycle.

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2�

During 2006, KONE also introduced a Premier Partnership® program, which is

a systematic way of packaging, promoting and delivering a customized offering

to KONE’s key customers. KONE Premier Partnership® is a collaborative cross-

business approach that utilizes all opportunities for cross-selling, up-selling and

additional sales. the new approach increases customer value by offering optimal

management of the entire equipment and flexible and dedicated service, while

also supporting customer relationships by bringing more communication and

transparency to decision making. the new program supports the KONE Care for

life approach by reviewing maintenance contracts from the life cycle perspective.

newtoolsinUseIn 2006, KONE implemented a corporate-wide application for customer

relationship management (CRm). the new tool was developed to enable a

more customer-oriented approach and more efficient management of customer

information. By mid 2007, all KONE country organizations will have the CRm

processes and system implemented.

A centralized Business Intelligence portal containing business news, reports

and analyses was also launched in 2006 to strengthen KONE’s business intelli-

gence operations. the news portal, KONE Compass, supports daily business

operations by offering a wide range of business environment-related information

with global coverage.

co-operationagreementsandacquisitionsKONE continued to acquire mainly small elevator service companies. Acquisitions

were made in France, Italy, Canada, Denmark, the Netherlands, Finland, the U.S.,

Germany, Spain, Portugal and Sweden.

One of the most significant acquisitions was Evin SAS, an elevator company

located in lille, France. Evin SAS installs, maintains and modernizes elevators and

automatic building doors. the acquisition strengthens KONE’s position as a

market leader in the elevator and door businesses and improves its position in

several regions in France.

In Germany, KONE increased its shareholding in lödige Aufzugstechnik to

85 percent. the company employs approximately �00 people and has 5,500

units under maintenance contract.

In malaysia, KONE closed the joint venture agreement with Fuji lift &

Escalators. KONE has an 80 percent holding in the company.

KONE Corporation and KmZ Karacharovo mechanical Factory agreed to

withdraw from their plans to set up a joint venture elevator company in Russia,

first announced by the parties in April 2005. However, KONE and KmZ will

continue to cooperate on the local Russian elevator market.

BUSINESS REvIEw

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22

KONE’s activities are guided by ethical principles. the rights and responsibilities of

the personnel include the right to a safe and healthy working environment and

personal well-being, as well as prohibition of discrimination.

implementationofRevisedStrategycontinuedFollowing the revision of the corporate strategy in early 2005, KONE’s human

resources management continued to promote its implementation throughout the

organization in 2006.

the end of 2005 saw the initiation of a process aimed at defining values for

KONE in order to support and guide the changes that followed the strategy

revision. In particular, values were defined to promote the achievement of more

customer-oriented operating methods. In June 2006 a start was made on

communicating and applying these values in practice.

A global employee survey was carried out at the beginning of 2006 to follow

up not only the job satisfaction, leadership, customer satisfaction and information

flow that had been surveyed in 2004, but also the progress made in adopting the

new corporate strategy. According to the survey, good progress had been made

in reaching the objectives set in 2004, and each unit prepared its own operating

plan based on the results.

Steps were taken to actively support communication of the strategy. In order

to support line management, a facilitator network made up of employees working

in different parts of the organization was founded to support establishment of the

strategy in the various countries and business units. Strategy discussions were

organized during the year at the unit, department and working group levels to

promote adoption of the corporate goals and the understanding of how they

affect the work of each employee. In addition, the strategy was communicated by

a video reporting on how changes had been put into practice, President’s letters,

personnel magazines, intranet and electronic newsletters.

more customer-oriented operating methods were promoted through the

continued development of customer relationship processes and the training of

sales personnel. Efforts were continued to train not only the sales management

but also other employees working in customer service duties.

competenceDevelopmentKONE develops the know-how of its personnel in their daily work through

targeted learning solutions and job rotation. Each business unit’s own training

and Personnel Development Department is mainly responsible for the develop-

ment of the unit’s personnel. KONE’s training centers in various parts of the world

are responsible for technical training. Global training programs are also organized

in order to strengthen common operating models, coach managers and ensure

in-house generation of future managers. virtual management is coached through

web-based learning tools. Human resources management and change manage-

ment continued to be generally focused on in management training.

Central to KONE’s personnel strategy is ensuring interest in KONE as an employer and securing the availability, commitment and continuous development of its human resources. Employees’ core competence areas are developed to support the company’s current and future business requirements. The purpose of KONE’s personnel strategy is to help the company meet its business targets. Motivational leadership and operating methods are employed to support the achievement of business targets.

PERSONNEl

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23

valuesGuideinthewayofchangeKONE initiated a value process at the end of 2005, as a result of which four

values guiding and supporting operations were defined. the values were defined

in a process comprising several consecutive working groups participating in

different areas of the organization. the aim of the values finalized in June 2006

is to support KONE’s traditional good working culture, while at the same time

guiding operations in the direction indicated by the strategy. the new values

were communicated to employees during the year in the letters of the President,

in the personnel magazine, in the intranet and in electronic newsletters. In

addition, a video was prepared to promote adoption of the values, in which

KONE employees around the world reported on the significance of the values in

their own work. the values were also refined by means of open dialogue in small

groups. In accordance with our new values we want to delight our customers,

have energy for renewal and passion for performance, and above all we are

willing to win together.

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5824

10

8

58

24

18

24

Four training programs were organized during the summer of 2006 to

accelerate implementation of the corporate strategy and to strengthen the ability

of the participants to manage change. Altogether 250 representatives of KONE’s

management from various countries and business units participated in the work

shops. the partner in the program was the world-leading International Institute

for management Development (ImD). In addition to the program, the strategy

and values have been incorporated into all of KONE’s global training programs.

talentandperformancemanagementthe purpose of annual personal development discussions is to ensure each

employee’s awareness of, and commitment to, corporate goals and to agree upon

his or her individual targets and development needs. In the future, too, strategy-

induced change and the values supporting it will be examined in connection with

the personal development plans.

In order to ensure resourcing for future leadership and key assignments, KONE

carries out annual succession and development planning. In connection with this

activity, potential candidates for management positions are identified. As a result

of the strategy, human resouces have been completed in those functions that are

critical in terms of successful strategy implementation.

KONE cooperates actively with educational institutions, maintaining direct

contacts and participating in recruitment fairs and student publications. KONE

units around the world provide internships and thesis positions for technical and

economics students in their home countries, while KONE’s International trainee

Program enables them to apply for various positions around the world.

RegularemployeeinformationandconsultationworkKONE complies with the EU Directives on employee information and consultation

and organizes the related annual international employee meetings. Communica-

tion between the annual global meeting and working group meetings has been

increased particularly in connection with major changes.

SafetyFirstKONE strives to provide safe products and services to its customers and end-users,

as well as a safe working environment for its employees. the corporate safety

policy defines the general principles underlying safety operations, and includes

safety training and methods, as well as information on reporting. All KONE units

are required to comply with the corporate safety policy.

FocusareasofHumanResourcesmanagementin2007In 2007, human resources management will continue to promote implementation

of the corporate strategy. A more customer-oriented way of working will be

supported by further developing the skills of all employees and especially the

sales and customer service personnel. Communication of the strategy will be

continued, in addition to which the adoption of the new values will be promoted

in everyday work. During 2007, a global employee study will again be conducted

on the subjects studied in 2006, while at the same time surveying the adoption of

the revised strategy and the values defined in 2006.

PERSONNEl

EmPlOYEES BY JOB CAtEGORY, %

maintenance and modernization

New equipment sales and installation

manufacturing

Administration, It, R&D

EmPlOYEES BY mARKEt, %

Europe, middle East, Africa (EmEA)

Americas

Asia-Pacific

Occupational safety is measured continuously by the industrial injury frequency rate (IIFR). The rate was 8.4 at the end of 2006 (8.7 in 2005).

IIFR (Industrial Injury Frequency Rate): the number of injuries resulting in absence from work of one day, one shift or more, per million hours worked.

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25ENvIRONmENt

KONE strives to contribute to the environmental sustainability, both trough its own operations and the operations of its customers and suppliers. This is achieved by developing operating practices and supplying products and services that are environmentally sound.

environmentalcommitmentElevators and escalators are essential for management of massive people flows.

therefore they must operate efficiently and reliably – often continuously, for 24

hours a day, 365 days a year.

KONE aims to develop its manufacturing processes and operating procedures

so that their environmental impact will remain as small as possible throughout the

products’ entire life cycle. therefore it is of the utmost importance to reduce use-

related environmental impacts through continuous and efficient product develop-

ment, aimed at lowering energy and fuel consumption, oil requirements, and

noise levels.

KONE thoroughly analyzes the environmental impact of several products over

their entire life cycle. the analysis includes an evaluation of the impact from the

extraction and selection of raw materials to assembly, transportation, distribution,

use, and finally, the safe disposal of the product.

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26

the analyses indicate that the greatest environmental impact is generated by

the use of products, rather than their manufacture. It is estimated, that elevators,

for example, represent some 5–�0 percent of the energy consumption of a

building, depending on the other installed services.

Although manufacturing accounts for only a minor part of the total environ-

mental impact, it can have a significant local effect. the environmental issues

related to KONE´s manufacturing processes – such as exhaust fumes from

painting lines and waste generated by metal machining – are typical of industrial

engineering. KONE therefore strives to use as few chemicals that are damaging

to the environment and health as possible.

RecyclingElevators and escalators are durable and give long-lasting service when provided

with the appropriate maintenance. the environmental impact of maintenance is

mainly related to the disposal of replaced components, the cleaning of equipment

and exhaust from service vehicles. today some 90–95 percent of elevator and

escalator materials are easily recyclable metals. KONE has developed methods for

the extensive recycling of metals and other reusable materials. During replace-

ments, KONE takes full responsibility for the safe, environmentally friendly

removal and disposal of old equipment.

coordinationofenvironmentalissuesKONE’s business units are responsible for handling environmental issues. they

determine the environmental impact of their operations and products through

environmental management systems. the ISO �400� Environmental manage-

ment System is in use in four production facilities and seven country organiza-

tions. the production facilities and country organization in China passed the

ISO �400� certification in December 2006. Certification work will be actively

continued during 2007.

newenvironmentallyFriendlyinnovationsIn 2006, KONE developed the world’s flattest autowalk technology, the KONE

Innotracktm. the new autowalk solution is environmentally friendly because of its

oil-free drive system and pallet chain and the fact that it uses significantly less

material than traditional solutions.

In addition, an elevator powered by solar energy was tested in 2006 to

promote minimal environmental impact and reduce traditional energy

consumption.

environmentalResponsibilityKONE recognizes that all its activities and products have their own impact on the

environment. therefore we take care of the environment not only by our own

proactive initiatives, but also by complying with the laws and recommendations

related to our business and by continuously monitoring the changes made to

them.

ENvIRONmENt

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27CORPORAtE GOvERNANCE

KONE Corporation complies with the Recommendation for the Corporate

Governance of listed Companies, dated � July 2004, of the Helsinki Stock

Exchange, the Central Chamber of Commerce and the Confederation of Finnish

Industry and Employers, with the exception of recommendations 29 (Audit

Committee members), 32 (Nomination Committee members) and 35 (Compen-

sation Committee members). these exceptions are due to the company’s

ownership structure. the company’s largest shareholder, Antti Herlin, controls

62 percent of the company’s voting rights and 2� percent of its shares. the

significant entrepreneurial risk connected with ownership justifies the main

shareholder serving as Chairman of the Board of Directors and its Committees

and, in this capacity, overseeing shareholders’ interests.

KONE’s administrative bodies and officers with the greatest decision-making

power are the General meeting of Shareholders and the Board of Directors of

KONE Corporation, the Chairman of the Board and the President & CEO. At the

Annual General meeting of Shareholders, the shareholders approve the consoli-

dated financial statements, decide on the distribution of profits, and select the

members of the Board of Directors and the auditors and determine their compen-

sation. KONE Corporation’s Annual General meeting is convened by the Board of

Directors. According to the Articles of Association, the Annual General meeting of

shareholders shall be held within three months of the closing of the financial year

on a day designated by the Board of Directors.

BoardofDirectors

DutiesandResponsibilities

the Board of Directors’ duties and responsibilities are defined primarily by the

Articles of Association and the Finnish Companies Act. Its duties include the

approval and confirmation of strategic guidelines and principles of risk manage-

ment, ratification of annual budgets and plans, decisions on corporate structure,

and decisions on major acquisitions and investments. the Board appoints the

Chairman of the Board as well as the President & CEO of the Group and deter-

mines the conditions of their employment. It has created rules of procedure

stipulating the duties of the Board, its Chairman and its Committees.

the Board of Directors holds six regular meetings a year and additional

meetings as required. In 2006, the Board of Directors convened �� times, with an

average attendance rate of 92 percent.

the Board of Directors reviews its own performance and procedures once a

year.

membersoftheBoard

the Annual General meeting elects 5–8 members and no more than three deputy

members of the Board of Directors for one year at a time in accordance with

KONE Corporation’s Articles of Association. the Board of Directors elects a

Chairman and vice Chairman from among its members. In electing the members

of the Board, attention is paid to the candidates’ broad and mutually complemen-

tary experience, expertise and views of both KONE’s and other businesses.

the full-time Chairman of the Board of Directors of KONE Corporation is Antti

Herlin. Sirkka Hämäläinen-lindfors is the vice Chairman of the Board. the

members of the Board are matti Alahuhta, Jean-Pierre Chauvarie, Reino Hanhinen,

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28

masayuki Shimono, Sirpa Pietikäinen (as of 27 February, 2006) and Iiro viinanen.

Gerhard wendt was a Board member until 27 February, 2006. Of the Board

members, Jean-Pierre Chauvarie, Sirkka Hämäläinen-lindfors, Reino Hanhinen,

Sirpa Pietikäinen and Iiro viinanen are independent of the Corporation. with the

exception of Antti Herlin, all Board members are independent of significant

company shareholders.

Jukka Ala-mello serves as Secretary to the Board.

committees

the Board of Directors has appointed two committees consisting of its members:

the Audit Committee, and the Nomination and Compensation Committee. the

Board has confirmed rules of procedure for the Committees. the Secretary to the

Board acts as the Secretary of both Committees.

the Audit Committee monitors the Group’s financial situation, supervises

reporting related to financial statements and interim reports, assesses the

adequacy and appropriateness of KONE’s internal control and risk management

and adherence to rules and regulations, and deals with the Corporation’s internal

audit plans and reports. Urpo Paasovaara, Director of Internal Auditing, reports

the internal audit results to the Committee. the Audit Committee evaluates the

auditing of the Group companies’ accounts and the appropriateness of the

related arrangements and auditing services, and considers the auditors’ reports.

Furthermore, the Committee formulates a proposal to the Annual General

meeting regarding the auditors to be selected for the Corporation. In 2006, the

Committee consisted of Antti Herlin, Chairman, and Board members Sirkka

Hämäläinen-lindfors and Iiro viinanen as independent members. the Audit

Committee held four meetings in 2006.

the Nomination and Compensation Committee prepares proposals to be

made to the Annual General meeting regarding the nomination of Board

members and their compensation and makes decisions regarding senior manage-

ment appointments and compensation. In 2006, the Committee consisted of

Antti Herlin, Chairman, and Board members Sirkka Hämäläinen-lindfors and

Reino Hanhinen as independent members. the Nomination and Compensation

Committee held one meeting in 2006.

Operatingmanagement

chairmanoftheBoardandpresident&ceO

KONE Corporation’s Board of Directors appoints the full-time Chairman of the

Board and the President & CEO. the Board determines the conditions of employ-

ment of the full-time Chairman of the Board and the President & CEO, defined in

their respective written contracts. the Chairman of the Board prepares matters to

be considered by the Board together with the President & CEO and corporate

staff. the Chairman of the Board and the President & CEO are responsible for

execution of the targets, plans, strategies and goals set by the Board of Directors

within the KONE Group. the President & CEO is also responsible for operational

leadership within the scope of the strategic plans, budgets, operational plans,

guidelines and orders approved by KONE Corporation’s Board of Directors. the

President & CEO presents operational issues to the Board, and is responsible for

implementing the decisions of the Board.

Antti Herlin serves as KONE’s full-time Chairman of the Board, while matti

Alahuhta serves as the President & CEO.

CORPORAtE GOvERNANCE

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29

executiveBoard

the Executive Board supports the President & CEO in executing the corporate

strategy. the Executive Board follows business developments, initiates actions and

defines operating principles and methods in accordance with guidelines handed

down by the Board of Directors and President & CEO.

compensationsystems

compensationandOtherBenefitsoftheBoardofDirectors

the Annual General meeting of KONE Corporation in February 2006 confirmed

the monthly fees of the members of the Board as follows: Chairman EUR 4,000,

vice Chairman EUR 3,000 and ordinary members EUR 2,000. Additionally, a

meeting fee of EUR 500 was confirmed for each meeting of the Board and its

committees. Board members’ travel expenses and daily allowances are compen-

sated in accordance with the company’s travel expense policy.

compensationandOtherBenefitsofthechairman

the compensation for Antti Herlin, Chairman of the Board, consists of a basic

salary and a yearly bonus, which is defined by the Board and based on the

Corporation’s financial result. this bonus may not exceed 50 percent of the

recipient’s annual salary. In 2006, Antti Herlin’s basic salary was EUR 467,280. In

addition, his accrued bonus for the accounting period � January–3� December,

2006 totaled EUR 229,665. He was also paid EUR 44,000 as remunation for

serving as Chairman of the Board. Antti Herlin’s holdings of options are presented

on page 3�. the Chairman’s retirement age and pension are determined in

accordance with Finland’s Pensions Act. No separate agreement has been made

regarding early retirement.

compensationandOtherBenefitsofthepresident&ceO

the President & CEO’s compensation consists of a basic salary and a yearly bonus,

which is defined by the Board and based on the Corporation’s annual result and

other key targets. this bonus may not exceed �00 percent of the recipient’s

annual salary. matti Alahuhta serves as President & CEO of KONE Corporation. His

basic salary for 2006 was EUR 644,328. In addition, his accrued bonus for the

accounting period � January–3� December, 2006 totaled EUR 644,328. He was

also paid EUR 23,000 as remunation for serving on the Board. matti Alahuhta’s

holdings of options are presented on page 3�. He is also included in the share-

based incentive plan for the Corporation’s senior management, which the Board

approved in October 2005. the potential reward is based on the growth in

KONE’s sales and operating income for 2006 and 2007. the President & CEO’s

retirement age and pension are determined in accordance with Finland’s Pensions

Act. No separate agreement has been made regarding early retirement. Should

his employment contract be terminated before retirement, he has the right to the

equivalent of �8 months’ salary, which includes the salary for a 6-month term of

notice.

compensationoftheexecutiveBoard

Compensation for members of KONE Corporation’s Executive Board comprises a

basic salary and bonus, based on the Corporation’s annual result and the

achievement of personal targets. the bonus amount is determined by the

Nomination and Compensation Committee and may not exceed 50 percent of

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30

the annual salary. the Executive Board members’ holdings of options are

presented on page 3�. the members of the Executive Board are also included in

the share-based incentive plan for senior management. No separate agreement

has been made regarding early retirement for members of the Executive Board.

Compensation for termination of the employment contract prior to retirement is

a maximum of �5 months’ salary, which includes the salary for a 6-month term

of notice.

controlSystemsKONE Corporation’s Board of Directors has ratified the principles of internal

control, risk management and internal auditing to be followed within the

organization.

internalcontrolSystem

the goal of KONE’s internal control system is to ensure that the Group’s oper-

ations are efficient and profitable, that its business risk management is adequate

and appropriate, that the information created is reliable, and that the instructions

given and operating principles determined are followed.

the Board’s Audit Committee monitors the functioning of the internal control

process. the Corporation has an Internal Auditing Department, which is separ-

ated from the operating management and whose head reports to the Chairman

of the Board. the Internal Audit Department is responsible for auditing both

internal control and the management of business risks, and reports its findings to

the Audit Committee.

Riskmanagement

the purpose of risk management is to recognize, analyze and control potential

risks and threats to operations. with respect to certain risks, the principles and

main content of risk management are defined by KONE’s policies and guidelines.

while the monitoring, coordination and management of certain risks takes place

at the group level, each unit is responsible for carrying out risk management

related to its own operations. Executive management regularly identifies and

evaluates strategic and operational risks. As part of its efforts to manage risks of

damage or loss, KONE has extensive insurance coverage.

KONE’s financial risk management is presented in the notes to the financial

statements on page 65. Operational risks are described in the Board of Directors’

Report on page 52.

auditing

the duty of statutory auditing is to verify that, upon the closing of the books,

accurate and adequate information is provided on KONE’s result and financial

position. In addition, the Auditors report to the Board of Directors on the regular

auditing of the Corporation’s administration and operations.

According to the Articles of Association, the company must have a minimum

of one and a maximum of three Auditors. the Auditor must be an accountant or

accounting firm authorized by Finland’s Central Chamber of Commerce. the

Auditor is elected at the Annual General meeting for a term which expires at the

end of the following Annual General meeting.

KONE Corporation’s Auditors are Heikki lassila, Authorized Public Accountant,

and PricewaterhouseCoopers, Authorized Public Accountants. the fees paid to the

Auditors of the parent company and to other PricewaterhouseCoopers partner

CORPORAtE GOvERNANCE

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3�

classashare change

classBshare change

Series2005aoptionright change

Series2005Boptionright change

Alahuhta matti 50,000 5,000Cawén Klaus �4,000 -�,700 4,200Chauvarie Jean-Pierre 24,440 -7,000De Neef Peter �0,000 -480 2,200Hanhinen Reino �,000Herlin Antti �7,640,402 9,064,950 +293,900 2,850 7,000Kemppainen Pekka �2,340 �,700 5,800leppänen Heikki �0,000 -�,�00 �,000 -500malmberg Juho 2,920 +2,920maziol Eric �0,000 �,700 4,200mäkinen Heimo 40,360 �,000 -3,200Orchard william �0,000 500 �,000Rajahalme Aimo �0,000 �,000 -3,200tuomas Kerttu �0,000 �,750veeger Noud �4,020 �,000

the other public insiders did not own shares or option rights in KONE Corporation.

ShareholdingsofKOnecorporation’spublicinsiderson31December,2006

andchangesinShareholdingduringtheperiod1January–31December,2006

companies for their services in 2006 were EUR �.7 million for auditing and EUR

�.0 million for other consulting services. the fees paid to other Auditors in 2006

were EUR �.0 million for auditing and EUR 0.� million for other consulting

services.

insidersKONE Corporation adheres to the insider guidelines of the Helsinki Stock

Exchange, which have been supplemented with internal insider guidelines

approved by the Board of Directors. the company maintains its public and

company-specific insider registers in the Finnish Central Securities Depository’s

SIRE system.

In accordance with the Finnish Securities markets Act, KONE’s public insiders

include members of the Board of Directors, the President & CEO and the

Auditors. In addition, KONE’s extended list of public insiders includes members of

the Executive Board. KONE’s company-specific permanent insiders include

individuals who are defined by the company and who regularly possess insider

information due to their position in the company. Permanent insiders are

permitted to trade in KONE shares and securities entitling to KONE shares during

a six-week period after the release of interim and annual reports.

the company also maintains a project-specific insider register when necessary.

Project-specific insiders are prohibited from trading in KONE securities until

termination of the project.

the person in charge of KONE’s insider issues is the Secretary to the Board

of Directors.

the holdings and changes in holdings of the individuals in KONE’s public

insider register on 3� December, 2006 are presented in the table below.

A register of the holdings of KONE’s public insiders is regularly updated on

KONE’s website at www.kone.com.

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32 BOARD OF DIRECtORS

anttiHerlinChairman of the Boardb. �956, D.Sc. (Econ.) h.c.member of the Board since �99�.Has served as Board Chairman since 2003.Previously served as CEO of KONE Corporation �996–2006 and as Deputy Chairman �996–2003.Current key positions of trust are Chairman of the Board of the Confederation of Finnish Industries (EK), Security trading Oy and Holding manutas Oy, Deputy Chairman of the Supervisory Board of Ilmarinen mutual Pension Insurance Company and Board member of technology Industries of Finland and YIt Corporation.

SirkkaHämäläinen-lindforsvice Chairman of the Boardb. �939, D.Sc. (Econ.)member of the Board since 2004.Previously served as member of the Executive Board of the European Central Bank �998–2003, as Governor and Chairman of the Board of the Bank of Finland �992–�998 and as member of the Board of the Bank of Finland �99�–�992.Current key positions of trust are Board member of SanomawSOY Corporation, Investor AB and Foundation for Economic Education.

mattialahuhtab. �952, D. Sc. (Eng.)member of the Board since 2003.President & CEO of KONE Corporation since 2006, President of KONE Corporation since 2005.Previously served as Executive vice President of Nokia Corporation 2004, as President of Nokia mobile Phones �998–2003 and as President of Nokia telecommunications �993–�998.Current key positions of trust are Chairman of the Foundation Board of the International Institute for management Development (ImD, Switzerland), Chairman of the Board for the Centennial Founda-tion of technology Industries of Finland and Board member of Bt Group.

Jean-pierrechauvarieb. �935, Industrial Engineermember of the Board since 2000.Previously served as Deputy member of the Board �999–2000, as President of KONE Corporation �999–200�, as Area Director �995–�998 and as managing Director of KONE France �980–�995.

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33

ReinoHanhinenb. �943, m.Sc. (Eng.), D.Sc. (tech.) h.c.member of the Board since 2005.Previously served as President and CEO of YIt Corporation �987–2005 and as Group CEO 2000–2005, as managing Director of Perusyhtymä Oy �986–�987, as managing Director of YIt Oy Yleinen Insinööritoimisto �985–�986, as managing Director of Oy PPtH-Norden Ab �976–�985, as Division manager �974–�976 and as work Supervisor �968–�974 of YIt Oy Yleinen Insinööritoimisto.Current key position of trust are Chairman of the Board of YIt Corporation, and Board member of Rautaruukki Corporation.

Sirpapietikäinenb. �959, m.Sc. (Econ.)member of the Board since 27 February, 2006.worked as a lecturer on negotiation theory and as a consultant since �999. Previously served as member of Finland’s Parliament (�983–2003) and Finland’s minister of Environment (�99�–�995). Current key positions of trust are Chairman of Finland’s United Nations Association, Deputy Chairman of the Association Promoting Fair trade in Finland and Board member of the world Federation of United Nations Associations (wFUNA).

masayukiShimonob. �947member of the Board since 2004.Has served as President and CEO of toshiba Elevator and Building Systems Corporation since 2004.Previously served as Executive vice President and General manager of toshiba Elevator and Building Systems Corporation 2003–2004, as President and CEO of toshiba International Corporation (USA) �999–2003, as Deputy General manager of toshiba Corporation, International Operations Division �996–�999 and as vice President of toshiba International Corporation (USA) �99�–�996.

iiroviinanenb. �944, m.Sc. (tech.)member of the Board since �997.Previously served as President and CEO of Pohjola Group �996–2000, as Finland’s minister of Finance �99�–�996 and as member of Finland’s Parliament �983–�996.Current key positions of trust are Board member of Polttimo Companies ltd and Kumera ltd.

Jukkaala-mellob. �963, m.Sc. (Econ.), Authorized Public AccountantSecretary to the Board of Directors since 2006Has served as managing Director of Security trading Oy and Holding manutas Oy since 2006.Previously served as partner �995–2006, Authorized Public Accountant �993–2006 and accountant �987–�990 of PricewaterhouseCoopers Oy and financial manager of Panostaja Corporation �990–�993.Current key positions of trust are Board member of Security trading Oy, Holding manutas Oy, Panostaja Oyj and Suomen Helasto Oyj.

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34 ExECUtIvE BOARD

mattialahuhtaPresident & CEOb. �952, D. Sc. (Eng.)member of the Board since 2003. Employed by KONE Corporation since 2005. President of KONE Corporation since 2005Previously served as Executive vice President of Nokia Corporation 2004, as President of Nokia mobile Phones �998–2003 and as President of Nokia telecommunications �993–�998.Current key positions of trust are Chairman of the Foundation Board of the International Institute for management Development (ImD, Switzerland), Chairman of the Board for the Centennial Foundation of technology Industries of Finland and Board member of Bt Group.

Klauscawénm & A and Strategic Alliances, Russia, legal Affairsb. �957, ll.m.member of the Executive Board since �99�. Employed by KONE Corporation since �983.Previously served as General Counsel of KONE Corporation �99�–200�.Current key positions of trust are Board member of Oy Karl Fazer Ab, Kyro Corporation, toshiba Elevator and Building Systems Corporation (Japan).

pekkaKemppainenAsia-Pacificb. �954, licentiate in technologymember of the Executive Board since 2005. Employed by KONE Corporation since �984.Previously served as Executive vice President, New Equipment Business, Elevators and Escalators 200�–2004, as Senior vice President, New Equipment Business and technology �995–200� and as Director of the Research Center �990–�994.Current key positions of trust are Board member of Etteplan Design Center and toshiba Elevator and Building Systems Corporation (Japan).

HeikkileppänenNew Elevators and Escalatorsb. �957, licentiate in technologymember of the Executive Board since 2005. Employed by KONE Corporation since �982.Previously served as Senior vice President, technology 2004–2005 and as Head of the Global Research and Development 2000–2004.

JuhomalmbergDevelopmentb. �962, m.Sc. (Computer Science)member of the Executive Board since � February, 2006. Employed by KONE Corporation 2006. Previously served as managing Director of Accenture Finland 2002–2005, Director, Nordic Outsourcing of Accenture 2005, Deputy managing Director �999–2002 and technology Director �992–�999.

ericmaziolwest and South Europeb. �949, m.Sc. (Econ.)member of the Executive Board since 2005. Employed by KONE Corporation since �974.Previously served as Area Director in west and South Europe 2000–2005, as managing Director of KONE France �996–2000 and as vice President in marketing & Field Operations �99�–�996.

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HeimomäkinenNorth Americab. �944, m.Sc. (Eng.)member of the Executive Board since 2005. Employed by KONE Corporation since �968.Previously served as President and CEO of KONE Inc and as Area Director in North America 2004, as Executive vice President, technology & Purchasing and as Area Director in Asia-Pacific 200�–2004, as Senior vice President, Escalator Business and as Area Director in Asia-Pacific �999–200�, as President & CEO of montgomery-KONE Inc and as Area Director in Americas �994–�999.Current key position of trust is vice President of the National Elevator Industry, Inc. (NEII, USA).

peterdeneefServices b. �960, m.Sc (Organization Psychology)member of the Executive Board since 2005. Employed by KONE Corporation since �997.Previously served as managing Director of KONE Netherlands 2003–2005, as Director, Service and modernization �999–2003 and as manager, It and logistics �997–�999.Current key position of trust is the Chairman of the Quality, Safety, Environment and Education Committee of the European lift Association (ElA).

williamOrchardmajor Projectsb. �947, B.Sc. (Production Engineering)member of the Executive Board since 200�. Employed by KONE Corporation since �988.Previously served as Executive vice President, Service Business 200�–2004 and as managing Director of KONE Plc (UK) �99�–200�.Current key positions of trust are the President of European Elevator Associa-tion (EEA) and Board member of European lift Association (ElA).

aimoRajahalmeCFOb. �949, m.Sc. (Econ.)member of the Executive Board since �99�. Employed by KONE Corporation since �973.Has served as CFO since �99�.Current key position of trust is the Deputy Chairman of the Board of Uponor Corporation.

KerttutuomasHuman Resourcesb. �957, B. Sc. (Econ.)member of the Executive Board since 2002. Employed by KONE Corporation since 2002.Previously served as Group vice President, Human Resources of Elcoteq Network Corporation 2000–2002 and as Personnel & Organization manager of masterfoods Oy (mars) �994–�999.

noudveegerCentral and North Europeb. �96�, m. Sc. (Econ.)member of the Executive Board since 2004. Employed by KONE Corporation since �999.Previously served as managing Director of KONE Plc (UK) 2002–2004, as Director, New Elevator & Escalator Business of KONE Netherlands �999–2002, as Director of OtRA Netherlands �996–�998 and as managing Director of HCI Central America �993–�996.

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36 SHARES AND SHAREHOlDERS

marketvaluethe price of the KONE Corporation class B share rose 28 percent during the

financial year from EUR 33.37 to EUR 42.94. During the same period, the Omx

Helsinki Cap Index rose 24 percent and the Omx Helsinki Industrials Index rose

43 percent. the KONE Corporation class B share price peaked during the financial

year at EUR 43.4� and was EUR 27.80 at its lowest. the company’s market

capitalization, in which the unlisted class A shares are valued at the closing price

of the class B shares on the last trading day of the financial year, was EUR 5,382

million. At the end of December 2006, the company held 2,738,753 class

B shares as treasury shares.

During the financial year, 75.5 million KONE Corporation class B shares were

traded on the Helsinki Stock Exchange. the value of shares traded was EUR 2,662

million. the average daily traded number of shares was 300,853, representing

EUR �0,606,403. the relative turnover was approximately 69 percent.

SharesandSharecapitalKONE Corporation’s Articles of Association state that the minimum share capital is

EUR 60 million and the maximum share capital is EUR 260 million. the share

capital can be raised or reduced within these limits without an amendment to the

Articles of Association. At the end of December 2006, the share capital was EUR

64.0 million. the share capital was increased by EUR �05,594 due to subscriptions

of shares with KONE 2005A and 2005B options during the financial year. See note

2� to the financial statements for a table of changes in share capital.

Each class A share is assigned one vote, as is each block of �0 class B shares,

with the proviso that each shareholder is entitled to at least one vote. At the end

of December 2006, the total number of shares was �28,066,628, comprising

�09,0�4,450 class B shares and �9,052,�78 class A shares, with the accounting

par value being EUR 0.50 per share. the total number of votes was 29,952,929.

Companies

Foreign shareholders *)

Financial institutions and insurance companies

Individuals

Non-profit organizations

Public institutions

ClASS A SHARES, % ClASS B SHARES, %

Companies

Non-profit organizations

*) Includes foreign-owned shares registered by Finnish nominees.

92.6

7.4

23.6

50.8

12.0

5.36.0

2.4More investor information:

KONE as an Investment, page 98 Information for Shareholders, page 100

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�2

�0

8

6

4

2

0

50

45

40

35

30

25

20

37

KOnecorporation’ssharecapitalconsistsofthefollowing:

numberofShares parvalue(eUR)Class A �9,052,�78 9,526,089Class B �09,0�4,450 54,507,225total 128,066,628 64,033,314

KOneclassBShare

KOne2005aOptionRights

KOne2005BOptionRights

trading code, Helsinki Stock Exchange KNEBv KNEBvEw�05 KNEBvEw205ISIN Code FI00090�3403 FI00096�8334 FI00096�8342Accounting Par value EUR 0.50Conversion rate �:6 �:6

KONE Class B Share Omx Helsinki Industrials Index Omx Helsinki Cap Index

KONE ClASS B SHARE PRICE DEvElOPmENt � JUNE, 2005–3� DECEmBER, 2006, EUR

KONE ClASS B SHARES tRADED � JANUARY–3� DECEmBER, 2006, mIllION SHARES

mARKEt CAPItAlIZAtION, mEUR

Jan DecJul Aug Sep Oct Nov

6,000

5,000

4,000

3,000

2,000

�,000

0� Jun,2005

30 Jun,2005

30 Sep,2005

3� Dec,2005

3� mar,2006

30 Jun,2006

30 Sep,2006

3� Dec,2006

JunmayAprmar Feb

6 7 8 9 �0 �� �2 � 2 3 4 5 6 7 8 9 �0 �� �2

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38

DividendsIn accordance with the Articles of Association, class B shares are preferred for a

dividend, which is at least one percent and no more than 2.5 percent higher than

the dividend paid to the holders of class A shares, calculated from the accounting

par value of the share. KONE’s Board proposes that the dividend for the financial

year, � January–3� December, 2006, be EUR 0.99 per class A share and EUR �.00

per class B share.

authorizationtoRaisetheSharecapitalAt the end of the financial year, KONE’s Board had no valid authorization to

increase the share capital or to issue convertible loans or option rights, nor were

any convertible loans or option rights issued during the financial year.

authorizationtopurchaseandSurrenderOwnSharesKONE Corporation’s Annual General meeting held on 27 February, 2006 author-

ized the Board of Directors to purchase and surrender the company’s own shares.

On the basis of this authorization, KONE Corporation’s Board of Directors has

decided to commence purchasing shares at the earliest on 7 march, 2006. the

purchasing of shares will continue until otherwise announced.

the proposed amount corresponds altogether to nearly �0 percent of the

share capital of the Company and the total voting rights. No more than

�2,785,000 shares may be purchased, of which no more than �,905,000 may be

class A shares and �0,880,000 may be class B shares, taking into consideration the

provisions of the Companies Act regarding the maximum amount of own shares

that the Company is permitted to hold.

the Company’s own purchased shares shall be used as compensation in

possible acquisitions and in other arrangements, and to develop the Company’s

capital structure.

Class B shares shall be purchased at the market price in public trading on the

Helsinki Stock Exchange. Class A shares shall be purchased outside the Stock

Exchange at a price equivalent to the average paid for class B shares on the Stock

Exchange at the time of purchase.

During the financial year, �,963,9�3 class B shares were acquired at an average

price of EUR 35.29. the number of class B shares held by the consolidated

companies at the end of the year was 2,738,753.

2005aand2005BOptionsKONE’s 2005A and 2005B options are based on the 2004 option program of the

demerged Kone Corporation. In the demerger, the options of the demerging

corporation were exchanged for the options of the new companies, KONE

Corporation and Cargotec Corporation, on the date when the demerger came

into effect, � June, 2005, as follows: Each A option of Kone Corporation’s 2004

option program was exchanged for one A option of the new KONE Corporation

and Cargotec Corporation, and each B option of Kone Corporation’s 2004 option

program was exchanged for one B option of either the new KONE Corporation or

Cargotec Corporation.

the options were awarded free of charge to approximately 250 employees of

the company’s global organization. the program was introduced in 2000 and the

SHARES AND SHAREHOlDERS

Further information on Repurchased Own Shares

Note 21, page 78

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39

amount of options to be given was tied to the development of Kone’s cumulative

net income (after taxes) in 200�–2003.

A total of �45,�30 KONE 2005A options were initially subscribed, and Kone

Capital subscribed for all �70,000 KONE 2005B options offered to employees

designated by the Board of Directors. A total of �65,340 KONE 2005B options

were transferred to employees in 2005.

A total of 72,8�5 new 2005A and �45,900 2005B options were entered in the

book-entry system and listed on the main list of the Helsinki Stock Exchange on

� June, 2005.

Following the share-split decision made at the Extraordinary Shareholders’

meeting of 2� November, 2005, the number of shares that can be subscribed for

with 2005A and 2005B options was increased in proportion to the split. One

option entitles its holder to subscribe for six KONE class B shares. the subscription

price is EUR 8.04 per share. the annual share subscription period lasts from

2 January to 30 November. the maximum increase in shares represents 0.6

percent of the shares and 0.26 percent of the voting rights.

During the financial year, �3,468 class B shares were subscribed for with

80,808 2005A options. the remaining 37,762 2005A options entitle their holders

to subscribe for 226,572 class B shares. the share subscription period will last

until 3� march, 2008.

During the financial year, 2�,730 class B shares were subscribed for with

�30,380 2005B options. the remaining 87,470 2005B options entitle their

holders to subscribe for 524,820 class B shares. the share subscription period will

last until 3� march, 2009.

2005cOptionsthe Extraordinary Shareholders’ meeting of 2� November, 2005 approved the

Board’s proposal to issue new options to key personnel of the KONE group as well

as to a wholly-owned subsidiary of KONE Corporation. the option program will

include a maximum of 300 key employees and subsidiary directors globally. the

purpose of the options is to encourage long-term efforts by key personnel to

increase shareholder value and enhance their commitment to the company by

offering them an internationally competitive incentive program. the company’s

CEO and members of the Executive Board are not included in the program.

Some of the personnel included in the program are company insiders. these

persons currently own a maximum of 0.� percent of the shares and 0.04 percent

of the voting rights in the company.

A maximum of 2,000,000 options were offered for subscription. the maximum

number of options per person was limited to 8,000 shares. All 2,000,000 KONE

2005C options were subscribed, and the Board of Directors of KONE Corporation

approved the subscriptions on �9 December, 2005.

Each option entitles its owner to subscribe for one KONE class B share. the

class B shares for which the 2005C option rights can be exchanged constitute no

more than �.56 percent of the company’s total number of shares. the share

subscription price for 2005C options is the trade volume weighted average price

of the KONE Corporation class B share on the Helsinki Stock Exchange between

24 October, 2005 and �8 November, 2005, which was EUR 28.40 (split-adjusted).

At the end of the financial year, �,554,000 outstanding options were held by

Further information on Option Programs

Note 21, page 77

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40

employees and 446,000 by KONE’s subsidiary. the amount of KONE Corpora-

tion’s dividend paid after the determination of the subscription price shall be

deducted from the subscription price up until the time of share subscription, as

per the dividend record date. At the end of the financial year the effective

subscription price was EUR 27.40.

the share subscription period for 2005C option rights will be � April, 2008–

30 April, 20�0. However, the share subscription period will begin only if the

following criteria have been attained: the average net sales growth of the KONE

Group for the 2006 and 2007 financial years exceeds the market growth, and the

Earnings before Interest and taxes (EBIt) of the KONE Group for the 2006

financial year exceeds the EBIt for the 2005 financial year, and the EBIt for the

2007 financial year exceeds the EBIt for the 2006 financial year. If the above-

mentioned criteria have not been attained, the 2005C options will expire in the

manner decided by the Board of Directors.

Share-basedincentiveplanA share-based incentive plan for the company’s senior management, consisting of

approximately 35 individuals, was decided upon by the Board of Directors on

24 October, 2005. the potential reward is based on the growth in KONE’s sales

and operating income for 2006 and 2007. the reward is to be paid as a combin-

ation of class B shares and the cash equivalent of the tax and taxable benefit costs

that are incurred. the share ownership plan amounts to no more than 0.2 percent

of the entire Corporation’s shares. the plan prevents participants from transferring

the shares during a �5-month period following the termination of each earnings

period.

ShareholdersAt the end of December 2006, KONE had �3,673 shareholders. A breakdown of

shareholders is given in the adjacent tables.

At the end of December 2006, the ownership of approximately 43 percent of

KONE shares was in non-Finnish hands, corresponding to around �9 percent of

the votes in the company. Of foreign-owned shares, 6,524,482 were registered in

the shareholders’ own name. Foreign-owned shares can also be registered in the

name of Finnish nominees. Only shares registered in shareholders’ own names

entitle the holder to vote at shareholders’ meetings. there were 48,80�,0�7

foreign-owned shares – representing 38 percent of the shares – registered in the

name of Finnish nominees at the end of December 2006.

ShareholdingsofthemembersoftheBoardofDirectorsandchairmanoftheBoardKONE Corporation’s members of the Board of Directors and Chairman of the

Board directly owned a total of 473,9�8 class B shares, and indirectly owned a

total of �7,640,402 class A shares and 8,666,472 class B shares on 3� December,

2006, representing 20.9 percent of shares and 6�.9 percent of votes.

SHARES AND SHAREHOlDERS

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4241

Global RefeRences

Shareholdings on 31 December, 2005 by number of shares

Number of sharesNumber

of ownersPercentage

of ownersNumber

of sharesPercentage

of shares1 – 10 119 0.87 819 0.00

11 – 100 3,428 25.07 211,325 0.17101 – 1,000 7,748 56.67 2,924,287 2.28

1,001 – 10,000 2,105 15.40 5,995,945 4.6810,001 – 100,000 227 1.66 6,054,246 4.73

100,001 – 46 0.34 112,868,774 88.13Total 13,673 100.00 128,055,396 99.99shares which have not been transferred to the paperless book entry system 11,232 0.01Total 128,066,628 100.00

Largest shareholders on 31 December, 2006

Class A Class B Total Of shares, % Of votes, % 1 Herlin Antti 17,640,402 9,064,950 26,705,352 20.85 61.92 Holding Manutas oy 13,571,148 6,624,486 20,195,634 15.77 47.52 security Trading oy 4,069,254 2,041,986 6,111,240 4.77 14.27 Herlin antti **** 0 398,478 398,478 0.31 0.13 2 Toshiba Elevator And Building Systems

Corporation 0 6,046,680 6,046,680 4.72 2.02 3 D-sijoitus Oy 0 4,367,982 4,367,982 3.41 1.46 4 Mariatorp Oy 0 4,240,000 4,240,000 3.31 1.42 5 Sijoitus-Wipunen Oy 0 4,200,000 4,200,000 3.28 1.40 6 KONE Foundation 1,411,776 2,464,908 3,876,684 3.03 5.54 7 Ilmarinen Mutual Pension Insurance Company 0 2,717,826 2,717,826 2.12 0.91 8 Finnish State Pension Fund 0 880,000 880,000 0.69 0.29 9 Varma Mutual Pension Insurance Company 0 798,280 798,280 0.62 0.27 10 Blåberg Olli 0 598,000 598,000 0.47 0.20 10 largest shareholders total 19,052,178 35,378,626 54,430,804 42.5 75.4 foreign shareholders *** 55,325,499 55,325,499 43.2 18.5

Repurchased own shares 2,738,753 2,738,753 2.1 0.9 other owners 15,571,572 15,571,572 12.2 5.2Total 19,052,178 109,014,450 128,066,628 100 100

* antti Herlin’s ownership in Holding Manutas represents 1.1 percent of the shares and 12.8 percent of the voting rights and together with the ownership of security Trading, company in which he exercises controlling power, his ownership represents 51.0 percent of the shares and 62.7 percent of the voting rights.

** antti Herlin’s ownership in security Trading oy represents 93.8 percent of the shares and 97.7 percent of the voting rights. *** The american investment fund company Tweedy browne company llc notified Kone corporation on 1 april, 1999 that its

holdings of Kone corporation was over 5 percent of the shares. Includes foreign-owned shares registered by finnish nominees.**** antti Herlin’s ownership also includes the holdings of underaged children.

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4241

Global RefeRences

Shareholdings on 31 December, 2005 by number of shares

Number of sharesNumber

of ownersPercentage

of ownersNumber

of sharesPercentage

of shares1 – 10 119 0.87 819 0.00

11 – 100 3,428 25.07 211,325 0.17101 – 1,000 7,748 56.67 2,924,287 2.28

1,001 – 10,000 2,105 15.40 5,995,945 4.6810,001 – 100,000 227 1.66 6,054,246 4.73

100,001 – 46 0.34 112,868,774 88.13Total 13,673 100.00 128,055,396 99.99shares which have not been transferred to the paperless book entry system 11,232 0.01Total 128,066,628 100.00

Largest shareholders on 31 December, 2006

Class A Class B Total Of shares, % Of votes, % 1 Herlin Antti 17,640,402 9,064,950 26,705,352 20.85 61.92 Holding Manutas oy 13,571,148 6,624,486 20,195,634 15.77 47.52 security Trading oy 4,069,254 2,041,986 6,111,240 4.77 14.27 Herlin antti **** 0 398,478 398,478 0.31 0.13 2 Toshiba Elevator And Building Systems

Corporation 0 6,046,680 6,046,680 4.72 2.02 3 D-sijoitus Oy 0 4,367,982 4,367,982 3.41 1.46 4 Mariatorp Oy 0 4,240,000 4,240,000 3.31 1.42 5 Sijoitus-Wipunen Oy 0 4,200,000 4,200,000 3.28 1.40 6 KONE Foundation 1,411,776 2,464,908 3,876,684 3.03 5.54 7 Ilmarinen Mutual Pension Insurance Company 0 2,717,826 2,717,826 2.12 0.91 8 Finnish State Pension Fund 0 880,000 880,000 0.69 0.29 9 Varma Mutual Pension Insurance Company 0 798,280 798,280 0.62 0.27 10 Blåberg Olli 0 598,000 598,000 0.47 0.20 10 largest shareholders total 19,052,178 35,378,626 54,430,804 42.5 75.4 foreign shareholders *** 55,325,499 55,325,499 43.2 18.5

Repurchased own shares 2,738,753 2,738,753 2.1 0.9 other owners 15,571,572 15,571,572 12.2 5.2Total 19,052,178 109,014,450 128,066,628 100 100

* antti Herlin’s ownership in Holding Manutas represents 1.1 percent of the shares and 12.8 percent of the voting rights and together with the ownership of security Trading, company in which he exercises controlling power, his ownership represents 51.0 percent of the shares and 62.7 percent of the voting rights.

** antti Herlin’s ownership in security Trading oy represents 93.8 percent of the shares and 97.7 percent of the voting rights. *** The american investment fund company Tweedy browne company llc notified Kone corporation on 1 april, 1999 that its

holdings of Kone corporation was over 5 percent of the shares. Includes foreign-owned shares registered by finnish nominees.**** antti Herlin’s ownership also includes the holdings of underaged children.

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47 48

TuRnInG ToRso“from the very beginning of the Hsb Malmö Turning Torso project, it was obvious that the elevators would be

fundamental to the success of the project, during both construction and occupation. Kone has completely met

our expectations for high-quality technology and innovation”, Ingvar Nohlin, Project Manager, HSB Malmö.

Q1 ToweRDayne May, Commercial Manager for Sunland Constructions, credits Kone for its up-to-date products, flexibility

in meeting specific company requirements and competitive pricing. sunland constructions has been pleased with

the partnership, noting that Kone has demonstrated remarkable responsiveness during all phases of the entire

process including design, builder’s lift changeovers and breakdowns. likewise, relationships with Kone project

management, designers, engineers and site installation crews have proven to be excellent.

al faTTan MaRIne ToweRs“during construction of the al fattan Marine Towers 1 & 2, executed on a very tight schedule, Kone demonstrated

efficient and flexible project management skills that enabled us to complete these two projects successfully. we wish

to see Kone involved in our future projects”, Ibrahim M. El-Hamati, Executive Director of Arabtec Construction.

fInancIal sTReeT“Kone’s understanding of their role in the real estate process and the commercial importance of innovation is easily

the strongest among the leading worldwide elevator suppliers. Kone has worked diligently to minimize the spatial

and energy footprint of the elevator in the building and maximize the work done by the individual elevator”,

Steven D. Edgett, President of Edgett Williams Consulting Group.

fInancIal sTaTeMenTs

This report presents the financial performance of Kone corporation for the period january–december 2006. Kone corporation’s complete financial statements for the accounting period 1 january–31 december, 2006 are included in the corporation’s official financial statements documents.

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43 Global RefeRences

TuRnInG ToRsoMalmö, Sweden

The 190-meter residential and office tower

consists of nine cubes of five floors each.

The entire structure twists 90 degrees from

bottom to top, creating an impression of

lightness and arousing curiosity. Kone has

installed three Kone alta™ elevators in the

residential section and two Kone Mini-

space™ elevators in the office section. The

construction project was completed in 2005.

TRuMp InTeRnaTIonal HoTel and ToweRChicago, U.S.

The Trump International Hotel and Tower will

punctuate the chicago skyline as the second-

tallest building in the u.s. The 415-meter

complex will contain residential units and a

hotel. Kone know-how will ensure that the

varying needs for vertical transportation

flow in the hotel and residential sections, as

well as the expectation of high-class design,

will be met. The construction project is

scheduled to be completed in 2009.

fInancIal sTReeTBeijing, China

a pair of office towers for financial-sector

companies has emerged in beijing’s

central business district. Kone project

design and management services,

provided from the early design phases to

the construction phase, supported the

customer in achieving the building project

goals. The elevator design took account

of the need for an energy-efficient

transportation solution. The construction

project was completed in 2006.

fReedoM of THe seasNB 1352, Aker Yards, Finland

The “freedom of the seas” is the

world’s largest and most innovative

cruise ship with, a length of 339 meters.

at full occupancy, it carries 3,600

passengers and a crew of 1,400. The

ship was placed in service in 2006.

al faTTan MaRIne ToweRsDubai, United Arab Emirates

Two 54-story luxury towers rise above

dubai’s shoreline on the arabian Gulf.

The residential and retail complex, which

was completed in 2006, required a carefully

tailored solution for its vertical transporta-

tion. Travelling up to 200 meters, the scenic

elevators maximize the experience of

unforgettable views around the site and

the city.

suvaRnabHuMI InTeRnaTIonal aIRpoRTBangkok, Thailand

The suvarnabhumi International airport, the

new international airport for bangkok,

Thailand, opened in 2006. Kone delivered

188 elevators and 24 custom-designed

ramps to the airport. The terminal building,

which is the largest single airport terminal

building in the world, features 106 Kone

elevators.

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Q1 ToweRQueensland Gold Coast, Australia

Q1, which was completed in 2005, is

the world’s tallest residential building at

323 meters. The tenants can travel to

the 80th floor at 9 m/s, thanks to the

combination of Kone alta™ and Kone

Monospace® elevators installed in this

colossal residential tower.

nabeRezHnaya ToweRMoscow, Russia

The naberezhnaya Tower is a 3-tower

complex and one of the largest single office

developments in europe. The c Tower will be

the tallest building in europe at 268 meters

when completed in 2007. Most of the

elevators serving the complex are Kone

alta™ high-performance passenger elevators.

a Kone destination control system will serve

in the b & c Towers.

beIjInG capITal aIRpoRTBeijing, China

The world’s largest airport building is

under construction to welcome athletes

and sport enthusiasts to the beijing

olympic Games in 2008. The building is

designed to serve more than 40 million

passengers annually, and its design is

based on a number of passive environ-

mental concepts, making the building

one of the most sustainable terminals in

the world.

KaMppIHelsinki, Finland

The Kamppi project, the largest single

project in finland, is divided into three

parts: a shopping center, an underground

transport terminal and retail area, and a

residential and office building area. The

basic plan for the project is a traffic-free

city center, with the largest continuous

pedestrian zone in Helsinki. Kamppi was

opened in 2006.

beRlIn cenTRal sTaTIonBerlin, Germany

Kone delivered 54 ecologically sound

escalators ordered by a consortium formed

by strabag berlin and Heitkamp berlin for the

new berlin central station of the German

national Railway. The station, which was the

most important construction project in berlin

at the time, opened in 2006.

201 bIsHopsGaTe and THe bRoadGaTe ToweRLondon, U.K.

when completed in 2008, the two-part

office building complex will feature the

world’s first double-deck elevators with a

destination control system using a touch

screen user interface. The 165-meter tower

and 60-meter adjoining block are designed

to meet the needs of occupants in financial

and other professions.

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47 48

TuRnInG ToRso“from the very beginning of the Hsb Malmö Turning Torso project, it was obvious that the elevators would be

fundamental to the success of the project, during both construction and occupation. Kone has completely met

our expectations for high-quality technology and innovation”, Ingvar Nohlin, Project Manager, HSB Malmö.

Q1 ToweRDayne May, Commercial Manager for Sunland Constructions, credits Kone for its up-to-date products, flexibility

in meeting specific company requirements and competitive pricing. sunland constructions has been pleased with

the partnership, noting that Kone has demonstrated remarkable responsiveness during all phases of the entire

process including design, builder’s lift changeovers and breakdowns. likewise, relationships with Kone project

management, designers, engineers and site installation crews have proven to be excellent.

al faTTan MaRIne ToweRs“during construction of the al fattan Marine Towers 1 & 2, executed on a very tight schedule, Kone demonstrated

efficient and flexible project management skills that enabled us to complete these two projects successfully. we wish

to see Kone involved in our future projects”, Ibrahim M. El-Hamati, Executive Director of Arabtec Construction.

fInancIal sTReeT“Kone’s understanding of their role in the real estate process and the commercial importance of innovation is easily

the strongest among the leading worldwide elevator suppliers. Kone has worked diligently to minimize the spatial

and energy footprint of the elevator in the building and maximize the work done by the individual elevator”,

Steven D. Edgett, President of Edgett Williams Consulting Group.

fInancIal sTaTeMenTs

This report presents the financial performance of Kone corporation for the period january–december 2006. Kone corporation’s complete financial statements for the accounting period 1 january–31 december, 2006 are included in the corporation’s official financial statements documents.

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KONE Corporation’s first financial reporting period was 1 June–31 December, 2005. KONE’s reporting period follows the calendar year as of 2006. In order to facilitate evaluation of the financial performance and status of the company, a separate pro forma review, in which the company has used 1 January–31 December, 2005 data for comparison, is presented in this Annual Report.

The Financial Statements have been prepared in accordance with the International Financial Reporting Standards (IFRS).

KONE’s Operating Environment The operating environment remained good in most markets throughout the year. The need to modernize equipment and cater for ageing populations is driving demand in Europe and North America, while urbaniza-tion and economic growth are continuing to increase the demand for elevators and escalators and the related service in Asia.

In Europe, the Middle East and Africa (EMEA), the business environment continued to be favorable. Despite tough competition, KONE succeeded in strengthening its position even further.

The residential market was the main driver of Europe’s new equipment business in most countries, although commercial construction progressed at a fairly lively rate especially in the U.K. The Southern European market slowed down at the end of the year. The Middle East market was buoyant due to energetic construction growth in most segments.

In North America, the new equipment market continued to progress strongly. The market for hotel and leisure building solutions was especially active, whereas growth in the U.S. residential segment slowed down during the second half of the year.

The Asia-Pacific region developed well, with most markets maintaining a high level of activity. Rapid urbanization and economic growth were the main factors affecting the new equipment and modernization markets in the region. In China, the central government made several consecutive controlling actions particu-larly to guide residential construction towards more affordable housing for people migrating to the cities, which temporarily slowed down growth somewhat.

The pricing environment for new elevators and escalators continued to be competitive in all market areas.

The maintenance market progressed well, under continuous tough price competition. A high level of demand continued for the modernization of elevators and escalators in both Europe and North America, and also in some markets in Asia-Pacific. The growing modernization market became an increasingly important market for KONE, even though it is attract-ing the attention of both global and local players.

Orders Received and Order BookThe value of orders received during 2006, excluding the value of maintenance contracts, totaled EUR 3,116 (June–December 2005: 1,622) million. The order book was EUR 2,762 (31 December, 2005: 2,327) million at the end of December. This represents an increase of nearly 19 percent on the year-end order book. At comparable exchange rates this corresponded 24 percent.

The order intake for new equipment and moderniza-tions in the EMEA region continued to be good the whole year. Modernization orders continued to increase particularly in countries that have adopted SNEL (European Safety Norms for Existing Lifts) in their legislation.

In North America, order intake growth was strong. The success of the KONE extended machine-room-less (MRL) elevators and encouraging escalator demand in the public sector resulted in good order intake growth. The demand for modernizations continued to grow also in the U.S.

The Asia-Pacific region continued to be character-ized by high demand for new equipment. KONE’s market share grew rapidly especially in China, where progress has been especially good. KONE’s position has strengthened in the whole Asia-Pacific region.

KONE’s largest orders of the financial year were orders to supply all elevators for the old London Stock Exchange Building, to modernize escalators and walkways in the Roman metro system and major projects for the Madrid Metro. KONE also received an order for the Vienna International Airport, a service contract for the London Underground, and a major order for the retail sector from Tesco PLC to supply ramps and elevators for stores across the U.K. In addition, KONE received orders to design, supply and install all elevators on four cruise ships. In China, KONE was able to gain ground by signing orders with the China National Stadium in Beijing, for example.

BOARD OF DIRECTORS’ REPORT

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Net Sales KONE’s net sales totaled EUR 3,601 (June–December 2005: 2,101) million. New equipment sales accounted for EUR 1,491 (883.9) million of the total and service sales totaled EUR 2,110 (1,218) million

Net sales growth was almost totally organic and resulted from favorable market conditions and good progress in the company’s development programs, i.e. programs to increase customer focus and competitive-ness through a better product portfolio. In 2006, the annual sales for closed acquisitions amounted to approximately EUR 50 million. Net sales grew in all geographical areas. In 2006, growth was strongest in Asia-Pacific, and especially in China.

ResultKONE’s operating income improved and stood at EUR 360.1 (June–December 2005: 194.7) million or 10.0 (9.3) percent of net sales. Net financial items were EUR -3.5 (-2.1) million. The increase in operating income was driven by continued productivity improvements, which resulted from ongoing development programs.

KONE’s profit before taxes was EUR 356.3 (193.5) million. Taxes totaled EUR 121.9 (69.5) million, representing a 34.2 (35.9) percent tax rate.

Net income for January-December was EUR 234.4 (124.0) million. Earnings per share were EUR 1.86 (0.98).

Cash Flow and FinancingCash flow from operations (before financial items and taxes) for 2006 was EUR 371.7 (June–December 2005: 215.4) million. At the end of December, net working capital was negative at EUR -139.5 (31 December, 2005: -158.0) million, including financial items and taxes. Although the record net sales of the last quarter increased receivables, the overall cash flow was in accord with the result.

Net debt totaled EUR 124.9 (31 December, 2005: 99.3) million. Gearing was 17.9 percent compared to 14.8 percent at the end of December, 2005. KONE’s total equity/total assets ratio was 30.5 (31 December, 2005: 31.2) percent at the end of December.

Capital Expenditure, Acquisitions and Cooperation AgreementsIn 2006, KONE’s capital expenditure, including acquisitions, totaled EUR 150.5 (June–December 2005: 66.5) million. Acquisitions accounted for EUR 90.1 (37.1) million of this figure.

KONE continued its acquisition policy of buying small local elevator or door service companies. Acquisitions were made mainly in Europe and the U.S. in 2006.

In Germany, KONE increased its shareholding in Lödige Aufzugstechnik to 85 percent. The company has 5,500 units under maintenance and employes approxi-mately 100 people.

KONE signed an agreement to acquire Evin SAS, an elevator company located in France. Evin SAS was consolidated into KONE in September 2006. The company recorded sales of EUR 14 million in 2005 and employed somewhat over 100 persons. Evin SAS installed, maintained and modernized elevators and automatic building doors in several regions in France.

In November, KONE Corporation and KMZ Karacharovo Mechanical Factory agreed to withdraw from their plans to set up a joint venture elevator company in Russia, which was announced by the parties in April 2005. KONE and KMZ will, however, continue their cooperation on the local Russian elevator market.

KONE and Marimekko signed an agreement to start cooperation under license concerning the decoration of elevator car interiors.

Research and Product DevelopmentProduct development expenses totaled EUR 50.3 (June–December 2005: 29.7) million, representing 1.4 (1.4) percent of net sales. R&D expenses include develop-ment of new product concepts and further develop-ment of existing products and services. During the year the focus was on developing KONE’s product portfolio even further in order to maximize the accessible markets.

In Europe, a preferred offering for the new equip-ment market was released, providing better flexibility in fulfilling customer needs. It included a new set of visual outlooks for the car interiors and also improved performance, such as the more efficient use of space.

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KONE’s machine-room-less (MRL) product offering for the North American market now covers most hydraulic elevator segments. Further performance improvements were also released during the year, including the possibility for bigger loads.

In the Asian market, KONE continued to increase the flexibility of its product offerings and the coverage of its visual offering. In 2006, the first escalator product from KONE’s subsidiary KONE TELC Industries Co., Ltd was released in most Asian markets, including India, and in Australia, South Africa and some European markets.

With respect to modernizations, a solution featuring enhancements in accessibility, safety (optimized for the European Safety Norms for Existing Lifts, SNEL), visual outlook and performance was released in 2006.

KONE also announced that it has developed the world’s flattest autowalk technology, which makes designing locations for and installing autowalks considerably easier. Due to the innovative pallet return mechanism and a new kind of motor solution, each KONE InnoTrack™ autowalk is so flat that, unlike conventional solutions, it can be installed entirely on the floor level.

During 2005 and 2006 product creation at KONE has been developed to become much more cross-functional. This has significantly reduced the time to market in R&D.

Significant Events KONE and Hewlett-Packard (HP) signed a seven-year agreement covering IT infrastructure services. Under this agreement, HP will consolidate and maintain KONE’s servers, local area networks and operating help desks, and will harmonize desk-top computing environments in KONE’s global network.

The production of elevator doors and cars for the North American market started in the second quarter in KONE’s purpose-built facility in Torreón, Mexico. KONE also decided to build the capability to deliver all elevators for the North American markets from Torreón by the middle of 2007. In line with KONE’s global manufacturing processes, the new factory in Mexico employs the same modern production technology as other KONE component plants.

European Commission InvestigationIn March 2006, KONE submitted its reply to the European Commission concerning that body’s investigation of localized anticompetitive practices in the elevator and escalator industry in Belgium, Germany, Luxembourg and the Netherlands. KONE received a Statement of Objections on 10 October, 2005. Since the initiation of the investigation in January 2004, KONE has fully cooperated with the European Commission. KONE has not made a provision in this respect.

PersonnelKONE’s personnel are professional and specialized. As an employer the company focuses on securing the availability, commitment and continuous development of its human resources.

KONE had 29,321 (31 December, 2005: 27,238) employees at the end of December 2006. The average number of employees during January–December 2006 was 28,366 (June–December 2005: 27,016). Most of the personnel growth was in the fastest growing geographical markets, such as Asia-Pacific and the Middle East, with additional recruitment being carried out in service and installation operations due to growing volumes.

The geographical distribution of KONE employees was 58 (59) percent in EMEA, 18 (19) percent in the Americas and 24 (22) percent in Asia-Pacific.

Operational RisksKONE’s business activities are exposed to risks, of which the most significant are fluctuations in currency rates and increases in raw material prices and personnel costs.

A rise in raw material prices is reflected directly in the production costs of components made by KONE, such as doors and cars, and indirectly in the prices of purchased components. The price of oil affects maintenance costs.

Subsidiary investments are hedged from currency risks in accordance with the hedging policy to ensure that the total effect of foreign exchange rates on the Corporation’s gearing is neutral.

As the expenses and income of the elevator and escalator business occur mainly in the same currency, exchange rate movements are reflected mostly in the translation of the achieved result into euros.

BOARD OF DIRECTORS’ REPORT

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EnvironmentElevators and escalators are durable and give long-lasting service when appropriately maintained. The environmental impact of maintenance is chiefly related to the disposal of replaced components, the cleaning of equipment, and exhaust from service vehicles.

KONE takes care of the environment not only by its own proactive initiatives, but also by complying with the laws and recommendations related to its business and by continuously monitoring the changes made to them.

KONE strives to develop its products, manufacturing processes and operating procedures so that their environmental impact will remain as small as possible throughout the products’ entire life cycle.

Title Changes within KONE CorporationThe Board of Directors announced that, from 18 December, 2006, Antti Herlin’s title will be Chairman of the Board of KONE Corporation, while Matti Alahuhta’s title will be President & CEO of KONE Corporation. Previously, Herlin was the CEO in addition to serving as Chairman of the Board.

Appointment to the Executive BoardKONE Corporation appointed Juho Malmberg, M.Sc. (Computer Science), as Executive Vice President, Development and as a member of the Executive Board as of 1 February, 2006.

Annual General Meeting and Board of DirectorsKONE Corporation’s Annual General Meeting held in Helsinki on 27 February, 2006 decided to maintain the number of members of the Board of Directors at eight (8). Sirpa Pietikäinen was elected as a new member of the Board. Re-elected as full members of the Board were Matti Alahuhta, Jean-Pierre Chauvarie, Reino Hanhinen, Antti Herlin, Sirkka Hämäläinen-Lindfors, Masayuki Shimono and Iiro Viinanen. The Board’s term expires at the next Annual General Meeting. At its meeting held after the Annual General Meeting, the Board of Directors elected Antti Herlin as its Chairman and Sirkka Hämäläinen-Lindfors as Vice Chairman of the Board.

In addition, the Board of Directors’ proposal that the Annual General Meeting authorize it to repurchase KONE’s own shares with assets distributable as profit was approved. Altogether no more than 12,785,000 shares may be repurchased, of which no more than 1,905,000 are to be class A shares and 10,880,000 class B shares, taking into consideration the provisions of the Companies Act regarding the maximum amount of own shares that the Company is allowed to possess. The proposed amount corresponds to nearly 10 percent of both the share capital of the Company and the total voting rights.

In addition, the Board of Directors was authorized, with respect to the distribution of the repurchased shares, to decide to whom and in which order the repurchased shares will be distributed. The Board of Directors may decide on the distribution of repurchased shares otherwise than in proportion to the existing pre-emptive right of shareholders to purchase the Compa-ny’s own shares. The repurchased shares may be used as compensation in acquisitions and in other arrange-ments, as well as to implement the Company’s share-based incentive plans in the manner and to the extent decided by the Board of Directors. These authorizations shall remain in effect for a period of one (1) year from the date of the Annual General Meeting’s decision.

The Annual General Meeting elected Pricewater-houseCoopers Oy and Heikki Lassila, Authorized Public Accountant, as the auditors of the company.

The Annual General Meeting approved the Board’s proposal for a dividend for the reporting period, 1 June–31 December, 2005, of EUR 0.99 per class A share and EUR 1.00 per class B share, making a total of EUR 127.3 million. The date of the dividend payment was set at 9 March, 2006. The rest of the distributable equity, EUR 1,078 million, was retained and carried forward.

Incentive Programs, Share Capital and Market CapitalizationKONE Corporation has two classes of shares: the listed class B shares and the unlisted class A shares. KONE Corporation’s Articles of association state that the minimum share capital is EUR 60 million and the maximum share capital is EUR 260 million. The share capital can be raised or reduced within these limits without an amendment to the Articles of Association. At the end of December 2006, the share capital was EUR 64,033,314. The share capital was increased by EUR 105,594 due to subscriptions of shares with KONE 2005A and 2005B options during the financial year.

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KONE 2005A and 2005B options rights based on the KONE Corporation option program 2005 were listed on the main list of the Helsinki Stock Exchange on 1 June, 2005. Each option right entitles its holder to subscribe for six (6) class B shares at a price of EUR 8.04 per share.

As of 31 December, 2006, 557,118 shares have been subscribed for with the option rights, raising KONE’s share capital to EUR 64,033,314, comprising 109,014,450 listed class B shares and 19,052,178 unlisted class A shares.

The remaining 2005A option rights entitle their holders to subscribe for 226,572 class B shares, while the remaining 2005B option rights entitle their holders to subscribe for 524,820 class B shares. The share subscription period for series A option rights share subscription period ends on 31 March, 2008 and for series B option rights on 31 March, 2009.

The remaining number of shares that can be subscribed for is 751,392. The subscription price is EUR 8.04 per share.

KONE’s market capitalization grew by 28 percent during 2006 and was EUR 5,382 million on 31 December, 2006, disregarding own shares in the group’s possession.

Repurchase of KONE SharesOn the basis of the Annual General Meeting’s authori-zation, KONE Corporation’s Board of Directors decided to commence repurchasing shares on 7 March, 2006 at the earliest.

During the financial year, KONE Corporation repurchased 1,963,913 class B shares at an average price of EUR 35.29. At the end of December, the group possessed 2,738,753 of its own class B shares, repre-senting 2.5 percent of the total number of class B shares. This corresponds to 0.9 percent of the total voting rights.

At the end of the reporting period, KONE’s Board of Directors had no current authorization to raise the share capital or to issue convertible or warrant loans.

The Board’s Proposal of Distributable EquityThe parent company’s non-restricted equity on 31 December, 2006 is EUR 1,271,423,830.92 of which net profit from the financial year is EUR 262,326,865.64.

The Board of Directors proposes to the Annual General Meeting that a dividend of EUR 0.99 be paid on the 19,052,178 class A shares and EUR 1.00 on the outstanding 106,675,697 class B shares. The total amount of proposed dividends will be EUR 125,537,353.22. The Board of Directors further proposes that the rest, EUR 1,145,886,477.70 be retained and carried forward.

The Board proposes that the dividends be payable from 8 March, 2007.

OutlookWe estimate that market growth will not be equally strong in all markets this year as in 2006. This will be the case especially in North America and Southern Europe. However, the market development in e.g. Asia-Pacific will continue to be strong.

KONE’s target for 2007 is to achieve an approximate 10 percent growth in net sales, calculated at compa-rable exchange rates, compared to 2006. The operat-ing income (EBIT) target is to achieve growth of approximately 20 percent from the comparable 2006 figure of EUR 360 million.

In 2008, KONE’s objective is to achive an about 12 percent operating income (EBIT) margin.

Helsinki, 26 January, 2007

KONE Corporation

Board of Directors

BOARD OF DIRECTORS’ REPORT

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55CONSOLIDATED STATEMENT OF INCOME

MEUR Note 1 Jan–31 Dec, 2006 % 1 Jun–31 Dec, 2005 % Sales 4 3,600.8 2,101.4

Costs, expenses and depreciation 5, 6 -3,240.7 -1,906.7 Operating Income 360.1 10.0 194.7 9.3

Share of associated companies’ net income 13 -0.3 0.9 Financing income 7 16.1 9.4 Financing expenses 7 -19.6 -11.5

Income before Taxes 356.3 9.9 193.5 9.2

Taxes 8 -121.9 -69.5 Net Income 234.4 6.5 124.0 5.9 Net Income attributable to:

Shareholders of the parent company 234.8 124.8 Minority interests -0.4 -0.8

Total 234.4 124.0 Earnings per share for profit attributable to the shareholders of the parent company, EUR (Note 9)

Basic earnings per share, EUR 1.86 0.98 Diluted earnings per share, EUR 1.85 0.97

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56 CONSOLIDATED BALANCE SHEET

Assets MEUR Note 31 Dec, 2006 31 Dec, 2005

Non-Current Assets Goodwill 10 557.3 497.9Other intangible assets 11 58.4 53.7Property, plant and equipment 12 217.7 217.7Investments in associated companies 13 7.7 22.2Shares 14 116.5 129.8Available-for-sale investments 15 5.4 5.2Non-current financial receivables I 16 5.1 53.1Deferred tax assets 17 134.1 130.1

Total Non-Current Assets 1,102.2 1,109.7 Current Assets

Inventories 18 668.8 584.9Advance payments received 18 -552.1 -464.2Accounts receivable 622.0 524.3Deferred assets 19 126.0 148.6Income tax receivables 57.1 33.8Current financial receivables I 16 44.6 0.6Financial assets I 20 114.3 93.3Cash and cash equivalents I 109.5 113.5

Total Current Assets 1,190.2 1,034.8

Total Assets 2,292.4 2,144.5

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Equity and Liabilities MEUR Note 31 Dec, 2006 31 Dec, 2005 Capital and reserves attributable to the shareholders of the parent company

Share capital 21 64.0 63.9Share premium account 98.0 96.4Fair value and other reserves -0.5 -5.1Translation differences -14.0 9.9Retained earnings 547.6 501.3

Total Shareholders’ Equity 695.1 666.4 Minority interests 3.5 2.8 Total Equity 698.6 669.2 Non-Current Liabilities

Loans I 22 100.2 144.2Deferred tax liabilities 17 30.3 24.7Employee benefits 23 145.0 148.9

Total Non-Current Liabilities 275.5 317.8 Provisions 24 71.8 112.0 Current Liabilities

Current portion of long-term loans I 22 48.6 12.8Other liabilities I 22 249.6 202.8Accounts payable 231.5 214.2Accruals 25 619.2 557.0Income tax payables 97.6 58.7

Total Current Liabilities 1,246.5 1,045.5 Total Equity and Liabilities 2,292.4 2,144.5

Items designated “ I “ comprise interest-bearing net debt

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58 CONSOLIDATED STATEMENT OF CHANGES IN EqUITy

MEUR Shar

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1 Jan, 2006 63.9 96.4 -5.1 9.9 -21.9 523.2 2.8 669.2 Net income for the period 234.8 -0.4 234.4 Items booked directly into equity:

Transactions with shareholders and minority shareholders:

Dividends paid -126.9 -126.9Issue of shares (option rights) 0.1 1.6 1.7Purchase of own shares -69.3 -69.3Sales of own shares -Change in minority interests 1.1 1.1

Cash flow hedge 4.6 4.6Translation differences -30.4 -30.4Hedging of foreign subsidiaries 8.8 8.8Tax impact of hedging -2.3 -2.3Option and share based compensation 7.7 7.7

31 Dec, 2006 64.0 98.0 -0.5 -14.0 -91.2 638.8 3.5 698.6

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1 Jun, 2005 63.8 93.8 -2.2 0.0 0.0 397.9 22.9 576.2 Net income for the period 124.8 -0.8 124.0 Items booked directly into equity:

Transactions with shareholders and minority shareholders:

Dividends paid -Issue of shares (option rights) 0.1 2.6 2.7Purchase of own shares -21.9 -21.9Sales of own shares -Change in minority interests -19.3 -19.3

Cash flow hedge -2.9 -2.9Translation differences 15.2 15.2Hedging of foreign subsidiaries -7.1 -7.1Tax impact of hedging 1.8 1.8Option and share based compensation 0.5 0.5

31 Dec, 2005 63.9 96.4 -5.1 9.9 -21.9 523.2 2.8 669.2

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MEUR 1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005

Cash receipts from customers 3,656.1 1,983.0Cash paid to suppliers and employees -3,284.4 -1,767.6

Cash Flow from Operations 371.7 215.4

Interest received 12.5 5.8Interest paid -15.6 -8.5Dividends received 2.2 2.4Other financial items -4.7 -3.0Income taxes paid -100.3 -137.4

Cash Flow from Operating Activities 265.8 74.7

Capital expenditure -62.2 -29.4Proceeds from sales of fixed assets 0.6 0.9Acquisitions, net of cash -44.1 -37.1Proceeds from divested operations, net of cash 9.3 0.0

Cash Flow from Investing Activities -96.4 -65.6

Cash Flow after Investing Activities 169.4 9.1

Change in loans receivable -14.3 -17.8Change in current creditors, net 47.7 55.5Proceeds from long-term borrowings - 9.1Repayments of long-term borrowings -9.5 -16.8Purchases of own shares -69.3 -22.0Sales of own shares - -Share issue 1.7 2.8Dividends paid -126.8 -

Cash Flow from Financing Activities -170.5 10.8

Change in Net Cash -1.1 19.9

Cash and cash equivalents at the end of period 109.5 113.5Translation difference 2.9 -1.0Cash and cash equivalents in the beginning of period 113.5 92.6

Change in Net Cash -1.1 19.9

Reconciliation of Net Income to Cash Flow from Operating Activities

Net Income 234.4 124.0Depreciation and impairment 61.3 34.8

Income before Change in Working Capital 295.7 158.8

Change in receivables -102.4 -127.5Change in payables 70.5 -21.1Change in inventories 2.0 64.5

Cash Flow from Operating Activities 265.8 74.7

In drawing up the Statement of Cash Flow, the impact of variations in exchange rates has been eliminated by adjusting the beginning balance to reflect the exchange rate prevailing at the time of the closing of the books for the period under review.

CONSOLIDATED STATEMENT OF CASH FLOW

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1. Accounting Principles

Basis of PresentationKONE Corporation is a Finnish, public limited liability company domiciled in Helsinki, Finland. KONE Corporation with its subsidiaries form consolidated KONE Corporation (“KONE” or “the Group”). KONE provides its customers with elevators and escalators and solutions for their maintenance and modernization. KONE also provides maintenance for automatic building doors.

The Consolidated Financial Statements of KONE Corporation have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU observing the standards and interpretations effective on 31 December, 2006. The Group has not applied the following IFRS/IAS stan-dards, which has been issued, but whose application was not compulsory: Amendment to IAS 1 - Capital Disclosures, IFRS 7 Financial Instruments: Disclosures, IFRS 8 Operating Segments, IFRIC 11–IFRS 2 Group and Treasury Share Transactions and IFRIC 12 Service Concession Arrangements. These changes are estimat-ed not to have significant effect on financial result or position of the Group.

The consolidated financial statements have been prepared for the accounting period of 12 months between 1 January and 31 December, 2006. The financial statements have been authorised for issue by the Board of Directors of KONE Corporation on 26 January, 2007.

KONE Corporation demerged into two separately listed corporations, KONE Corporation and Cargotec Corporation, on 1 June, 2005. KONE Corporation’s (the parent company) first financial reporting period was 1 June–31 December, 2005. After this KONE Corpora-tion’s reporting period will follow the calendar year. In 2005 the accounting period of Finnish subsidiaries was 1 April–31 December, 2005 and the accounting period of foreign subsidiaries was the calendar year 2005.

The comparative consolidated financial statements have been prepared for the accounting period of 7 months between 1 June and 31 December, 2005. 1 June, 2005 opening balances were based on interim accounts, which were prepared in accordance with IFRS.

The Consolidated Financial Statements are present-ed in millions of euros and prepared under the historical cost convention except as disclosed below.

Consolidation PrinciplesThe consolidated accounts include the parent company and those companies in which the parent company held, directly or indirectly, more than 50 percent of the voting power or controls through management

agreements with majority shareholders at the end of the accounting period. In addition to these holdings, the consolidated accounts include possible holdings that are of a controlling-right nature (units/companies established for a specific reason). Subsidiaries acquired during the period were included in the Consolidated Financial Statements from the date of acquisition, and divested subsidiaries up to the date of sale. Acquisitions of subsidiaries are accounted for using the purchase method of accounting. Acquisition costs are allocated as assets and liabilities on the basis of fair value. The excess cost of an acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill (see Goodwill and Other Intangible Assets).

An associated company is a company in which the Group holds 20–50 percent of the voting power and has a participating interest of at least 20 percent or in which the Group has considerable influence. Invest-ments in associated companies were accounted for in the Consolidated Financial Statements under the equity method. KONE’s share of the profit or loss of an associated company is shown in the Consolidated Statement of Income as a separate item and its investments in the associated companies upon the date of acquisition, adjusted for changes in the associated companies’ equity after the date of acquisition, are shown in the Balance Sheet under “Investments in Associated Companies”.

Net income for the period is disclosed in the Statement of Income as an allocation to the sharehold-ers of the parent company and minority interests. Minority interests are disclosed separately under consolidated total equity.

All intra-corporate transactions, receivables, liabilities and unrealized profits, as well as distribution of profits within the Group have been eliminated in the Consoli-dated Financial Statements. Intra-corporate sharehold-ings have been eliminated by deducting the amount of each subsidiary’s equity at the time of acquisition from the acquisition cost of its shares.

Foreign Currency Transactions and TranslationsThe items included in the financial statements are initially recognized in the functional currencies, which are defined for each group entity based on their primary economic environment. The Presentation currency of financial statements is euro, which is also the functional currency of the parent company.

The initial transactions in foreign currencies are recorded in the functional currency at the rate of exchange prevailing on the date of the individual transaction. Foreign-currency denominated receivables

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61and liabilities are translated using period end exchange rate. Foreign exchange gains and losses related to business operations are treated as adjustments to sales or costs. Foreign exchange gains and losses associated with financing are included as a net amount under financial income and expenses.

The Statements of Income of foreign subsidiaries whose functional currency is not euro, are translated into euros based on the average exchange rate of the accounting period. Balance Sheet items, with the exception of net income for the accounting period, are translated into euros with the Balance Sheet exchange rate. Translation differences are recorded under equity. Exchange rate differences resulting from derivatives and loans designated as hedges on assets and liabilities in foreign subsidiaries have been entered as translation differences under shareholders’ equity. Exchange rate differences arising on the translation of the net investments in non-Euro currency subsidiaries and associated companies are recorded in translation difference. When a foreign entity is sold, cumulative translation differences are recognized in the Statement of Income as part of the gain or loss on the sale.

Settlement Date Accounting is applied to all financial assets and liabilities.

Derivative Financial Instruments and Hedge AccountingDerivative financial instruments are initially recognized in the Balance Sheet at cost and subsequently mea-sured at their fair value on each Balance Sheet date. Hedge accounting for qualifying hedges is required in the companies having a considerable volume of foreign exchange forward contracts. In other companies with relatively small volumes of derivative financial instru-ments the hedging of sales and purchases is classified as economic hedging.

When derivative contracts are entered into, the Group designates them as either cash flow hedges under IFRS hedge accounting for forecast transactions or firm commitments of sales or purchases, economic hedges for forecast transactions or firm commitments, fair value hedges for loans or deposits in foreign currencies or other Balance Sheet items or as hedges of investments in foreign entities.

Changes in the fair value of hedges qualifying as cash flow hedges that are effective are recognized in equity in the Fair Value and Other Reserves. Cumulative gain or loss of derivatives deferred to equity is trans-ferred to the Statement of Income and classified as revenue or expense for the accounting period when the hedged item affected the Statement of Income. Changes in the fair value of cash flow hedges that no longer qualify for hedge accounting under IAS 39 are recognized as they are incurred in the Statement of Income.

Changes in the fair value of economic hedges of sales and purchases are recognized in other income or expense in the Statement of Income. Commodity derivatives consisting of electricity derivatives are also

classified as economic hedges and recognized in other income and expenses.

Changes in the fair value hedges for loans and deposits in foreign currencies or other Balance Sheet items are recognized in financing items in the State-ment of Income, alongside the change in the valuation of the underlying exposure.

Changes in the fair values of hedges of investments in foreign entities have been booked into Translation Difference in the Balance Sheet.

The fair values of FX forward contracts are calculated by discounting the future cash flows of the contracts with the interest rate yield curves of the currencies bought and sold, translating the discounted amounts into the reporting currency using the Balance Sheet date foreign exchange rate and calculating the difference between the discounted amounts. The fair values of foreign currency options are calculated with an option pricing model using exchange rates, interest rate yield curves and volatilities of foreign currencies quoted in the FX market on the Balance Sheet date. The fair values of interest rate swaps and cross currency swaps are determined by discounting the future cash flows of the contracts with the interest rate yield curves of the currencies concerned, translating the discounted amounts into the reporting currency using the Balance Sheet date foreign exchange rate and calculating the difference between the incoming and outgoing discounted amounts and by eliminating the accrued interests already booked as a net amount in deferred assets. The fair value of electricity derivatives is the period end value listed by Nord Pool (Scandinavian electricity pool).

Segment ReportingThe profitability of KONE Corporation is presented as a single entity. KONE business idea is to serve its customers by providing solutions throughout the entire lifecycle of a product, beginning from the installation of a new products until it is replaced with new equipment, including maintenance and modernizations. KONE strives to seek extensive customerships, including deliveries of new products with a long-term mainte-nance contract. Also KONE’s operating business structure is global. Due to the reasons presented above and concerning the risk-return relationships, splitting the operating income between new equipment business and service business or between the market areas is not relevant.

Revenue RecognitionRevenue from the sale of goods is recognized after KONE has transferred the risks and rewards of owner-ship of the goods to the customer, and KONE retains neither a continuing right to dispose of the goods, nor effective control of the goods.

Revenues from separately defined, long-term major projects are recorded as sales under the percentage of completion method. The percentage of completion is defined as the proportion of individual contract cost

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incurred to date from the total estimated contract costs.

Revenues from rendering of maintenance services and repairs are recognized when the services have been rendered or the work has been carried out.

Research and Development CostsResearch and development costs are expensed as they are incurred as future economic benefits of new products and development of existing products and services can only be proven after their successful introduction to the market.

Income TaxThe Group tax expense includes taxes of Group companies based on taxable income for the period, together with tax adjustments for previous periods and the change of deferred taxes. Deferred taxes are provided using the liability method for temporary differences arising between the tax basis of assets and liabilities and their book values in financial reporting, and measured with enacted tax rates. The principal temporary differences arise from defined benefit plans, provisions, inter-company inventory profits, untaxed reserves and tax losses carried forward. Tax losses carried forward are recognized only to the extent that it is probable that future taxable profits will be available, against which unused tax losses can be used. Only deferred tax assets that seem certain to be realized are recognized. Deferred taxes are not provided for goodwill that is not deductible for tax purposes.

Goodwill and Other Intangible AssetsAcquisitions of companies are accounted for using the purchase method of accounting. Goodwill represents the excess of purchase cost over the fair value of assets and liabilities of acquired companies in connection with major acquisitions. Goodwill represents the value of business and market share acquired. Goodwill is not amortized but impairment tested (see Impairment of Assets).

In connection with minor acquisitions, typically acquisitions of small elevator and door service compa-nies, the excess of purchase cost over the fair value of the net identifiable assets is allocated to the acquired maintenance contracts with the estimated useful lifetime and included in intangible assets with a definite lifetime. They are amortized on a straight-line basis over the expected useful lifetime, typically five years.

Expenditure on acquired patents, trademarks and licenses, including acquired software licenses, is included in other intangible assets and capitalized and amortized using the straight-line method over their use-ful lives, which doesn’t usually exceed five years. Where an indication of impairment exists, the book value of any intangible asset is impairment tested (see Impair-ment of Assets).

Property, Plant and EquipmentProperty, plant and equipment are stated at cost less accumulated depreciation and less any impairment losses (see impairment of assets below). Depreciation is recorded on a straight-line basis over the economic useful lives of the assets as follows:

Buildings 5–40 yearsMachinery and equipment 4–10 years

Land is not depreciated.

The expenditure on repairs and maintenance of property, plant and equipment are recognized as expense when incurred.

Impairment of AssetsThe book values of non-current tangible assets and other intangible assets are reviewed upon each Balance Sheet date to determine whether there is any indication of impairment, or more frequently should any indica-tion arise. If any such an indication arises, the recover-able amount is estimated as the higher of the net selling price and the value in use. An impairment loss is recognized in the Statement of Income whenever the book value exceeds the recoverable amount.

A previously recognized impairment loss is reversed only if there has been a significant change in the estimates used to determine the recoverable amount, however not to an extent higher than the book value that would have been determined had no impairment loss been recognized in prior years.

The Group assesses the book value of goodwill annually or more frequently if any indication of impairment exists. Goodwill is allocated to the cash generating units (CGUs) of the Group, identified according to the country of operation and business unit at the level at which goodwill is monitored for internal management purposes. The recoverable amount of a CGU is determined by value-in-use calculations. In assessing the recoverable amount, estimated future cash flows are discounted to their present value based on the weighted average cost of capital prevailing in KONE for the main currency area in the location of the cash generating unit (country or business area). The weighted average cost of capital reflects the average, long-term capital structure prevailing in industry and in KONE and the shareholder risk premium. An impair-ment loss of goodwill is never reversed.

LeasesKONE has entered into various operating leases under which payments are treated as rentals and charged to the Statement of Income on a straight-line basis over the leasing term. Leases of plant and equipment where KONE fundamentally bears all the rewards and risks of ownership are classified as finance leases. Finance leases

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are capitalized at the inception of the lease at the lower of the fair value of the leased equipment and the estimated present value of the underlying lease payments. The corresponding rental obligations, net of finance charges, are included in interest-bearing liabilities. Plant and equipment acquired under finance leasing contracts are depreciated over the lesser of the useful life of the asset and lease period.

SharesShare investments are valued at fair values. Change in fair values and exchange gains and losses of designated hedging instruments are recognized in the Statement of Income. Investments in shares are measured at cost when fair values are not available.

Available for Sale InvestmentsInvestments are valued at historical cost convention or fair value less cost to sell.

InventoriesInventories are valued at the lowest of cost and net realizable value. Cost is determined on a first in first out (FIFO) basis. Raw materials and supplies, however, are valued at standard cost. Semi-manufactures have been valued at variable production costs. Work in progress includes direct labor and material costs as of the Balance Sheet date with a proportion of indirect costs related to manufacturing and installation costs of sales orders included in work in progress. Inventories are presented in the Balance Sheet as a gross amount, however, the advance payments received from customers for the orders in work in progress are presented in current assets. An allowance is recorded for obsolete items.

ReceivablesAccounts receivable are initially measured at cost. Subsequently, an estimate is made for doubtful accounts based on an analysis of potential credit loss risk. Bad debts are written off when identified.

Loans ReceivableLoans receivable originated by the Group with a fixed maturity are measured at amortized cost using the effective interest rate method and those that do not have a fixed maturity are measured at cost. Loans receivable are impaired if the book value is greater than the estimated recoverable amount.

Financial AssetsDeposits at banks are classified as financial assets held to maturity. Commercial papers, bonds and other comparable financial assets are measured at fair values. These fair values are based on market quotations or the net present value calculations of the future cash flows of the assets.

Cash and Cash EquivalentsCash and cash equivalents include cash balances and shortterm deposits with banks. Bank overdrafts are included in other current liabilities.

Post-employment BenefitsThe Group operates various employee benefit plans in accordance with local conditions and practices. The plans are classified as either defined contribution plans or defined benefit plans. The pension plans are generally funded by payments from employees and by the relevant KONE companies. The assets of these plans are generally held in separate insurance companies or trustee-administered funds. Pension costs and liabilities are based on calculations by the local authorities or independent qualified actuaries Contributions to the defined contribution plans are charged directly to the Statement of Income in the year to which these contributions relate. For defined benefit plans, pension cost is determined based on the advice of qualified actuaries who carry out a full valuation of the plan on a regular basis using the projected unit credit method. Under this method, the costs of providing pensions are charged to the Statement of Income so as to spread the regular costs over the working lives of employees.

The liability of defined benefit pension plans is the present value of the defined benefit obligation less the fair value of plan assets together with adjustments for unrecognized actuarial gains or losses. The discount rates used in actuarial calculations of employee benefits liabilities are adjusted to market rates. Actuarial gains and losses are recognized in the Statement of Income for the employees’ average remaining working lives to the extent that they exceed the greater of 10 percent of the defined benefit obligation or 10 percent of the fair value of plan assets. Obligations to pay long-term disability benefit, whose level is dependent on the length of service of the employee, are measured to reflect the probability that payment will be required and the length of service for which is expected to be made.

ProvisionsProvisions are recognized when KONE has a current legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made.

Provisions for warranties cover the estimated liability to repair or replace products still under warranty on the Balance Sheet date. This provision is calculated based on historical experience of levels of repair and replace-ments.

A provision for business restructuring is recognized only when the detailed and formal plans have been established, when there is a valid expectation that such

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a plan will be carried out and the plan has been communicated.

Provisions for loss contracts are recognized when it is probable that costs will exceed the estimated total revenue. The probable loss is recognized as an expense immediately.

Other provisions include various items, e.g. related to severance, unemployment and other employment expenses and the sale of divested operations.

Loans PayableLoans payable are initially recognized at cost. Costs directly attributable to the issuing of the debt are deducted from the amount of loan payable and initially recognized. Interest expenses are accrued and recorded in the Statement of Income over the period of the loan payable using the effective interest rate method.

Earnings per ShareBasic earnings per share is calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the Group and held own shares. Diluted earnings per share has been computed by applying the “treasury stock” method, under which earnings per share data is computed as if the warrants and options were exercised as the beginning of the period, or if later, on issue and as if the funds obtained thereby were used to purchase common stock at the average market price during the period. In addition to the weighted average number of shares outstanding, the denominator includes the incre-mental shares obtained through the assumed exercise of the warrants and options. If criteria for options set in the terms and conditions of the option plan are not met options are not included in calculated number of shares.

EquityWhen the Group purchases KONE Corporation’s own shares, the consideration paid and directly attributable costs are recognized as a deduction in equity. When such shares are sold, the consideration received, net of directly attributable transaction costs and income tax effect, is included in equity.

DividendThe dividend proposed by the board has not been deducted from the equity prior to the shareholders meeting’s acceptance.

Share-based CompensationPursuant to the option plan the Board has in year 2005 granted the option rights to around 300 key employees as well as to a wholly-owned subsidiary of KONE Corporation. The options will be distributed to key personnel when the criteria for options set in the terms

and conditions of the option plan are met. The fair value of the options granted to the key employees has been determined at the grant date and it will be recognized as an expense over the vesting period. The total amount to be expensed over the vesting period is determined based on the Group’s estimate of the number of the options that are expected to be vested at the end of the vesting period. The fair value of the options granted are determined by Black-Scholes pricing model. The impact of any non-market vesting conditions (sales growth and profitability improvement) has been excluded, but they are included in assump-tions about the number of options that are expected to become exercisable. At each balance sheet date, the entity revises its estimates of the number of options that are expected to become exercisable. It recognizes the impact of the revision of original estimates in the income statement. When the options are exercised, the proceeds received (net of any transaction costs) are credited to share capital (nominal value) and share premium.

The Board has granted the share ownership plan 2006–2007 to the Group’s management. Pursuant to the share ownership plan the reward to the manage-ment will be settled as a combination of KONE class B shares and cash when the criteria set in the terms and conditions for the plan are met. The fair value of the share-based payments settled with KONE class B shares has been determined at the grant date and it will be recognized as an expense over the vesting periods. The total amount to be expensed over the vesting period is determined based on the Group’s estimate of the number of the shares that are expected to be vested at the end of the vesting period. The impact of any non-market vesting conditions (sales and EBIT development) has been excluded, but they are included in assump-tions about the number of shares that are expected to become distributed. At each balance sheet date, the entity revises its estimates of the number of shares that are expected to become distributed. It recognizes the impact of the revision of original estimates in the income statement. The fair value of the share-based payments settled with cash has been determined as 1.5 fold the fair value of the estimated grantable shares. The liability shall be measured, initially and at each reporting date until settled, at the fair value of the shares expected to be distributed, by applying the option pricing model and the extent to which the employees have rendered service to date. It recognizes the impact of the revision of original estimates, if any, in the income statement, with a corresponding adjustment to the liability.

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2. Financial Risk Management

KONE business activities are exposed to financial risks such as currency risks, interest rate risks, refinancing and liquidity risks, commodity risks, energy price risks, counterparty risks and operative credit risks. KONE Group Treasury function manages financial risks centrally according to limits set in the Group Treasury Policy approved by the Treasury Committee, which are based on the main principles for risk management determined by the Board. The derivative instruments used and their nominal values on 31 December, 2006 appear in note 27.

Currency RisksKONE operates internationally and is, thus, exposed to currency risks arising from exchange rate fluctuations related to currency flows from sales and purchases (transaction risk) and from translation of balance sheet items of foreign subsidiaries into euros (translation risk).

The policy of the Group is to fully hedge the initial transaction exposure. This means that the effect of foreign exchange rate changes on the margin of already contracted and highly probable business deals is eliminated while also giving the business time to react and adapt to changes in the exchange rate levels.

The initial exposure is managed in the business units by taking into account the foreign exchange risk considerations when deciding on the currencies used in export/import pricing and invoicing and by using currency clauses in tenders. The Group companies hedge their firm contracts and estimated quarterly cash flows of highly probable purchases or sales with internal forward contracts and report monthly their transaction risk position to the Group Treasury. Binding contracts are hedged for the whole contract period and estimat-ed sales or purchases for the period of 6 to 9 months. Large tenders are hedged on basis of option strategies. The Group Treasury is responsible for managing the Group’s currency risks externally.

Hedge accounting is applied in subsidiaries having large volume of foreign currency transactions. Other companies use economic hedging. The instruments used for cash flow hedging are FX forward contracts. The majority of the hedged cash flows are denomi-nated in SEK, USD, GBP, SGD and AUD and they are expected to be realized within one year. A few longer-term projects are estimated to be realized within two years.

The policy regarding translation risks is to hedge the balance sheet structure in such a way that changes in exchange rates have a neutral impact on KONE’s gearing. Balance sheet structure in foreign entities is hedged by using cross-currency swaps, FX forward contracts and loans denominated in foreign currencies.

Interest-rate RisksChanges in interest rates on interest-bearing receivables and debts in different currencies create interest-rate risks. These risks are managed by adjusting the duration of debt to the targeted level through different combi-nations of fixed and floating interest in the debt portfolio and various interest-rate derivatives.

Commodity and Energy Price RisksThe group uses electricity derivatives to hedge risk in electricity price development. Electricity derivatives are classified as economic hedges.

Refinancing and Liquidity RisksIn order to minimize funding and liquidity risks and to cover estimated financing needs, KONE has committed 4–6 years bilateral un-drawn credit facilities. The long-term loan repayment schedule can be found in note 22.

Counterparty RisksKONE only approves counterparties with high credit-worthiness when investing liquid assets. Derivative contracts are made exclusively with leading banks and credit institutions.

Operative Credit RisksGroup’s customer base consists of a large number of customers in all market areas. Measures to reduce credit risks include advance and progress payments, documentary credits and guarantees. Management considers that no significant concentration of credit risk with any individual customer, counterparty or geographical region exists for the Group.

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3. Acquisitions

KONE continued to pursue an aggressive acquisition policy during the financial period. Most of the acquisitions were companies specializing in elevator, escalator and automatic building door service. The acquisitions are individu-ally immaterial to KONE’s financial statements. The fair values of the asset and liability items booked on the acquisitions did not differ materially from the book values prior to the business combinations.

3.1 Major acquisitionsDuring the accounting period KONE made major acquisitions for a total consideration of EUR 73.6 (34.1) million and an increase in goodwill EUR 65.3 (23.7) million. These major acquisitions were paid in cash. Among the major acquisitions were Lödige Aufzugstechnik (Germany), which was previously an associated company to KONE, KONE Garant Aufzug GmbH (Germany), Evin SAS (France), Europe Ascenceurs Services SA (France), Fuji Lift & Escalator Sdn Bdn (Maleysia), Borga Bijstede (Netherlands) and four companies in Spain. The above mentioned acquisitions have been summarized in the following table. See note 10 for more details about goodwill.

Assets and liabilities of the acquired companies: 1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Intangible assets 0.3 0.4Tangible assets 4.6 4.5Inventories 8.0 4.8Accounts receivables 14.1 6.7Cash and cash equivalents 7.8 7.0Total assets 34.8 23.4 Pension liabilities 0.6 0.0Interest-bearing loans 0.6 4.0Provisions 0.5 0.8Other liabilities 23.6 8.2Total liabilities 25.3 13.0 Net assets 9.5 10.4 Cumulative acquisition cost 86.4 34.1Goodwill 78.1 23.7Minority interests 1.2 -

3.2 Minor acquisitionsDuring the accounting period 2006 KONE made minor acquisitions for a total consideration of EUR 16.5 (4.8) million, of which EUR 15.8 (4.6) million was allocated to maintenance contracts in other intangible assets. Maintenace contracts are amortized in five years. See note 11 for more details about other intangible assets.

4. Percentage of Completion Method

The amount of sales recognized in the income statement for long-term projects under the percentage of completion method was MEUR 104.0 (88.3). The effect of the percentage of completion method on the amount of sales was EUR -41.3 (19.2) million for the period. The balance sheet includes EUR 28.3 (39.8) million in unbilled contract revenue due to the percentage of completion method for long-term contracts in progress on the balance sheet date.

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5. Costs and Expenses

1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Change of work in progress -92.4 41.9Direct materials, supplies and external services 1,276.1 708.0Other direct product costs 125.7 72.7Wages and other salaries 947.6 520.8Other statutory employer expenses 344.1 195.4Pension costs 83.9 44.8Operating lease expenses 37.1 18.5 Other expenses * 494.3 285.3Costs and expenses total 3,216.4 1,887.4 Other income 37.0 15.5 Depreciation and amortization (Note 6) 58.3 34.8Impairment charges 3.0 - Costs, expenses and depreciation total 3,240.7 1,906.7

1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005R&D costs included in total costs 50.3 29.7as percentage of sales, % 1.4 1.4

The change in the amount of doubtful accounts deducted from accounts receivable during the accounting period was EUR 10.1 (0.8) million.

* include other variable costs, rents and premise related costs, consulting and external services, IT and other miscellaneous costs.

6. Depreciation and Amortization

1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Other intangible assets

Maintenance contracts 12.4 7.2Other 8.7 3.6

Buildings 6.9 5.0Machinery and equipment 30.3 19.0Total 58.3 34.8

7. Financing Income and Expenses

1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Dividend income 2.2 2.4Interest income 13.2 6.3Other financing income 0.6 0.5Change in fair value of interest rate swaps 0.0 0.2Interest expenses -16.6 -8.0Other financing expenses -3.0 -1.3Exchange rate differences 0.1 -2.2Total -3.5 -2.1

Financing income and expenses include net interest income from cross-currency swaps EUR 4.0 million 1 January– 31 December, 2006.

Exchange rate differences arising from the effective hedging of sales and material purchases by FX derivatives are recognized in operating income as a correction to sales and material purchases. The net exchange rate loss amounted to EUR 0.5 (3.7) million.

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8. Income Taxes

Taxes in statement of income 1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Current year tax expense 113.7 66.7Change in deferred tax assets and liabilities 2.4 3.4Tax expense for previous years 5.8 -0.6Other - -Total 121.9 69.5

Reconciliation of income before taxes with total income taxes in the statement of income 1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Income before taxes 356.3 193.5Tax calculated at the domestic corporation tax rate 92.6 50.3Effect of different tax rates in foreign subsidiaries 19.1 20.2Permanent differences 4.4 -0.4Previous years taxes 5.8 -0.6Other items - -Total 121.9 69.5 Effective tax rate 34.2 % 35.9 %

Tax rate of parent company 26.0 % 26.0 %

Effective tax rate is affected by share-based compensation and certain other imputed items recognized which are considered as either temporary or permanent differencies.

9. Earnings per Share

Basic earnings per share are calculated by dividing the Net income attributable to the shareholders of the parent company by the weighted average number of shares outstanding during the year. Diluted earnings per share are calculated by adjusting the weighted average number of shares for the effect of all dilutive potential shares. The Group has only one category of dilutive potential shares, i.e. share options. Issued 2005C share option rights are not included in the calculation of the dilution effect, as the option program is based on conditions related to the net sales and operating income of future accounting periods and these conditions are not yet attained at the end of the financial year.

1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Net income attributable to the shareholders of the parent company, MEUR 234.8 124.8 Weighted average number of shares (1,000 pcs) 126,416 127,392Basic earnings per share, EUR 1.86 0.98 Dilution effect of issued share options (1,000 pcs) 681 823Weighted average number of shares, dilution adjusted (1,000 pcs) 127,097 128,215Diluted earnings per share, EUR 1.85 0.97

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10. Goodwill

10.1 Goodwill allocationGoodwill is allocated to the Group’s cash-generating units (CGUs) according to the country of the operation at the level at which the goodwill is monitored for internal management purposes. A market area summary of the goodwill allocation is presented below (carrying amounts):

31 Dec, 2006 31 Dec, 2005EMEA 393.3 321.3Americas 121.1 133.8Asia-Pacific 42.9 42.8Total 557.3 497.9

10.2 Impairment testingThe value-in-use calculations use cash flow projections based on financial estimates approved by the management covering a three-year-period. Cash flows beyond the three-year period are extrapolated by using the estimated growth rate of zero. Average discount rates used in calculations:

EMEA Americas Asia Pacific 6.25 % 8.03 % 9.38 %

EUR 3.0 million impairment loss has been booked into the statement of income during the accounting period.

Based on the sensitivity analysis, essential potential future impairment losses have not been foreseen.

10.3 Goodwill reconciliation

Goodwill 31 Dec, 2006 31 Dec, 2005Opening net book value 497.9 473.2Translation difference -12.4 4.7Increase 0.8 0.4Decrease -4.1 -10.1Reclassifications 12.8 6.0Companies acquired 65.3 23.7Companies sold - -Impairment charges -3.0 -Closing net book value 557.3 497.9

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11. Other Intangible Assets

1 Jan–31 Dec, 2006Maintenance

contracts Other Total 1 Jan, 2006: Acquisition cost 94.1 99.3 193.4Accumulated amortization and impairment -60.5 -79.2 -139.7Net book value 33.6 20.1 53.7 Opening net book value 33.6 20.1 53.7Translation difference -0.7 -0.1 -0.8Increase 0.9 9.0 9.9Decrease -0.4 0.0 -0.4Reclassifications 0.6 0.2 0.8Companies acquired 15.8 0.5 16.3Companies sold - - -Amortization -12.4 -8.7 -21.1Impairment charges - - -Closing net book value 37.4 21.0 58.4 31 Dec, 2006:Acquisition cost 110.3 108.9 219.2Accumulated amortization and impairment -72.9 -87.9 -160.8Net book value 37.4 21.0 58.4

1 Jun–31 Dec, 2005Maintenance

contracts Other Total 1 Jun, 2005: Acquisition cost 89.1 96.2 185.3Accumulated amortization and impairment -53.3 -75.6 -128.9Net book value 35.8 20.6 56.4 Opening net book value 35.8 20.6 56.4Translation difference 0.4 0.0 0.4Increase 0.5 2.8 3.3Decrease -0.5 -0.3 -0.8Reclassifications 0.0 0.6 0.6Companies acquired 4.6 0.0 4.6Companies sold - - -Amortization -7.2 -3.6 -10.8Impairment charges - - -Closing net book value 33.6 20.1 53.7 31 Dec, 2005: Acquisition cost 94.1 99.3 193.4Accumulated amortization and impairment -60.5 -79.2 -139.7Net book value 33.6 20.1 53.7

Maintenance contractsMost of the minor acquisitions in KONE are small elevator, escalator and door service businesses. These businesses consist of firm contractual commitments with customers to service and maintain the said equipment. The value of these contracts is usually not included in the Balance Sheet of the acquired business prior to the acquisition. The maintenance contracts in other intangible assets represents the excess of purchase cost over the fair value of the net identifiable assets of acquired companies in connection with these minor acquisitions.

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12. Property, Plant and Equipment

1 Jan–31 Dec, 2006 Land BuildingsMachinery &

equipment

Machinery & equipment,

leased for own use

Fixed assets under

construction Advance

payments Total

1 Jan, 2006: Acquisition cost 17.9 220.3 541.7 39.9 3.2 3.3 826.3Accumulated depreciation -1.0 -117.6 -467.4 -22.6 - - -608.6Net book value 16.9 102.7 74.3 17.3 3.2 3.3 217.7 Opening net book value 16.9 102.7 74.3 17.3 3.2 3.3 217.7Translation difference -0.1 -2.6 -1.8 -1.6 0.0 0.0 -6.1Increase 0.5 2.4 27.7 9.1 11.5 3.3 54.5Decrease -0.1 -3.6 -1.8 -2.5 0.0 -1.4 -9.4Reclassifications 0.0 8.8 2.9 - -9.8 -2.7 -0.8Companies acquired 1.7 2.2 0.7 - 0.0 0.0 4.6Companies sold -0.7 -4.8 -0.1 - - - -5.6Depreciation 0.0 -6.9 -24.8 -5.5 - - -37.2Impairment charges - - - - - - -Closing net book value 18.2 98.2 77.1 16.8 4.9 2.5 217.7 31 Dec, 2006:Acquisition cost 19.2 222.7 569.3 44.9 4.9 2.5 863.5Accumulated depreciation -1.0 -124.5 -492.2 -28.1 - - -645.8Net book value 18.2 98.2 77.1 16.8 4.9 2.5 217.7

1 Jun–31 Dec, 2005 Land BuildingsMachinery &

equipment

Machinery & equipment,

leased for own use

Fixed assets under

constructionAdvance

payments Total

1 Jun, 2005: Acquisition cost 16.3 216.2 524.8 36.4 2.2 4.8 800.7Accumulated depreciation -1.0 -112.6 -452.7 -18.3 - - -584.6Net book value 15.3 103.6 72.1 18.1 2.2 4.8 216.1 Opening net book value 15.3 103.6 72.1 18.1 2.2 4.8 216.1Translation difference 0.1 1.6 1.1 0.7 0.4 0.4 4.3Increase 0.3 2.0 10.8 3.0 6.8 3.9 26.8Decrease -0.2 -5.2 -2.9 -0.2 -0.1 0.0 -8.6Reclassifications 0.0 3.7 6.8 - -6.1 -5.8 -1.4Companies acquired 1.4 2.0 1.1 - - - 4.5Companies sold - - - - - - -Depreciation 0.0 -5.0 -14.7 -4.3 - - -24.0Impairment charges - - - - - - -Closing net book value 16.9 102.7 74.3 17.3 3.2 3.3 217.7 31 Dec, 2005: Acquisition cost 17.9 220.3 541.7 39.9 3.2 3.3 826.3Accumulated depreciation -1.0 -117.6 -467.4 -22.6 - - -608.6Net book value 16.9 102.7 74.3 17.3 3.2 3.3 217.7

During the period of 1 Jan–31 Dec, 2006 capital expenditure in production facilities, customer service of sales and maintenance operations and information systems including new finance lease agreements, totaled EUR 60.4 (29.4) million.

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13. Associated Companies and Related Party Transactions

Investments in associated companies 31 Dec, 2006 31 Dec, 2005Total in the beginning of period 22.2 27.6Translation difference -0.5 0.2Share of associated companies result after taxes -0.3 0.9Dividend received -0.1 -0.3Acquisitions 0.0 0.8Disposal - -7.0Reclassifications -13.6 -Total at the end of period 7.7 22.2

Investments in associates at the end of period include goodwill of EUR 2.8 (15.5) million.

The total amount of assets in the balance sheets of the associated companies of KONE were EUR 28.5 million and total equity EUR 13.1 million. The total sales of associated companies was EUR 27.1 million and net income EUR 0.4 million.

The associated companies’ financial information presented here is based on the latest official financial statements available. The calculation of the share of net income for KONE finacial statements 31 December, 2005 has been done based on the information those companies have compiled for KONE.

Transactions with associated companies 1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Sales of goods and services 1.1 2.0Purchases of goods and services 1.3 0.8

Balances with associated companies

Receivables from associated companies 31 Dec, 2006 31 Dec, 2005Long-term loans 1.4 0.6Short-term loans 0.1 0.1Accounts receivables 0.1 0.9Deferred assets 0.4 0.0Total 2.0 1.6

Liabilities to associated companies 31 Dec, 2006 31 Dec, 2005Long-term loans - 0.0Short-term loans - 0.6Accounts payables 0.0 0.1Accruals - 0.0Total 0.0 0.7

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Transactions with key management

Key management of KONE consists of Board of Directors and Executive Board

Paid compensation for the key management 1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Salaries and remunerations 6.2 2.9Severance payments - 0.3Post-employment benefits - 0.0Share based payments 2.5 0.0Total 8.7 3.2

Paid compensation recognized as expense for members of Board of Directors and President, ’000 1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Alahuhta Matti, President 1) 667.3 383.8Chauvarie Jean-Pierre 26.5 14.0Hanhinen Reino 27.0 12.0Herlin Antti 1) 511.3 273.0Hämäläinen-Lindfors Sirkka 47.5 14.0Pietikäinen Sirpa 23.0 -Shimono Masayuki 25.5 24.0Viinanen Iiro 27.0 14.0Wendt Gerhard 4.0 14.0Total 1,359.1 748.8

1) In addition, Matti Alahuhta’s accrued bonus for the accounting period 2006 totaled EUR 644,328 and Antti Herlin’s bonus EUR 229,665. These will be paid during 2007.

Compensation for Chairman, Antti Herlin, consists of a basic salary and a yearly bonus, which is defined by the Board and based on the Corporation’s financial result. This bonus may not exceed 50 percent of the recipient’s annual salary. In 2006, Antti Herlin’s basic salary was EUR 467,280. In addition, his accrued bonus for the accounting period 1 January–31 December, 2006 totaled EUR 229,665. He was also paid EUR 44,000 as remuneration for serving as Chairman of the Board. Herlin’s holdings of option rights are presented on page 31. The Chairman of the Board’s pension and retirement age are determined in accordance with the retirement age legislation in force. No separate agreement has been made regarding early retirement.

The President’s compensation consists of a basic salary and yearly bonus, defined by the Board on the basis of the Corporation’s annual result and other key targets. This bonus may not exceed 100 percent of the recipient’s annual salary. Matti Alahuhta serves as President of KONE Corporation. His basic salary for 2006 was EUR 644,328. In addition, his accrued bonus for the accounting period 1 January–31 December, 2006 totaled EUR 644,328. He was also paid EUR 23,000 as remuneration for serving on the Board. Alahuhta’s holdings of option rights are presented on page 31. He is also included in the share-based incentive plan for the company’s senior management, which the Board approved in October 2005. The potential reward is based on the growth in KONE’s sales and operating profit for 2006 and 2007. His pension and retirement age are determined in accordance with the legislation in force. No separate agreement has been made regarding early retirement. Should his employment contract be terminated before retirement, he has the right to the equivalent of 18 months’ salary, which includes the salary for a 6-month term of notice.

Compensation for members of KONE Corporation’s Executive Board comprises a fixed basic salary and bonus, based on the Corporation’s annual result and the achievement of personal targets. The bonus amount is determined by the Compensation Committee and may not exceed 50 percent of the annual salary. The Executive Board members’ holdings of option rights are presented on page 31. The Executive Board members are included in the share-based incentive plan. No separate agreement has been made regarding early retirement for members of the Executive Board. Compensation for termination of the employment contract prior to retirement is a maximum of 15 months’ salary, which includes the salary for a 6-month term of notice.

14. Shares

Shares held includes a 19.9 percent ownership in Toshiba Elevator and Building Systems Corporation together with the advance payments paid at the end of the period 1 January–31 December, 2006 for acquisitions that have not been finalized on the Balance Sheet date.

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15. Available-for-Sale Investments

Available for sale investments includes smaller holdings in other companies.

16. Financial Receivables

31 Dec, 2006 31 Dec, 2005Non-current loans receivable 3.0 20.5Non-current cross-currency swaps 2.1 32.6Current loans receivable 1.4 0.6Current cross-currency swaps 43.2 -Total 49.7 53.7

The fair values of financial receivables are not materially different from their carrying amounts. Financial receivables consist mainly of loans receivable from associated companies and the fair value of

cross-currency swaps. The average interest rate of the loans receivable portfolio on 31 December, 2006 was 3.7 (2.4) percent.

17. Deferred Tax Assets and Liabilities

Deferred tax assets 31 Dec, 2006 31 Dec, 2005Tax losses carried forward 19.8 19.6Provisions 57.9 57.4Pensions 28.8 28.8Consolidation entries 14.0 11.5Other temporary differences for assets 13.6 12.8Total 134.1 130.1 Total in the beginning of period 130.1 125.6Translation difference -3.3 7.4Change in statement of income 7.1 -4.7Acquisitions, divestments and other 0.2 1.8Total at the end of period 134.1 130.1 Deferred tax liabilities 31 Dec, 2006 31 Dec, 2005Depreciation difference 0.6 1.6Goodwill depreciation 19.1 14.0Other temporary differences for liabilities 10.6 9.1Total 30.3 24.7 Total in the beginning of period 24.7 25.8Translation difference -0.5 0.3Change in statement of income 9.5 -1.4Acquisitions, divestments and other -3.4 -Total at the end of period 30.3 24.7 Net deferred tax assets and liabilities 103.8 105.4

As stated in the accounting principles the deferred tax asset has not been recognized for all temporary differences.

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18. Inventories

31 Dec, 2006 31 Dec, 2005Raw materials, supplies and finished goods 164.2 132.9Work in progress 497.6 446.9Advance payments paid 7.0 5.1Inventories 668.8 584.9 Advance payments received -552.1 -464.2Total 116.7 120.7

Work in progress includes direct labour and material costs as of the Balance Sheet date with the proportion of indirect costs related to manufacturing and installation of firm customer orders received. Firm customer orders are mainly fixed price contracts with customers for the sale of new equipment or for the modernization of old equipment. Advance payments received include customer payments for the orders in work in progress according to the contractual payment terms.

19. Deferred Assets

31 Dec, 2006 31 Dec, 2005Deferred interests 2.7 2.0Accrued income of service contracts 16.3 12.6Unbilled contract revenue (Note 4) 28.3 39.8Derivative assets 5.1 11.5Pension surplus of defined benefit plans 1.3 1.3Prepaid expenses and other receivables 72.3 81.4Total 126.0 148.6

The net present value of cross currency swaps excluding accrued interests is not included in derivative assets but in financial receivables (Note 16).

20. Financial Assets

31 Dec, 2006 31 Dec, 2005Total 114.3 93.3

The fair values of financial assets are not materially different from their carrying amounts.Financial assets consist of short-term deposits and the average interest rate of the financial assets portfolio on

31 December, 2006 was 3.6 (2.7) percent.

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21. Shareholders Equity

Total shareholders’ equity consists of share capital, share premium account, fair value and other reserves, translation differences and retained earnings. When 2005A, 2005B and 2005C option rights are excercised, the impacts of change in share capital, which exceeds the accounting par value of the shares, are included in the share premium account. The sales of own shares over or under the acquisition value are booked into the reserve for invested non-restricted equity. Fair value and other reserves include the changes in fair value of cash flow hedges. Translation differences arising from the application of the purchase method on the translation of the net investment in foreign subsidiaries and associated companies are recorded in translation differences. Exchange rate differences resulting from derivatives and loans intended as hedges on assets and liablilities in foreign subsidiaries are entered also in translation differences. The purchase price of own shares purchased by KONE Group companies is deducted from the retained earnings. Net income of the accounting period is booked directly to retained earnings.

Shares and Share CapitalAt the end of the financial year 2006 the number of shares outstanding was 128,066,628. The accounting par value of each share is EUR 0.50. The share capital was EUR 64.0 million and the total number of votes was 29,952,929. Each class A share is assigned one vote, as is each block of 10 class B shares, with the provision that each shareholder is entitled to at least one vote. According to the Articles of Association of KONE Corporation, the minimum share capital is EUR 60 million and the maximum share capital is EUR 260 million. The share capital can be raised or reduced within these limits without an amendment to the Articles of Association. At the end of the financial year, the Board of Directors of KONE Corporation had no valid authorisation to increase the share capital or to issue convertible bonds or ortion rights, nor were any convertible loans issued during the financial year.

In accordance with the Articles of Association, class B shares are preferred for a dividend, which is at least 1 percent and no more than 2.5 percent higher than the dividend paid to the holders of class A shares, calculated form the accounting par value of the share.

The Extraordinary Shareholders’ Meeting approved on 21 November, 2005 the proposal by the Board of Directors to increase the number of shares in proportion to the holdings of the shareholders by doubling the number of shares from 63,867,465 to 127,734,930 shares without increasing the share capital. The number of class A shares will increase to 19,052,178 and the number of class B shares to 108,682,752. As a result, each share with the current accounting par value of EUR 1.00 was split into two shares with accounting par values of EUR 0.50. Trading of these shares started on Tuesday 29 November, 2005.

Changes in share capital Class A Class B TotalNumber of shares as of 1 January, 2006 19,052,178 108,803,262 127,855,440 Share subscription with 2005A and 2005B option rights 28 Mar, 2006 83,040 83,040Share subscription with 2005A and 2005B option rights 3 May, 2006 8,640 8,640Share subscription with 2005A and 2005B option rights 9 Aug, 2006 10,740 10,740Share subscription with 2005A and 2005B option rights 3 Nov, 2006 36,150 36,150Share subscription with 2005A and 2005B option rights 29 Dec, 2006 72,618 72,618 Number of shares, 31 December, 2006 19,052,178 109,014,450 128,066,628 Number of votes, 31 December, 2006 19,052,178 10,900,751 29,952,929 Share capital, 31 December, 2006, MEUR 9.5 54.5 64.0

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Changes in share capital Class A Class B TotalNumber of shares as of 1 June, 2005 9,526,089 54,228,666 63,754,755 Share subscription with 2005A and 2005B option rights 24 Aug, 2005 45,600 45,600Share subscription with 2005A and 2005B option rights 23 Sep, 2005 24,930 24,930Share subscription with 2005A and 2005B option rights 26 Oct, 2005 42,180 42,180Increase in the numebr of shares (share split two-for-one) 28 Nov, 2005 9,526,089 54,341,376 63,867,465Share subscription with 2005A and 2005B option rights 22 Dec, 2005 120,510 120,510 Number of shares, 31 December, 2005 19,052,178 108,803,262 127,855,440 Number of votes, 31 December, 2005 19,052,178 10,879,715 29,931,893 Share capital, 31 December, 2005, MEUR 9.5 54.4 63.9

Option RightsKONE 2005A and KONE 2005B option rights are based on the option program of the demerged Kone Corporation (Business Identity Code 0110139–9). In the demerger, option rights of the demerging corporation were exchanged to option rights of the new companies KONE Corporation and Cargotec Corporation on the effective date of the demerger 1 June, 2005 as follows:- Each series A option right of Kone Corporation option program 2004 was exhanged to one (1) series A option

right of New KONE Corporation and one (1) series A option right of Cargotec Corporation; and- Each series B option right of Kone Corporation option program 2004 was exchanged to one (1) series B option

right of New KONE Corporation and one (1) series B option right of Cargotec CorporationAccording to the decision of the Extraordinary Shareholders’ Meeting on 17 November, 2000, the option rights were awarded to approximately 250 employees of the company’s global organization. The program was introduced in 2000 and the amount of option rights to be given was tied to the development of Kone’s cumulative net income (after taxes) in 2001–2003. The conditions required for the option program were met because Kone’s aggregated net income according to the Consolidated Financial Statements for 2001–2003 exceeded EUR 470 million. Maxi-mum of 350,000 options rights were issued, of which a maximum of 180,000 A option rights were offered to the Group’s key personnel and a maximum of 170,000 B option rights to Kone’s wholly-owned subsidiary Kone Capital Oy. A total of 145,130 A option rights were subscribed and Kone Capital subscribed all 170,000 B option rights to be offered to employees designated by the Board of Directors. A total of 149,340 B option rights were transferred to employees on 1 April, 2005 and further 16,000 B option rights 1 June–31 December, 2005.

Following the decision to increase the number of company shares (split) made by the Extraordinary Shareholders’ Meeting on 21 November, 2005, the number of shares that can be subscribed for with KONE 2005A and 2005B option rights was increased in proportion to the split. The annual subscription period during which the shares can be subscribed with the option rights lasts from 2 January to 30 November. The shares acquired shall first qualify for dividend payment for the financial year during which the subscription has taken place. Other rights related to the shares shall commence on the date when the increase in the share capital is entered in the Trade Register.

The Extraordinary Shareholders’ Meeting approved on 21 November, 2005 the Board’s proposal to issue new option rights to key personnel of the KONE group as well as to a wholly-owned subsidiary of KONE Corporation. The option program will include a maximum of 300 key employees and subsidiary directors globally. The purpose of the stock options is to encourage long-term efforts by key personnel to grow shareholder value and increase their commitment to the company by offering them an internationally competitive incentive program. The company’s CEO, President and members of the executive board are not included in the program. Some of the personnel included in the program belong to the inner circle of the company. These persons owned as per 31 December, 2006 a maximum of 0.1 percent of the shares and 0.04 percent of the voting rights in the company.

A maximum total of 2,000,000 stock options marked with the symbol 2005C were offered for subscription. The maximum number of option rights per person has been limited to 8,000 option rights. During the financial year 2005, the employees subscribed for 1,544,000 option rights and the subsidiary Kone Capital Oy the remaining 456,000 option rights to be offered to employees designated by the Board of Directors. During year 2006 totally 83,000 option rights were granted from Kone Capital Oy to employees and totally 57,000 stock options were returned to Kone Capital Oy. Each stock option entitles its owner to subscribe for one (1) KONE class B share. The class B shares for which these stock options can be exchanged constitute no more than 1.56 percent of the company’s total number of shares.

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The share subscription price for 2005C option rights is the trade volume weighted average price of the KONE Corporation B share on the Helsinki Stock Exchange between 24 October 2005 and 18 November 2005, which was EUR 28.40 (split adjusted). The amount of KONE Corporation’s dividend paid after the determination of the subscription price shall be deducted from the subscription price up until the time of share subscription, as per the dividend record date. Therefore the effective subscription price as per 31 December, 2006 was EUR 27.40.

The share subscription period for 2005C option rights shall be 1 April, 2008–30 April, 2010. However, the share subscription period will begin only if the following criteria have been attained: the average net sales growth of the KONE Group for financial years 2006 and 2007 exceeds market growth and the Earnings before Interest and Taxes (EBIT) of the KONE Group for the financial year 2006 exceeds the EBIT for the financial year 2005 and the EBIT for the financial year 2007 exceeds the EBIT for the financial year 2006. If the above-mentioned criteria have not been attained, stock options 2005C expire in the manner decided by the Board of Directors.

Option rights

Option rights

granted to employees

Unexcercised option rights

Option rights held by the

subsidiary 31 Dec, 2006

Number of class B shares that can be

subscribed for with the option rights

Share subscription

price EUR

Share subscription

period2005A 145,130 37,762 0 6 8.04 13.6.2005–31.3.20082005B 165,340 82,810 4,660 6 8.04 13.6.2005–31.3.20092005C 1,554,000 1,554,000 446,000 1 27.40 1.4.2008–30.4.2010

Changes in the number of option rights outstanding 1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Number of option rights outstanding at the beginning of accounting period 1,683,770 197,425

Granted option rights 83,000 1,544,000Returned option rights 57,000 0Exercised option rights 35,198 57,655

Number of option rights outstanding at the end of accounting period 1,674,572 1,683,770Excisable option rights 31 December, 2006 125,232 155,770

Share-based Incentive PlanThe Board of Directors decided on 24 October, 2005 on a share-based incentive plan for the company’s senior management, consisting of approximately 35 individuals. The potential reward is based on the growth in KONE’s sales and operating profit for 2006 and 2007. The reward is to be paid as a combination of class B shares and the cash equivalent of the tax and taxable benefit costs that are incurred. The share ownership plan amounts to no more than 0.2 percent of all the corporation’s shares. The plan prevents participants from transferring the shares during the fifteen-month period following the termination of each earning period.

Authority to Purchase Own SharesThe Shareholders’ Meeting held on 27 February, 2006 authorized the Board of Directors to repurchase and redistribute the company’s own shares. On the basis of this authorization the Board of Directors decided to commence repurchasing shares at the earliest on 7 March, 2006. The repurchasing of shares will continue until otherwise announced.

The Company’s own repurchased shares shall be used as compensation in possible acquisitions and in other arrangements as well as to develop the Company’s capital structure. Altogether no more than 12,785,000 shares may be repurchased, of which no more than 1,905,000 are class A shares and 10,880,000 are class B shares, taking into consideration the provisions of the Companies Act regarding the maximum amount of own shares that the Company is allowed to possess. The amount of shares that can be repurchased corresponds to less than 10 percent of the share capital of the Company and the total voting rights.

Class B shares shall be purchased at the market price in public trading on the Helsinki Stock Exchange. Class A shares shall be purchased outside the Stock Exchange at a price equivalent to the average paid for class B shares on the Stock Exchange at the time of purchase.

During the financial years 2005 and 2006 following own shares were repurchased (split-adjusted amount).

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Repurchased Own Shares

Number of shares Cost in MEUR1 January, 2006 374,840 10.2

May 2006 740,160 24.4June 2006 155,000 5.3July 2006 56,440 1.9August 2006 138,320 4.9October 2006 180,000 6.7November 2006 693,993 26.0

31 December, 2006 2,338,753 79.4

Number of shares Cost in MEUR1 June, 2005 0

September 2005 160,840 8.7October 2005 26,580 1.5Increasing the number of shares (split two-for-one) 187,420

31 December, 2005 374,840 10.2

In addition, relating to the share-based incentive plan, a company included in the consolidated financial statements acquired 400,000 KONE class B shares in December 2005 for a total of EUR 11.8 million.

Share-based Compensation

1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Share-based compensation recognized as an expense in statement of income, MEUR

To be paid in shares 8.9 0.5To be paid in cash 6.1 0.7

31 Dec, 2006 31 Dec, 2005Liabilities resulting from share based compensation, MEUR

To be paid in shares 1.0 0.1To be paid in cash 6.9 0.6

Share price at the date of issuing the share-based incentive plan was EUR 28.2.The non-market related conditions for the share-based incentive plan are expected to be attained to the extent

that 90 percent of the reward will be realized. During the financial year 2006 possibility for totally 34,000 more KONE class B shares was granted and possibility

for totally 12,000 class B shares was returned to the company. Outstanding amount of KONE class B shares belonging to the incentive plan was therefore as per 31 December, 2006 totally 268,000 class B shares.

The value for the option program is calculated using the Black-Scholes option pricing model.

The parameters used in defining the fair value of the option program are:

2005C Option rightsShare price at the date of issue, EUR 31.9Subscribtion price, EUR 28.4Duration (years) 2.28Expected volatility, % 25Riskless interest rate, % 3.5Expected redundancy, % 0Option fair value at the date of issue, EUR 7.75

The share subscribtion price is reduced with the amount of dividends decided before the share subscribtion at the date of record of each dividend distribution.

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22. Interest-bearing Liabilities

Carrying amount

31 Dec, 2006Carrying amount

31 Dec, 2005Non-current

Loans 89.8 133.0Finance lease liabilities 10.4 11.2

Total 100.2 144.2 Current portion of long-term loans

Loans 42.4 6.8Finance lease liabilities 6.2 6.0

Total 48.6 12.8 Current

Loans 50.8 3.7Commercial papers 158.2 150.1Overdrafts used 40.6 49.0

Total 249.6 202.8 Total interest-bearing liabilities 398.4 359.8

The fair values of the interest-bearing liabilities are not materially different from their carrying amounts.The average interest rate of the non-current liabilities portfolio on 31 December, 2006 was 3.7 (3.4) percent and

that of current liabilities 3.8 (2.6) percent.

Repayment schedule of non-current interest-bearing liabilities

2008 2009 2010 2011 Later TotalLoans 68.1 4.9 1.3 1.1 14.4 89.8Finance lease liabilities 5.2 3.3 1.4 0.5 - 10.4Total 73.3 8.2 2.7 1.6 14.4 100.2

The average interest rate refixing period of non-current interest-bearing liabilities is 16 months. In addition, KONE has undrawn long-term bilateral revolving credit facilities totalling EUR 302 million.

KONE has non-cancellable finance lease agreements for machinery & equipment and buildings with varying terms and renewal rights.

31 Dec, 2006 31 Dec, 2005Minimum lease payments

Less than 1 year 6.4 7.61–5 years 12.4 11.3Over 5 years - -

18.8 18.9Future finance charges -2.2 -1.7Present value of finance lease liabilities 16.6 17.2

31 Dec, 2006 31 Dec, 2005Present value of finance lease liabilities

Less than 1 year 6.2 6.01–5 years 10.4 11.2Over 5 years - -

Total 16.6 17.2

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23. Employee Benefits

The group operates various employee benefits plans throughout the world. Pension arrangements are made in accordance with local regulations and practise in line with the defined contribution pension plans or defined benefit pension plans. Under defined contribution plans the group’s contributions are recorded as an expense in the accounting period to which they relate. For defined benefit pension plans retirement, disability, death and termina-tion income benefits are determined, retirement benefits generally being a function of years worked and final salary.

In Finland, pension cover has been arranged through local insurance companies in accordance with defined contribution plans (Finnish Statutory Employment Pension Scheme “ TEL “). In Sweden, pension cover is arranged through both insurance companies and book reserves in accordance with the Swedish “FPG/PRI System”. Same type of book reserve for unfunded defined benefit pension plans are used also e.g. in Germany and in Italy. Other post-employment unfunded obligations include book reserves for termination income benefits, which are made in some countries in accordance with local practise.

The main countries to have funded defined benefit plans are U.K., U.S., Canada and Australia. Defined benefit pension plans are funded by the relevant KONE companies to satisfy local statutory funding requirements. The discount rates used in actuarial calculations of employee benefits liabilities are adjusted to market rates. The group funds also include certain other post-employment benefits in U.S. relating to retirement, medical and life insurance programmes.

Employee benefit liabilities recognized in the balance sheet 31 Dec, 2006 31 Dec, 2005Employee benefits

Defined benefit plans 122.2 125.2Other post-employment benefits 22.8 23.7

Total 145.0 148.9

31 Dec, 2006Defined benefit

plansOther post-employment

benefitsPresent value of unfunded obligations 57.1 4.3Present value of funded obligations 270.7 25.9Fair value of benefit plans’ assets -178.4 -2.2Unrecognized actuarial gains (+)/losses (-) -27.2 -5.2Total 122.2 22.8

Net liability reconciliation 1 Jan–31 Dec, 2006Defined benefit

plansOther post-employment

benefitsNet liability in the beginning of period 125.2 23.7Translation difference -2.3 -1.1Acquisition of new companies 0.6 0.0Disposal of companies - -Costs recognized in statement of income 14.9 1.7Paid contributions -16.2 -1.5Net liability at the end of period 122.2 22.8

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82 NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS

31 Dec, 2005Defined benefit

plansOther post-employment

benefitsPresent value of unfunded obligations 63.4 14.2Present value of funded obligations 256.3 16.8Fair value of benefit plans’ assets -156.3 -3.4Unrecognized actuarial gains (+)/losses (-) -38.2 -3.9Total 125.2 23.7

Net liability reconciliation 1 Jun–31 Dec, 2005Defined benefit

plansOther post-employment

benefitsNet liability in the beginning of period 129.2 19.1Translation difference 1.6 0.8Acquisition of new companies - -Disposal of companies - -Costs recognized in statement of income 7.2 3.8Paid contributions -12.8 0.0Net liability at the end of period 125.2 23.7

Amounts recognised in the statement of income

Total pensions 1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Defined contribution pension plans 66.4 31.9Defined benefit pension plans 15.8 9.1Other post-employment benefits 1.7 3.8Total 83.9 44.8

1 Jan–31 Dec, 2006Defined benefit

plansOther post-employment

benefitsCurrent service costs 11.6 0.9Interest costs 16.3 0.9Expected return on plans’ assets -12.8 -0.3Net actuarial gains (-)/losses (+) recognized 0.8 0.2Past-service costs - -Settlements -0.1 -Loss curtailments - -Total 15.8 1.7

1 Jun–31 Dec, 2005Defined benefit

plansOther post-employment

benefitsCurrent service costs 5.9 3.3Interest costs 8.7 0.5Expected return on plans’ assets -7.2 -0.2Net actuarial gains (-)/losses (+) recognized -0.2 0.1Past-service costs 0.2 -Settlements -0.1 -Loss curtailments 1.8 0.1Total 9.1 3.8

The actual return on defined benefit plan assets was EUR 15.2 (7.2) million.

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83

Defined benefit plans: Assumptions used in calculating benefit obligations

1 Jan–31 Dec, 2006 Europe U.S.Discount rate, % 3.75–5.00 5.70Expected return on plan assets, % 3.00–6.67 8.50–9.00Future salary increase, % 2.5–4.6 4.0Future pension increase, % 1.5–3.2 4.0Expected average remaining working years 10–18 15

1 Jun–31 Dec, 2005 Europe U.S.Discount rate, % 4.00–4.80 5.75Expected return on plan assets, % 3.00–6.40 9.00Future salary increase, % 3.0–4.3 4.0Future pension increase, % 2.5–3.0 4.0Expected average remaining working years 10–18 15

24. Provisions

1 Jan–31 Dec, 2006Provision for

warrantyProvision for claims

Provision for business

restructuring

Provision for loss

contractsOther

provisions TotalTotal provision in the beginning of period 18.6 6.9 28.2 35.9 22.4 112.0Translation difference -0.5 -0.2 0.3 -1.9 -3.5 -5.8Increase 6.3 1.9 5.1 24.5 8.9 46.7Provision used -5.1 -2.1 -23.0 -32.0 -3.9 -66.1Reversal of provision -3.4 -1.7 -0.9 -4.5 -5.0 -15.5Companies acquired 0.3 - - 0.1 0.1 0.5Companies sold - - - - - -Total provision at the end of period 16.2 4.8 9.7 22.1 19.0 71.8

Non-current

liabilitiesCurrent

liabilities TotalDistribution of the provisions as of 31 Dec, 2006 20.8 51.0 71.8

1 Jun–31 Dec, 2005Provision for

warrantyProvision for claims

Provision for business

restructuring

Provision for loss

contractsOther

provisions TotalTotal provision in the beginning of period 17.9 6.4 90.2 38.1 30.5 183.1Translation difference 0.4 0.1 0.1 2.3 0.5 3.4Increase 7.9 1.4 0.0 14.9 5.9 30.1Provision used -2.6 -1.1 -61.8 -13.6 -12.0 -91.1Reversal of provision -5.0 0.0 -0.3 -6.0 -3.0 -14.3Companies acquired - 0.1 - 0.2 0.5 0.8Companies sold - - - - - -Total provision at the end of period 18.6 6.9 28.2 35.9 22.4 112.0

Non-current

liabilitiesCurrent

liabilities TotalDistribution of the provisions as of 31 Dec, 2005 21.5 90.5 112.0

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84 NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS

25. Accruals

31 Dec, 2006 31 Dec, 2005Accrued interests 1.5 0.4Deferred income of service contracts 33.2 34.4Late costs accruals 143.9 95.7Accrued salaries, wages and employment costs 199.2 194.3Derivative liabilities 3.0 16.8Other accrued expenses 238.4 215.4Total 619.2 557.0

26. Commitments

31 Dec, 2006 31 Dec, 2005Mortgages

Group and parent company 30.7 30.7Pledged assets

Group and parent company 5.4 5.8Guarantees

Associated companies 1.8 2.0Others 3.4 23.6

Operating leases 115.8 118.9Total 157.1 181.0

Possible unidentified debts and liabilities of the demerged Kone Corporation are transferred to the new KONE Corporation according to the demerger plan.

KONE leases cars, machinery & equipment and buildings under non-cancellable operating leases. The leases have varying terms and renewal rights.

The future minimum lease payments under non-cancellable operating leases 31 Dec, 2006 31 Dec, 2005Less than 1 year 34.6 31.21–5 years 72.5 72.2Over 5 years 8.7 15.5Total 115.8 118.9

The aggregate operating lease expenses totaled EUR 37.1 (18.5) million.The European Commission initiated an investigation In January 2004 concerning alleged anticompetitive

practices in the elevator and escalator market in Europe. As a result of the Commission’s investigations, KONE received at the end of 2005 a Statement of the Objections from the Commission concerning localized anticompeti-tive practices in Belgium, Germany, Luxembourg and the Netherlands. KONE submitted its reply to the Statement of Objections to the Commission in 2006. Since the initiation of the investigation, KONE has fully cooperated with the European Commission.

The European Commission has not issued a decision nor decided on possible fines yet. KONE has not made a provision in this respect.

27. Derivatives

Fair values of derivative financial instruments

Positive fair value

31 Dec, 2006

Negative fair value

31 Dec, 2006

Net fair value

31 Dec, 2006

Net fair value

31 Dec, 2005FX Forward contracts 3.9 2.7 1.2 -6.1Currency options 0.1 0.1 0.0 0.0Cross-currency swaps, due under one year 43.2 - 43.2 -Cross-currency swaps, due in 1–3 years 2.8 - 2.8 32.6Electricity derivatives 0.5 0.2 0.3 0.7Total 50.5 3.0 47.5 27.2

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85

Nominal values of derivative financial instruments 31 Dec, 2006 31 Dec, 2005FX Forward contracts 392.8 859.3Currency options 32.3 7.4Cross-currency swaps, due under one year 153.8 -Cross-currency swaps, due in 1–3 years 43.6 173.8Electricity derivatives 2.9 2.4Total 625.4 1,042.9

The positive fair values of FX forward contracts on 31 Dec, 2006 included cash flow hedges under IAS 39 hedge accounting EUR 1.5 million, economic hedges EUR 1.8 million and net investment hedges under IAS 39 hedge accounting EUR 0.6 million. The positive fair values cross-currency swaps on 31 Dec, 2006 included net investment hedges under IAS 39 hedge accounting EUR 2.8 million and other net investment hedges EUR 43.2 million. The negative fair values of FX forward contracts on 31 Dec, 2006 included cash flow hedges under IAS 39 hedge accounting EUR 1.1 million, economic hedges EUR 1.5 million and net investment hedges under IAS 39 hedge accounting EUR 0.1 million. The nominal values of FX forward contracts on 31 Dec, 2006 included cash flow hedges under IAS 39 hedge accounting EUR 119.3 million, economic hedges EUR 204.4 million and net investment hedges under IAS 39 hedge accounting EUR 68.9 million. The nominal values cross-currency swaps on 31 Dec, 2006 included net investment hedges under IAS 39 hedge accounting EUR 43.6 million and other net investment hedges EUR 153.8 million.

Derivates are hedging transactions and following KONE hedging policy.

28. Principal Subsidiaries

Shareholding (%)Company Country Parent company GroupKONE Inc. United States 100KONÉ S.A. France 99.97KONE Plc United Kingdom 100 100KONE S.p.A. Italy 100KONE GmbH Germany 100KONE Elevators Pty Ltd Australia 30 100KONE B.V. Netherlands 100KONE Hissit Oy Finland 100 100KONE Elevators Co. Ltd China 95KONE AB Sweden 100Other subsidiaries (184 companies)

A list of shares and participations can be found in the KONE Corporation closing documents.

Market Area Information

1 Jan–31 Dec, 2006 Sales Assets employed InvestmentsPersonnel at

the end of periodEMEA 1) 2,319.4 543.8 33.1 17,016Americas 805.1 145.8 13.6 5,309Asia-Pacific 476.3 129.4 13.7 6,996Non-allocated 4.5Total 3,600.8 823.5 60.4 29,321

1 Jun–31 Dec, 2005 Sales Assets employed InvestmentsPersonnel at

the end of periodEMEA 1) 1,388.6 447.7 17.2 16,029Americas 452.7 127.9 4.7 5,088Asia-Pacific 260.1 142.4 7.5 6,122Non-allocated 50.5 Total 2,101.4 768.5 29.4 27,238

1) EMEA = Europe, Middle East, Africa

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86 CALCULATION OF KEy FIGURES

Average Number

of Employees=

the average number of employees at the end of each calendar month

during the accounting period

Return on Equity (%) = 100 x net income

total equity (average of the figures for the accounting period)

Return on

Capital Employed (%)= 100 x

income after financing items + interest + other financing costs

total assets - non-interest-bearing-debt

(average of the figures for the accounting period)

Total Equity/Total Assets (%) = 100 xtotal equity

total assets

Gearing (%) = 100 xinterest-bearing-debt - liquid assets - loans receivable

total equity

Basic Earnings/Share = net income attributable to the shareholders of the parent company

issue and conversion adjusted weighted average

number of shares - repurchased own shares

Equity/Share = total shareholders’ equity

number of shares (issue adjusted) - repurchased own shares

Dividend/Share = payable dividend for the accounting period

issue and conversion adjusted weighted average

number of shares - repurchased own shares

Dividend/Earnings (%) = 100 x dividend/share

earnings/share

Effective Dividend yield (%) = 100 x dividend/share

price of class B shares at the end of the accounting period

Price/Earnings = price of class B shares at the end of the accounting period

earnings/share

Average Price = total EUR value of all class B shares traded

average number of class B shares traded during the accounting period

Market Value of All

Outstanding Shares=

the number of shares (A + B) at the end of the accounting period

times the price of class B shares at the end of the accounting period 1)

Shares Traded = number of class B shares traded during the accounting period

Shares Traded (%) = 100 x number of class B shares traded

average weighted number of class B shares

1) Excluding repurchased own shares

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87SUMMARy IN FIGURES

Consolidated Statement of Income 1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Sales, MEUR 3,601 2,101- sales outside Finland, MEUR 3,502 2,034Operating income, MEUR 360 195- as percentage of sales, % 10.0 9.3Income before taxes, MEUR 356 194- as percentage of sales, % 9.9 9.2Net income, MEUR 234 124 Consolidated Balance Sheet, MEUR 31 Dec, 2006 31 Dec, 2005Non-current assets 1,102 1,110Inventories, net 117 121Other current assets 1,074 914Total equity 699 669Non-current liabilities 276 318Provisions 72 112Current liabilities 1,247 1,046Total assets 2,292 2,145Interest bearing net debt 125 99Assets employed 1) 824 769Net working capital 1) -140 -158 Other Data 1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Orders received, MEUR 3,116 1,622Order book, MEUR 2,762 2,327Capital expenditure , MEUR 60 29- as percentage of sales, % 1.7 1.4Expenditure for research and development, MEUR 50 30- as percentage of sales, % 1.4 1.4Average number of employees 28,366 27,016Number of employees at the end of period 29,321 27,238 Key Ratios, % 1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Return on equity 34.3 34.1 2)

Return on capital employed 35.4 36.4 2)

Total equity/total assets 30.5 31.2Gearing 17.9 14.8 Key Figures per Share 3) 1 Jan–31 Dec, 2006 1 Jun–31 Dec, 2005Basic earnings per share, EUR 1.86 0.98Diluted earnings per share, EUR 1.85 0.97Basic earnings per share, EUR 1.86 1.68 2)

Diluted earnings per share, EUR 1.85 1.67 2)

Equity per share, EUR 5.55 5.24Dividend per class B share, EUR 1.00 4) 1.00Dividend per class A share, EUR 0.99 4) 0.99Dividend per earnings, class B share, % 53.8 4) 102.0Dividend per earnings, class A share, % 53.2 4) 101.0Effective dividend yield, class B share, % 2.3 4) 3.0Price per earnings, class B share 23 34Market value of class B share, average, EUR 35 27- high, EUR 43 34- low, EUR 28 22- at the end of period, EUR 43 34Market capitalization at the end of period, MEUR 5,382 4,261Number of class B share traded, ‘000 75,514 43,202Class B share traded, % 69 40Weighted average number of class A shares, ‘000 19,052 19,052Number of class A shares at the end of period, ‘000 19,052 19,052Weighted average number of class B shares 6) , ‘000 108,045 109,163Number of class B shares at the end of period 5), ‘000 106,276 108,028Weighted average number of shares 6), ‘000 127,097 128,215

1) Including tax receivables and liabilities, accrued interest and derivative items2) Annualized 3) On 28 November, 2005 the shares were split at a ratio of one to two4) Board’s proposal5) Reduced by the number of repurchased own shares 6) Adjusted for share issue and option dilution, and reduced by the number of repurchased own shares

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88 BOARD OF DIRECTORS’ DIVIDEND PROPOSAL

The parent company’s non-restricted equity on 31 December, 2006 is EUR 1,271,423,830.92 of which net profit from the financial year is EUR 262,326,865.64.

The Board of Directors proposes to the Annual General Meeting that a dividend of EUR 0.99 be paid on the 19,052,178 class A shares and EUR 1.00 on the out-standing 106,675,697 class B shares. The total amount of proposed dividends will be EUR 125,537,353.22. The Board of Directors further proposes that the rest, EUR 1,145,886,477.70 be retained and carried forward.

The Board proposes that the dividends be payable from 8 March, 2007.

Helsinki, 26 January, 2007

Antti Herlin Sirkka Hämäläinen-Lindfors

Matti Alahuhta Jean-Pierre Chauvarie

Reino Hanhinen Sirpa Pietikäinen

Masayuki Shimono Iiro Viinanen

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89AUDITORS’ REPORT

To the shareholders of KONE Corporation

We have audited the accounting records, the financial statements, the report of the Board of Directors and the administration of KONE Corporation for the period 1 January–31 December, 2006. The Board of Directors and the President have prepared the consolidated financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, as well as the report of the Board of Directors and the parent company’s financial state-ments, prepared in accordance with prevailing regulations in Finland, containing the parent company’s balance sheet, income statement, cash flow statement and notes to the financial statements. Based on our audit, we express an opinion on the consolidated financial statements, as well as on the report of the Board of Directors and the parent company’s financial statements and administration.

We conducted our audit in accordance with Finnish Standards on Auditing. Those standards require that we perform the audit to obtain reasonable assurance about whether the financial statements and the report of the Board of Directors are free of material misstatement. An audit includes examining on a test basis evidence supporting the amounts and disclosures in the financial statements and in the report of the Board of Directors, assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. The purpose of our audit of the administration is to examine whether the members of the Board of Directors and the President of the parent company have complied with the rules of the Companies’ Act.

Consolidated financial statementsIn our opinion the consolidated financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view, as defined in those standards and in the Finnish Accounting Act, of the consolidated results of operations as well as of the financial position.

Parent company’s financial statements, report of the Board of Directors and administrationIn our opinion the parent company’s financial state-ments have been prepared in accordance with the Finnish Accounting Act and other applicable Finnish rules and regulations. The parent company’s financial statements give a true and fair view of the parent company’s result of operations and of the financial position.

In our opinion the report of the Board of Directors has been prepared in accordance with the Finnish Accounting Act and other applicable Finnish rules and regulations. The report of the Board of Directors is consistent with the consolidated financial statements and the parent company’s financial statements and gives a true and fair view, as defined in the Finnish Accounting Act, of the result of operations and of the financial position.

The consolidated financial statements and the parent company’s financial statements can be adopted and the members of the Board of Directors and the President of the parent company can be discharged from liability for the period audited by us. The proposal by the Board of Directors regarding the disposal of distributable funds is in compliance with the Companies’ Act.

Helsinki, 26 January, 2007

PricewaterhouseCoopers OyAuthorised Public Accountants

Jouko Malinen Heikki LassilaAuthorised AuthorisedPublic Accountant Public Accountant

The auditors’ report has been issued on the official financial statements of KONE Corporation. The condensed financial statements information presented in this annual report does not include all information of the official financial statements.

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90 REVIEW 2006 WITH PRO FORMA COMPARISON FIGURES

KONE Corporation’s first financial reporting period was 1 June–31 December, 2005. KONE’s reporting period follows the calendar year as of 2006. In order to facilitate evaluation of the financial performance and status of the company KONE has, in addition to the Financial Statements, included this separate pro forma review, in which the company has used 1 January–31 December 2005 data for comparison.

The Financial Statements have been prepared in accordance with the International Financial Reporting Standards (IFRS).

KONE’s Operating Environment The operating environment remained good in most markets throughout the year. The need to modernize equipment and cater for ageing populations is driving demand in Europe and North America, while urbaniza-tion and economic growth are continuing to increase the demand for elevators and escalators and the related service in Asia.

In Europe, the Middle East and Africa (EMEA), the business environment continued to be favorable. Despite tough competition, KONE succeeded in strengthening its position even further. The residential market was the main driver of Europe’s new equipment business in most countries, although commercial construction progressed at a fairly lively rate especially in the U.K. The Southern European market slowed down at the end of the year. The Middle East market was buoyant due to energetic construction growth in most segments.

In North America, the new equipment market continued to progress strongly. The market for hotel and leisure building solutions was especially active, whereas growth in the U.S. residential segment slowed down during the second half of the year.

The Asia-Pacific region developed well, with most markets maintaining a high level of activity. Rapid urbanization and economic growth were the main factors affecting the new equipment and modernization markets in the region. In China, the central government made several consecutive controlling actions particu-larly to guide residential construction towards more affordable housing for people migrating to the cities, which temporarily slowed down growth somewhat.

The pricing environment for new elevators and escalators continued to be competitive in all market areas.

The maintenance market progressed well under continuous tough price competition. A high level of demand continued for the modernization of elevators and escalators in both Europe and North America, and also in some markets in Asia-Pacific. The growing modernization market became an increasingly important market for KONE, even though it is attract-ing the attention of both global and local players.

Orders Received and Order BookThe value of orders received during 2006, excluding the value of maintenance contracts, increased by approximately 18 percent and totaled EUR 3,116 (January–December 2005: 2,639) million. At compa-rable exchange rates, the growth was also approxi-mately 18 percent. The order book was EUR 2,762 (31 December, 2005: 2,327) million at the end of Decem-ber. This represents an increase of nearly 19 percent on the year-end order book. At comparable exchange rates this corresponded 24 percent.

The order intake for new equipment and moderniza-tions in the EMEA region was strong. Modernization order growth was good particularly in countries that have adopted SNEL in their legislation.

In North America, order intake growth was strong. The success of the KONE extended machine-room-less (MRL) elevators and encouraging escalator demand in the public sector resulted in good order intake growth. The demand for modernizations continued to grow also in the U.S.

The Asia-Pacific region continued to be character-ized by high demand for new equipment. KONE’s market share grew rapidly especially in China, where progress has been especially good. KONE’s position has strengthened in the whole Asia-Pacific region.

KONE’s largest orders of the financial year were orders to supply all elevators for the old London Stock Exchange Building, to modernize escalators and walkways in the Roman metro system and major projects for the Madrid Metro. KONE also received an order for the Vienna International Airport, a service contract for the London Underground, and a major order for the retail sector from Tesco PLC to supply ramps and elevators for stores across the U.K. In addition, KONE received orders to design, supply and install all elevators on four cruise ships. In China, KONE was able to gain ground by signing orders with the China National Stadium in Beijing, for example.

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91

Net Sales In comparison to 2005, KONE’s net sales increased by approximately 11 percent and totaled EUR 3,601 (January–December 2005: 3,242) million. Growth at comparable exchange rates was also approximately 11 percent. New equipment sales accounted for EUR 1,491 (1,301) million of the total and represented an approximate 15 percent increase compared to the same period in 2005. Service sales increased by approximately 9 percent and totaled EUR 2,110 (1,942) million.

Net sales growth was almost totally organic and resulted from favorable market conditions and good progress in the company’s development programs, i.e. programs to increase customer focus and competitive-ness through a better product portfolio. In 2006, the annual sales for closed acquisitions amounted to approximately EUR 50 million. Net sales grew in all geographical areas. In 2006, growth was strongest in Asia-Pacific, and especially in China.

ResultKONE’s operating income improved in comparison to 2005 and stood at EUR 360.1 (January–December 2005: 272.0) million or 10.0 (8.4) percent of net sales (the 2005 figures exclude the EUR 89.2 million provision made in the first quarter of 2005). Net financial items were EUR -3.5 (-6.4) million. The increase in operating income compared to the corresponding period of 2005 was driven by continued productivity improvements, which resulted from ongoing development programs.

KONE’s profit before taxes was EUR 356.3 (177.9) million. Taxes totaled EUR 121.9 (69.1) million, representing a 34.2 (38.8) percent tax rate.

Net income for January-December was EUR 234.4 (108.8) million. Earnings per share were EUR 1.86 (0.87).

Cash Flow and FinancingCash flow from operations (before financial items and taxes) for 2006 was EUR 371.7 (January–December 2005: 329.4) million. At the end of December, net working capital was negative at EUR -139.5 (31 December, 2005: -158.0) million, including financial items and taxes. Although the record net sales of the last quarter increased receivables, the overall cash flow was in accord with the result.

Net debt totaled EUR 124.9 (31 December, 2005: 99.3) million. Gearing was 17.9 percent compared to 14.8 percent at the end of December 2005. KONE’s total equity/total assets ratio was 30.5 (31 December, 2005: 31.2) percent at the end of December.

Capital Expenditure, Acquisitions and Cooperation AgreementsIn 2006, KONE’s capital expenditure, including acquisitions, totaled EUR 150.5 (January–December 2005: 173.7) million. Acquisitions accounted for EUR 90.1 (93.2) million of this figure.

KONE continued its acquisition policy of buying small local elevator or door service companies. Acquisitions were made mainly in Europe and the U.S. in 2006.

In Germany, KONE increased its shareholding in Lödige Aufzugstechnik to 85 percent. The company has 5,500 units under maintenance and employs approxi-mately 100 people.

KONE signed an agreement to acquire Evin SAS, an elevator company located in France. Evin SAS was consolidated into KONE in September 2006. The company recorded sales of EUR 14 million in 2005 and employed somewhat over 100 persons. Evin SAS installed, maintained and modernized elevators and automatic building doors in several regions in France.

In November, KONE Corporation and KMZ Karacharovo Mechanical Factory agreed to withdraw from their plans to set up a joint venture elevator company in Russia, which was announced by the parties in April 2005. KONE and KMZ will, however, continue their cooperation on the local Russian elevator market.

KONE and Marimekko signed an agreement to start cooperation under license concerning the decoration of elevator car interiors.

Research and Product DevelopmentProduct development expenses totaled EUR 50.3 (January–December 2005: 50.8) million, representing 1.4 (1.6) percent of net sales. R&D expenses include development of new product concepts and further development of existing products and services. During the year the focus was on developing KONE’s product portfolio even further in order to maximize the accessible markets.

In Europe, a preferred offering for the new equip-ment market was released, providing better flexibility in fulfilling customer needs. It included a new set of visual outlooks for the car interiors and improved performance, such as the more efficient use of space.

KONE’s machine-room-less (MRL) product offering for the North American market now covers most hydraulic elevator segments. Further performance improvements were also released during the year, including the possibility for bigger loads.

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92

In the Asian market, KONE continued to increase the flexibility of its product offerings and the coverage of its visual offering. The first escalator product from KONE’s subsidiary KONE TELC Industries Co., Ltd was released in most Asian markets, including India, and in Australia, South Africa and some European markets.

With respect to modernizations, a solution featuring enhancements in accessibility, safety (optimized for the European Safety Norms for Existing Lifts, SNEL), visual outlook and performance was released in 2006.

KONE also announced that it has developed the world’s flattest autowalk technology, which makes designing locations for and installing autowalks considerably easier. Due to the innovative pallet return mechanism and a new kind of motor solution, each KONE InnoTrack™ autowalk is so flat that, unlike conventional solutions, it can be installed entirely on the floor level.

During 2005 and 2006 product creation at KONE has been developed to become much more cross-functional. This has significantly reduced the time to market in R&D.

European Commission InvestigationIn March 2006, KONE submitted its reply to the European Commission concerning that body’s investigation of localized anticompetitive practices in the elevator and escalator industry in Belgium, Germany, Luxembourg and the Netherlands. KONE received a Statement of Objections on 10 October, 2005. Since the initiation of the investigation in January 2004, KONE has fully cooperated with the European Commission. KONE has not made a provision in this respect.

PersonnelKONE’s personnel are professional and specialized. As an employer the company focuses on securing the availability, commitment and continuous development of its human resources.

KONE had 29,321 (31 December, 2005: 27,238) employees at the end of December 2006. The average number of employees during January–December 2006 was 28,366 (January–December 2005: 26,405). Most of the personnel growth was in the fastest growing geographical markets, such as Asia-Pacific and the Middle East, with additional recruitment being carried out in service and installation operations due to growing volumes. The geographical distribution of KONE employees was 58 (59) percent in EMEA, 18 (19) percent in the Americas and 24 (22) percent in Asia-Pacific.

OutlookWe estimate that market growth will not be equally strong in all markets this year as in 2006. This will be the case especially in North America and Southern Europe. However, the market development in e.g. Asia-Pacific will continue to be strong.

KONE’s target for 2007 is to achieve an approximate 10 percent increase in net sales, calculated at compa-rable exchange rates, compared to 2006. The operat-ing income (EBIT) target is to achieve growth of approximately 20 percent from the comparable 2006 figure of EUR 360 million.

In 2008, KONE’s objective is to achieve an about 12 percent operating income (EBIT) margin.

REVIEW 2006 WITH PRO FORMA COMPARISON FIGURES

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93CONSOLIDATED STATEMENT OF INCOME WITH PRO FORMA COMPARISON FIGURES

MEUR 2006 % 2005 1) %

Sales 3,600.8 3,242.2

Costs and expenses -3,182.4 -3,000.4Depreciation -58.3 -59.0

Operating income 360.1 10.0 182.8 5.6

Share of associated companies’ income -0.3 1.5Financing income and expenses -3.5 -6.4

Income before taxes 356.3 9.9 177.9 5.5

Taxes -121.9 -69.1

Net income 234.4 6.5 108.8 3.4

Net income attributable to:

Shareholders of the parent company 234.8 110.2Minority interests -0.4 -1.4

Total 234.4 108.8

1) Including a MEUR 89.2 provision for the development and restructuring program. Operating income excluding the provision was MEUR 272.0.

Earnings per share for profit attributable to the shareholders of the parent company, EURBasic earnings per share 1.86 0.87Diluted earnings per share 1.85 -

Page 94: Annual Report 2006 Annual Report 2006 [2.7 MB]

94 CONSOLIDATED BALANCE SHEET WITH PRO FORMA COMPARISON FIGURES

Assets, MEUR 31 Dec, 2006 31 Dec, 2005

Non-current assetsIntangible assets 615.7 551.6Tangible assets 217.7 217.7Loans receivable and other interest-bearing assets 5.1 53.1Deferred tax assets 134.1 130.1Investments 129.6 157.2

Total 1,102.2 1,109.7

Current assetsInventories 668.8 584.9Advance payments received -552.1 -464.2Loans receivable and other interest-bearing assets 44.6 0.6Accounts receivable and other non interest-bearing assets 805.1 706.7Cash, cash equivalents and financial assets 223.8 206.8

Total 1,190.2 1,034.8

Total assets 2,292.4 2,144.5

Equity and liabilities, MEUR 31 Dec, 2006 31 Dec, 2005

Equity 698.6 669.2

Non-current liabilitiesLoans 100.2 144.2Deferred tax liabilities 30.3 24.7Employee benefits 145.0 148.9

Total 275.5 317.8

Provisions 71.8 112.0

Current liabilitiesLoans 298.2 215.6Accounts payable and other liabilities 948.3 829.9

Total 1,246.5 1,045.5

Total equity and liabilities 2,292.4 2,144.5

Page 95: Annual Report 2006 Annual Report 2006 [2.7 MB]

95CONSOLIDATED STATEMENT OF CASH FLOW WITH PRO FORMA COMPARISON FIGURES

MEUR 1–12/2006 1–12/2005

Operating income 360.1 182.8Change in working capital -46.7 87.6Depreciation 58.3 59.0

Cash flow from operations 371.7 329.4

Cash flow from financial items and taxes -105.9 -163.4

Cash flow from operating activities 265.8 166.0

Cash flow from investing activities -97.0 -182.5Purchase and sales of own shares -69.3 -21.9Share issue 1.7 5.0Dividends paid -126.8 -127.3

Change in net debt -25.6 -160.7

Net debt in the beginning of period 99.3 -61.4Net debt in the end of period 124.9 99.3

Change in net debt -25.6 -160.7

Page 96: Annual Report 2006 Annual Report 2006 [2.7 MB]

96 qUARTERLy KEy FIGURES

Q4/2006 Q3/2006 Q2/2006 Q1/2006 Q4/2005 Q3/2005pro forma

Q2/2005pro forma

Q1/2005Orders received MEUR 712.1 742.0 821.9 840.3 702.5 649.4 688.3 604.1Order book MEUR 2,762.1 2,951.0 2,818.0 2,654.0 2,326.8 2,371.7 2,264.7 2,023.1Sales MEUR 1,145.6 879.8 840.4 735.0 1,013.4 804.7 783.1 649.3Operating income MEUR 123.4 101.1 83.9 51.7 93.6 79.1 60.8 39.0 1)

Operating income % 10.8 11.5 10.0 7.0 9.2 9.8 7.8 6.0 1)

1) Excluding MEUR 89.2 provision for the development and restructuring program

Page 97: Annual Report 2006 Annual Report 2006 [2.7 MB]

97SUMMARy IN FIGURES 2003–2006

Consolidated Statement of Income 2006pro forma

2005pro forma

2004 1)

pro forma 2003

Sales, MEUR 3,601 3,242 2,895 2,856

- sales outside Finland, MEUR 3,502 3,137 2,801 2,767

Operating income, MEUR 360 272 2) 235 280

- as percentage of sales, % 10.0 8.4 2) 8.1 9.8

Income before taxes, MEUR 356 178 233 281

- as percentage of sales, % 9.9 5.5 8.1 9.8

Net income, MEUR 234 109 164 205

Consolidated Balance Sheet, MEUR 2006 2005 2004 2003

Non-current assets 1,102 1,110 1,020 954

Inventories, net 117 121 130 108

Other current assets 1,074 914 914 1,035

Total equity 699 669 727 622

Non-current liabilities 276 318 291 367

Provisions 72 112 125 149

Current liabilities 1,247 1,046 922 960

Total assets 2,292 2,145 2,065 2,097

Interest bearing net debt 125 99 -61 -25

Assets employed 3) 824 769 665 597

Net working capital 3) -140 -158 -180 -194

Other Data 2006 2005 2004 2003

Orders received, MEUR 3,116 2,639 2,136 2,021

Order book, MEUR 2,762 2,327 1,796 1,640

Capital expenditure, MEUR 60 58 47 41

- as percentage of sales, % 1.7 1.8 1.6 1.4

Expenditure for research and development, MEUR 50 51 50 48

- as percentage of sales, % 1.4 1.6 1.7 1.7

Average number of employees 28,366 26,405 24,315 23,562

Number of employees at the end of period 29,321 27,238 25,262 23,737

Key Ratios, % 2006 2005 2004 2003

Return on equity 34.3 15.6 24.3 -

Return on capital employed 35.4 18.3 23.1 -

Total equity/total assets 30.5 31.2 35.2 29.7

Gearing 17.9 14.8 -8.4 -4.0

Key Figures per Share 4) 2006 2005 2004 2003

Basic earnings per share, EUR 1.86 0.87 1.33 1.64

Equity per share, EUR 5.55 5.24 5.53 4.80

Weighted average number of class A shares, ‘000 19,052 19,052 19,052 19,052

Number of class A shares at the end of period, ‘000 19,052 19,052 19,052 19,052

Weighted average number of class B shares 5), ‘000 107,363 108,333 104,147 106,208

Number of class B shares at the end of period 6), ‘000 106,276 108,028 108,267 107,876

Weighted average number of shares 5), ‘000 126,416 127,385 123,199 125,260

1) Disregarding MEUR 15.3 non-recurring income due to a provision reversal regarding disability pensions2) Excluding MEUR 89.2 provision for the development and restructuring program3) Including tax receivables and liabilities, accrued interest and derivative items4) On 28 November, 2005 the shares were split at a ratio of one to two5) Adjusted for share issue and reduced by the number of repurchased own shares, not dilluted6) Reduced by the number of repurchased own shares

Page 98: Annual Report 2006 Annual Report 2006 [2.7 MB]

98 KONE AS AN INVESTMENT

At general meetings each KONE class A share is assigned one vote, as is each block of 10 class B shares, with the proviso that each shareholder is entitled to at least one vote.

KONE has not adopted a specific dividend policy. In the case of dividend distribution, the dividend paid on the class B share is higher than that on the class A share. The difference between the dividends is at minimum one (1) percent and at maximum two and a half (2.5) percent, calculated from the accounting par value of the share. The accounting par value of the share is EUR 0.50.

KONE’s long-term business objectives are to grow faster than the market, to reach a 12 percent operating income margin while maintaining strong, positive cash flow. KONE’s focus is on accomplishing solid and steady growth.

Investor Relations PolicyKONE strives to offer liquid shares that present an attractive investment alternative to domestic and foreign institutional and private investors. The primary task of Investor Relations is to ensure that the market has timely and comprehensive information in order to objectively and correctly evaluate KONE securities at all times. This task is to be fulfilled in all written financial communication, i.e. annual and interim reports, press releases and Internet entries, as well as in communica-tion with investors and analysts.

KONE complies with the legal requirements for listed companies as defined by the Securities Market Act and the Helsinki Stock Exchange rules regarding prompt and simultaneous disclosure of information in all its financial communication.

KONE was founded in 1910 and listed on the Helsinki Stock Exchange in 1967. KONE Corporation has two classes of shares: the listed class B shares with the trading code KNEBV, and the unlisted class A shares. At the end of 2006 KONE’s market capitalization was EUR 5,382 million.

Investor Relations ActivitiesAll Investor Relations activities are coordinated by the Investor Relations Department. This ensures fair and equal access to company information and to its spokespersons. Investor Relations also gathers and analyses capital market information for KONE’s Executive Board. In all our activities, we strive for prompt, transparent and good service.

During 2006, KONE released a financial statement bulletin on its 2005 result, and an Annual Report, as well as three quarterly reviews. In conjunction with the release of financial reports, KONE held domestic analyst and press conferences and online audio-cast conference calls for international investors and analysts. During the year, KONE management and Investor Relations also frequently held one-on-one meetings with investors both in Finland and during road shows in major financial centers in Europe, as well as taking part in industry seminars.

Silent PeriodKONE has a silent period prior to releasing financial statements. This means that no discussions regarding financial issues are held with the capital market or media during a three-week period preceding publica-tion. This concerns meetings, telephone conversations and other means of communication.

KONE maintains comprehensive investor relations pages at its website, for more information please visit www.kone.com.

Further information on KONE’s shares and shareholders:

Corporate Governance, page 27 Shares and Shareholders, page 36

Page 99: Annual Report 2006 Annual Report 2006 [2.7 MB]

99

Investor Contacts

Ms Sophie JollyVice President, Investor RelationsTel. +358 (0)204 75 4534Mobile: +358 (0)40 828 7317E-mail: [email protected]

KONE CorporationKeilasatama 3FI-02150 Espoo, FinlandE-mail: [email protected]

Changes of AddressKONE’s shareholders are kindly requested to report written changes of address to the bank where they have their book-entry account. Those shareholders who are registered at the Finnish Central Securities Depository should send a written notice to:

Finnish Central Securities DepositoryCustomer Account ServiceP.O. Box 1110FI-00101 Helsinki, Finland

In the notice, shareholders should mention their name, new address and old address, and book-entry account number.

AnalystsThe following brokers and financial analysts actively follow KONE’s development on their own initiative. KONE is not responsible for their comments and views.

ABG Sundal Collier Ltd Erik Ejerhed +44 20 790 55 633ABN AMRO Jan Brännback +358 (0)9 228 321CA Cheuvreux Patrik Sjöblom +46 8 723 5115Carnegie Investment Bank AB, Finland Branch Miikka Kinnunen +358 (0)9 6187 1241Danske Bank Patrik Setterberg +45 33 44 0874Deutsche Bank AG Timo Pirskanen +358 (0)9 2525 2553eq Bank Ltd Erkki Vesola +358 (0)9 6817 8402Evli Bank Plc Jari Harjunpää +358 (0)9 4766 9726FIM Securities Lauri Saarela +358 (0)9 6134 6307Handelsbanken Capital Markets Tom Skogman +358 10 444 2752J.P. Morgan Securities Nicolas Paton +44 207 325 5044Kaupthing Bank Johan Lindh +358 (0)9 4784 000Mandatum Securities Antti Suttelin +358 (0)10 236 4708OKO Bank Sampo Brisk +358 (0) 10 252 4504SEB Enskilda Kaisa Ojainmaa +358 (0)9 616 28 726UBS Nordic Research Olof Cederholm +46 8 453 7306

Page 100: Annual Report 2006 Annual Report 2006 [2.7 MB]

100

Annual General MeetingKONE Corporation’s Annual General Meeting will be held on 26 February, 2007 at 11:00 a.m. at Finlandia Hall, Mannerheimintie 13, FI-00100 Helsinki, Finland.

Shareholders wishing to attend the meeting must be registered on the KONE shareholder list at the Finnish Central Securities Depository no later than 16 February, 2007, and must register for attending the meeting by telephone (+358 (0)204 75 4548), by fax (+358 (0)204 75 4523), or by mail (KONE Corporation, P.O. Box 7, FI-02151 Espoo, Finland), or over the internet (www.kone.com/agm) no later than 4.00 p.m. Finnish time on 21 February, 2007. Any proxies must be submitted at the same time.

INFORMATION FOR SHAREHOLDERS

Payment of DividendsThe Board of Directors proposes to the Annual General Meeting that a dividend of EUR 0.99 per class A share and EUR 1.00 per outstanding class B share be distributed for the financial year, January-December 2006. The Board of Directors’ proposal for the distribution of profits is set out in the financial state-ments on page 88.

Only those who have been registered as share-holders at the Finnish Central Securities Depository by 1 March, 2007, the record date for dividend distribu-tion, are entitled to dividends. The date for payment of dividends is 8 March, 2007.

Trading Codes KONE Corporation has two classes of shares: the unlisted class A shares and the listed class B shares. The KONE class B shares, and the KONE 2005A and 2005B options are listed on the Helsinki Stock Exchange and are registered in the Finnish Central Securities Depository. Share subscription with 2005 A options will end on 31 March, 2008 and with 2005B options on 31 March, 2009.

Securities Helsinki Stock Exchange trading codeKONE class B share KNEBV2005A option KNEBVEW1052005B option KNEBVEW205

KONE’s Financial Reporting Schedule in 2007Financial Statements for 2006 26 January, 2007Annual Report for 2006 Week 6, February 2007Interim Report for 1 January–1 March, 2007 24 April, 2007Interim Report for 1 January–30 June, 2007 20 July, 2007Interim Report for 1 January–30 September, 2007 23 October, 2007

Publication of Financial InformationKONE Corporation publishes financial information in Finnish and English. All material is available on the KONE website www.kone.com, where requests for e-mail distribution can also be made.

The Annual Report is mailed to all shareholders and to all individuals registered in the company’s mailing list. Printed Interim Reports are mailed only on request.

Financial reports can be ordered by mail (KONE Corporation, Corporate Communications, P.O. Box 7, FI-02151 Espoo, Finland), or by e-mail ([email protected]), or by telephone (+358 (0)204 751), or by fax (+358 (0)204 75 4515).

Changes of AddressKONE’s shareholders are kindly requested to report written changes of address to the bank where they have their book-entry account. Those shareholders who are registered at the Finnish Central Securities Depository should send a written notice to:

Finnish Central Securities DepositoryCustomer Account ServiceP.O. Box 1110FI-00101 Helsinki, Finland

In the notice, shareholders should mention their name, new address and old address, and book-entry account number.

Page 101: Annual Report 2006 Annual Report 2006 [2.7 MB]

Des

ign

Inco

gnito

oy,

prin

ting

lönn

berg

prin

t

Images

Cover Suvarnabhumi International airport, Bangkok, thailand © aot

p. 2–3 City View of Chicago, u.S.

p. 12 Marimekko design, designer Maija louekari

p. 15 agence rea

p. 16 residential buildings, Beijing, China © pixtal/lehtikuva

p. 43–46 turning torso, Malmö, Sweden © HSB turning torso/ole Jais

trump International Hotel and tower, Chicago, u.S. © the trump organization/SoM (llC)

201 Bishopsgate and Broadgate tower, london, u.K. © the British land Company/SoM (llC)

naberezhnaya tower, Moscow, russia © enKa

Beijing Capital airport, Beijing, China © Foster and partners/nigel Young

Suvarnabhumi International airport, Bangkok, thailand © aot

p. 48–49 logan International airport, Boston, u.S.

this annual report contains forward-looking statements that are based on the current expectations, known factors, decisions and plans of the management of Kone. although management believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to be correct. accordingly, results could differ materially from those implied in the forward-looking statements as a result of, among other factors, changes in economic, market and competitive conditions, changes in the regulatory environment and other government actions and fluctuations in exchange rates.

Page 102: Annual Report 2006 Annual Report 2006 [2.7 MB]

KONE Corporation

Head OfficeKartanontie 1p.o. Box 8FI-00331 HelsinkiFinlandtel. +358 (0)204 751Fax +358 (0)204 75 4309

Corporate OfficesKeilasatama 3p.o. Box 7FI-02151 espooFinlandtel. +358 (0)204 751Fax +358 (0)204 75 4496

www.kone.com


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