Riding the waves of change - Annual Report Awards, Annual Report … · 2011-09-26 · 2010 Annual...

DSME 2010 Annual Report

Riding the waves of change

Company Overview 03 / Key Figures 04 / CEO Message 06 / 2010 at a Glance 08 Operation Review 10 / Financial Review 24 / Corporate History 84 / Global Network 85

Contents

For Daewoo Shipbuilding & Marine Engineering Co. Ltd., 2010 was truly a remarkable year — one of the strongest and most memorable in our company’s history. Not only did we achieve impressive financial results and eclipse one of our most challenging years with one of our best, but we also worked together to enhance our value and solidify our position in the international markets.

The collective strength of our experienced leadership, premier assets, efficient operating structure and flexible financial position underlies a resilient, stable operation that allows us to effectively maneuver and prosper, enriching all of our stakeholders.

BEyonD RESiliEncE

Company Overview 03 / Key Figures 04 / CEO Message 06 / 2010 at a Glance 08 Operation Review 10 / Financial Review 24 / Corporate History 84 / Global Network 85

Contents

Daewoo Shipbuilding & Marine Engineering Co. Ltd. (hereafter

DSME) began operation in 1973 at the Okpo Shipyard in Geoje

Island, South Gyeongsang Province. As a global leader in the

building of ships and offshore structures, our product portfolio

includes a wide range of commercial ships such as LNG carriers,

LPG carriers, bulk carriers, oil tankers, containerships and pure car

carriers; offshore structures such as fixed platforms, drilling rigs,

semi-submersible drilling rigs, FPSO, and drillships; as well as naval

vessels and passenger ships including submarines, destroyers,

rescue ships and patrol boats.

DSME actively pursues eco-friendly management activities

through our commitment in 1995 to establish green shipyards

and in our operation of the world’s largest dry dock, with a

capacity of one million tons on an area spanning 4.3 million

square meters. We have optimal facilities ranging from block

manufacturing plants to PE sites, dry docks and inner walls.

Moreover, equipped with our IT-based shipbuilding technologies,

offshore structure building capabilities, large-scale plant project

management capabilities, and advanced technologies for building

submarines and destroyers, DSME produces a wide variety of

ships and offshore structures of outstanding quality.

In 2010 when we announced our decision to focus on ethical

management – a qualitative leap that will allow DSME to become

the world’s No.1 heavy industries group – our revenues amounted

to KRW 12.075 trillion and our operating income reached KRW

1.011 trillion. As a result, we rejoined the ‘10-1 trillion club’ – a term

for firms that achieve more than 10 trillion won in revenue and 1

trillion won in operating profit on a yearly basis. At the same time,

we engaged in a number of innovative activities to reduce costs

by approximately KRW 600 billion, enabling us to improve our

management structure in all areas.

Company Overview With regards to our yard facilities, we are currently working

on the Neutae Breakwater Reclamation Project and have

constructed additional inner walls in anticipation of future

increases in orders in our offshore business. Construction is

also underway for the in-house PE zone, the Heavy Zone in

the G2 area and on inner walls. Our investment in new growth

engines in different fields include the equity acquisition of the

Paenal Yard in Angola, development of the DeWind model,

and equity acquisition of mining areas in Cepu, Indonesia.

Production-wise, we successfully constructed our first

exclusively developed model of the DSME 10000 Drillship in

2010, and are within three years of full-scale construction. We

have also delivered Asia’s largest semi-submersible drilling

rigs, providing owners with greater economies of scale, thus

allowing us to increase the number of orders we received in

offshore structures. We successfully built and delivered the

ROKS Yulgok Yi Yi, the Korean navy’s second Aegis Destroyer,

equipped with the Aegis combat system and the most up-to-

date anti-ship, aircraft and submarine capacities.

In the technology sector, we have focused on securing

value-added core technologies. We co-developed a green

ship propulsion system in collaboration with MAN Diesel,

exclusively developed the world’s largest stand-alone LNG

storage tank, developed the shipping industry’s first ship

maintenance management software (CMMS) and developed a

large gradual roll molding and bending machine for large ship

plates. We won the bronze medal in the Korean Technology

Awards for our 14000 TEU containership, and our exclusive

technology for LNGCs was selected as one of Korea’s top 100

technologies. In addition, nine of our vessels (containerships,

VLCCs, LNGCs, LNG-RVs, etc.) were recognized as the world’s

best by globally renowned marine publications including

Naval Architect, Maritime Reporter, Marine Log and Fair Play.

In our efforts to ensure future growth engines, we have also

created business models targeting North America and China

to develop our wind turbine business into one of the world’s

top three by 2010. Additionally, we are actively working

to secure production bases in major hubs in Korea, China

and North America, and have also secured the basic design

capacity to advance into the clean coal power plant business.

DSME has paved the way to become the world’s No.1 heavy

industries group with annual revenue projections of KRW

40 trillion by 2020, receiving orders for ships and offshore

plants through local contacts and establishing joint ventures

with Zvezda (Russia), equity investments in the Paenal Yard

(Angola), etc.

Despite the sluggish recovery in the shipbuilding industry,

the volume of orders received in 2010 topped USD 10 billion

due to product portfolio diversification: the world’s largest

platform plant installation vessels from Allseas Group SA

in Switzerland; luxury ferries from Tunisian state-owned

company CoTuNav; FPSOs from France‘s Total; and Type-214

submarines from the Korean navy.

While we expect to witness a shrinkage in logistical volume

resulting from the lower production rates worldwide and

delays in the recovery of ship prices this year, we are also

projecting potential growth in the offshore plant business.

Against this backdrop, we plan to achieve revenues of

over KRW 10 trillion, and an operating income of over

KRW 1 trillion through such key strategies as maintaining

competitiveness in our key products such as ships and

offshore structures; sustainably improving our management

fundamentals to obtain higher efficiency in our operations;

securing growth engines such as wind power and modular

plants, optimizing our business, production and workforce

globally; and contributing to society. Our target order volume

is set at USD 11 billion, up USD 650 million on the previous

year due to an expansion in orders received for FPSOs and

drillships.

Key Figures

Major Operating Performance

2010 2009 2008

Sales 12,074.5 12,442.5 11,074.6

Operating Income 1,011.1 684.5 1,031.6

Net Income before Income Taxes 1,024.3 768.1 579.7

Net Income 780.1 577.5 401.7

(KRW Billion)

Net Income(KRW Billion)

780.1

577.5

401.7

2010

2009

2008

Total Assets(KRW Trillion)

14.2

15.1

16.0

2010

2009

2008

Sales(KRW Billion)

12,074.5

12,442.5

11,074.6

2010

2009

2008

DSME ANNUAL REPORT 2010 04

2010

2010 New Orders(%)

Sales Breakdown(%)

New Order Breakdown(%)

Order Backlog Breakdown(%)

49.3Offshore

44.4Commercial Ships

2010

2010 Shareholder Structure(%)

31.26KDB

22.91Foreigner Ownership

1.22 Treasure & ESOP

25.50 Others 19.11

KAMCO

● LNGC ● Tanker ● Containership ● Offshore ● Others

2010

2009

2008

9 19 1322 37

15 11 1227 35

31 12 1414 29

2010

2010

2009

2009

2008

2008

17

17

23

15

11

23

28

49

40

18

17

36

11

46

34

4

5

10

15

27

14

13

10

21

28

35

33

6.3 Others

05KEy FIGURES

CEO Message

As an environmentally responsible heavy industries

group, we will work toward ensuring future growth and

profitability in partnership with our shareholders. I hope

you will join us as we create a better future.


Last year represented a breakthrough in our efforts to overcome the

global economic crisis that began in 2008, as we made a qualitative

leap forward. DSME has successfully pursued its goal of becoming one

of the world’s top heavy industries groups thanks to your unyielding

dedication and loyalty as shareholders.

Although the global economy has begun to recover, turmoil in the

European economy still threatens to impede future economic growth.

However, with all our employees and executives joining forces and

working together over the past year, we have successfully received

orders for ships and offshore plants worth over USD 10 billion,

maintaining our world’s No.1 position for two years running. The

volume of orders DSME received in 2010 made it the most successful

year since the onset of the economic downturn in 2008.

We have achieved significant advances in revenue and operating

income with revenue amounting to KRW 12.075 trillion and an

operating income of KRW 1.011 trillion. Through these figures, DSME

has rejoined the ‘10-1 trillion club’ – a term for firms that achieve more

than 10 trillion won in revenue and 1 trillion won in operating profit

on a yearly basis – for the second time since 2008. It is never easy for a

non-conglomerate to achieve such a goal. All of this is attributable to

your unsparing support and devotion, and I sincerely pledge that we

will dedicate all of our efforts to fulfill your continuing expectations.

This year will be another challenging year. Despite the surging volume

in shipping orders and the global economy recovery, we cannot

be complacent. China, in particular, out performs Korea in terms of

order volume and the industry’s strong government support, despite

being technologically behind Korea. As a result, competition among

shipbuilders will certainly intensify over the short- to mid-term.

Regardless, DSME is committed to transforming any threats into

opportunities and further develop by regrouping and outlining new

goals to achieve. We will maintain our current status as a member of

the ‘10-1 trillion club’ and strive to receive orders worth over USD 11

billion. This will spur us further to achieve projected revenues of KRW

40 trillion by 2020 as we become a heavy industries company capable

of providing total solutions to our customers.

We have three key management principles in place to achieve our

goals: securing the No.1 position in terms competitiveness in the

shipbuilding and offshore industries; securing future growth engines;

and maintaining a sense of ownership.

First of all, the shipbuilding and marine engineering industry faces

fierce competition with the benefits of the economic turnaround yet

to arrive. However, for us, this industry is analogous to seed money

for our sustainable growth. We will maintain our leading presence

in the market by securing a technological advantage for the next

generation of products, and ensuring cost competitiveness through

efficient operations. Moreover, we will strive to generate profits while

acquiring new orders in partnership with the countries we tapped

into over the past year.

We will strengthen our position to secure future growth engines

such as modular-based onshore plants and power facilities utilizing

CO2 capture technologies, while securing cost competitiveness and

expanding our market share in the wind power business. To this end,

we will do the utmost to globally optimize our business, production

and workforce.

Lastly, we will imbue our workforce with a sense of ownership. We

will act with the mindset of ‘owners’ wherever we may be in order to

practice our two management principles set out above. Our business

environment is rapidly changing, requiring us to advance into new

fields, and our sense of ownership will be a weapon that ensures

our workforce successfully adapts to these changing conditions.

We are dedicated to seeking creative solutions to any problems we

encounter as we actively work to provide our customers with the best

desired results, and we hope we can count on your continued trust

and support as we makes this journey together.

Through these endeavors, DSME will achieve its goals regardless of

the challenges or circumstances confronting it, and will continue to

be the world’s No.1 integrated heavy industries group so that we may

share the fruits of our harvest with you.

While there are many changes ahead, including changes in corporate

governance, we will do our utmost to reward your support and

encouragement. By embodying the ideal that each and every worker

is an owner of DSME, we will continue to strive toward achieving our

goal of becoming the world’s No.1 integrated heavy industry group.

We will ensure your satisfaction as shareholders, enable all our

employees and executives to find value in their work, and grow into

a top-ranked enterprise that benefits society through its continuing

social contributions. Once again, thank you for your encouragement

and support, and I wish you and your family good health and

prosperity.

Nam, Sang-taePresident & CEO of DSME

07CEO MESSAGE

THE FIRST QUARTER

1. Develops a strategic partnership with Russia

DSME’s President & CEO Mr. Sang-Tae Nam met

with Russian Prime Minister Vladimir Putin in

Vladivostok to develop a strategic partnership.

During the meeting, Prime Minister Putin pledged

to make the new USC-DSME joint venture a

top government priority. The shipyard, to be

constructed in the Russian city of Bolshoi Kamen

in Primorsky Krai, will focus on various large-sized

commercial vessels as well as offshore & onshore

projects needed in Shtokman, Yamal and the

Sakhalin Oil & Gas Fields.

2. Wins an order for five SUEZMAX crude oil carriers from Angola-based Sonangol

DSME signed a USD 350 million order for five

SUEZMAX crude oil carriers with Angola based,

Sonangol. DSME is scheduled to deliver the

vessels from the middle of 2011 to early 2013.

DSME and Sonagol have maintained a close

relationship since their first offshore plant contract

was signed in 1995. This order marks the pinnacle

of a fifteen-year relationship built on mutual trust

and respect.

3. Partners with MAN Diesel to develop environmental-friendly vessels

MAN Diesel, the world’s leading providers of diesel

engines for marine and power plant applications,

signed an agreement with DSME develop a high

pressure gas ship propulsion system. If applied to

a 14000 TEU container vessel, this system could

reduce annual operating costs by around USD 12

million, based on current gas and oil prices. The

two companies will develop an environmentally

friendly system to supply high-pressure gas for

MAN Diesel’s ME-GI engine.

4. Signs MOU with Nova Scotian government on wind power

DSME reached an agreement with the provincial

authorities regarding the creation of a joint

business venture to produce a wind turbine

plant in the Canadian province of Nova Scotia,

with a capital investment of 40 million Canadian

dollars. DSME also signed a Memorandum of

Understanding (MOU) with Nova Scotia Power

Inc. (NSPI), the power generation and delivery

company in Nova Scotia that will provide it with a

wind turbine component manufacturing plant.

THE SECOND QUARTER

5. Wins an order for a new submersible drilling rig from KNOC

DSME won an order for a new submersible drilling

rig from a consortium led by the state-run Korea

National Oil Corporation. The vessel will be built

using a barge-type design and will be used for oil

exploration in the Zhambyl oil field in Kazakhstan.

This order was especially significant as it is a

tangible achievement complimenting DSME’s

overseas energy development plans, and will lead

to additional orders for the production facilities

and plants required in the Zhambyl Oil Field.

6. DSME CEO Wins Top CEO Award

On May 4th, DSME’s President & CEO Mr. Sang-

Tae Nam received the 42nd Korean Top CEO

Award for his contribution to the development

of Korean shipbuilding industry. The award, run

by the Korea Management Association (KMA),

gives recognition to executives who have made

significant contributions to their companies. The

award is one of the country’s top management

prizes and holds great prestige.

7. Establishs joint venture with Russia

DSME signed an agreement with Russian United

Shipbuilding Corporation (USC) to build a joint

shipyard in Zvezda, near Vlasvosto, Moscow.

The joint venture is an extension of an earlier

agreement the two companies signed in 2009 to

modernize the Zvezda Shipyard.

8. Wins USD one billion worth of new orders in June

DSME received shipbuilding orders worth USD

one billion in June. DSME signed a contract with

a client from South Asia to build three VLOCs

(Very Large Ore Carrier) valued at USD 350 million.

Scheduled for delivery by the beginning of 2013,

the vessels will measure 362 meters in length and

65 meters in width. With a payload capacity of

400,000 tons of ore, the loading and unloading

of cargo at port will be much easier due to an

innovative new ballast system.

THE THIRD QUARTER

9. Signs contract with Heerema Marine Contractors to build a pipe-laying vessel

On July 16th, DSME signed a contract with

Heerema Marine Contractors to build a pipe-

laying vessel. Scheduled for delivery by the end of

2012, the vessel will measure 215 meters in length

and 46 meters in width, and will be able to achieve

speeds of up to 14 knots. The vessel, which will

be fitted with 4,000 ton crane and pipe reels, is

able to lay pipes at an ocean depth of more than

3,000 meters. With the DPS (dynamic positioning

system) and the abandonment & recovery winch

system, the pipe-laying vessel can carry out

operations regardless of the environment.

2010 at a Glance

1 2 4 5 6


10. Receives an order from COTUNAV to build a luxury ferry

On July 26th, DSME received an order from

CoTuNav (Compagnie Tunisienne de Navigation),

a Tunisian state-run shipping company, to

build a luxury ferry. This contract is valued at

approximately 310 billion won, with DSME

scheduled to make delivery by the beginning of

2012.

11. Emerges as a player in the South African shipping industry

DSME entered into the South African shipping

market. Mr. Sang-Tae Nam, CEO & President of

DSME, met with South African President Jacob

Zuma to discuss economic cooperation in the

shipping business, and agreed to strengthen

their mutual cooperation. At the meeting,

President Jacob Zuma asked DSME to share its

wealth of experience in various industries such as

shipbuilding, construction, energy and shipping

to promote the economic development of South

Africa.

12. Successfully signs contracts to build an FPSO from Total

On August 23rd, DSME successfully signed a

contract to build an FPSO (floating, production,

storage and offloading) unit worth USD $1.81

billion with Total, a leading European oil company.

The FPSO, named CLOV FPSO, will operate in

waters off the west coast of Angola and was

named after the oil fields where it will operate.

It will also have a storage capacity of close to

180,000 barrels of crude oil. It is noteworthy

that DSME received this major project due to

its competitiveness, experience, and executive

capabilities.

THE FOURTH QUARTER

13. Wins a new order to build the Korean Navy’s Type-214 submarine

DSME received an order from the South Korean

navy to construct its sixth Type-214 submarine.

The 1800-ton submarine, which can perform

anti-ship and submarine warfare and blockade

enemy bases, is expected to be a core aspect

of the Korean Navy’s military strength. DSME is

scheduled to deliver the Type-214 submarine by

2014.

14. DSME’s joint venture company in Russia wins its first contract

Zvezda-DSME, a joint venture between DSME and

Russia’s USC (United Shipbuilding Corporation),

successfully won its first shipbuilding contract.

On October 20th, Zvezda-DSME signed a contract

to build 12 crude and refined oil carriers with

Sovcomflot, a Russian state-owned shipping

company. Signed in the Kremlin, the contract

is worth approximately USD 800 million. The

contract is especially meaningful as it is the first

successful result of DSME’s localization strategy

for the Russian shipbuilding market.

15. Acquires stake in Angola-based PAENAL shipyard

DSME entered the African shipbuilding market by

acquiring a 30 percent stake in Angola’s Paenal

Shipyard in a deal signed with Sonangol Holdings

and SBM Offshore. Paenal Shipyard is located

near the city of Porto Amboim, 300 km south of

Luanda. The joint venture between Sonangol,

an Angolan state-owned oil company, and SBM

Offshore, a Netherlands-based marine technology

company, was established in August 2008. DSME

plans to participate directly in the management

of the Paenal Shipyard by providing expertise on

the operation and management of shipyards and

offering consulting services on the construction

techniques of marine structures.

16. Wins orders for a Drillship and Semi-submersible drilling rig

On December 8th, DSME successfully signed

a contract to build a drillship and a semi-

submersible drilling rig worth USD 1.08 billion

with an America-based offshore drilling company.

The two vessels will be constructed at the DSME

shipyard in Okpo, Geoje Island. The drillship is

scheduled to be delivered by March of 2013 and

the drilling rig by August of 2013. Measuring

243 meters in length and 42 meters in width, the

vessel will be a standard DSME drillship.

17. Joins the 10 Trillion Won Sales and 1 Trillion Won Operating Income Club

DSME posted record-high annual sales of around

12 trillion won in sales and approximately 1

trillion won in operating income in 2010, up 47.7

percent from the previous year. DSME was able to

post such high earnings as we concentrated on

building high value-added products such as LNG

ships, ultra large container ships, and drillships.

10 11 12 13 16

092010 AT A GLANCE

Operation ReviewShip Business 12 / Offshore Business 14 / New Growth Engines 16 Research & Development 18 / HSE 20 / Board of Directors 22

5.09 Offshore

4.59 Commercial Ships

0.65 Others

8.0

6.0

10.0

4.0

2.0

0

n e w o r d e r s

( U S D B i l l i o n )


OPERATION REvIEw

DSME has been a pioneering force behind Korea’s shipbuilding industry, and has grown into a global leader in shipbuilding and offshore structures. Today, equipped with our expertise and spirit of innovation, we are charting a new course to transform ourselves into a global integrated heavy industries company.

To make our vision reality, we continue to work as true partners for our customers, bringing our experience, competency and commitment to the table. our innovation and dedication has brought high levels of sustainable growth for our company and significant returns for all our customers across the globe.

TowARD SuSTAinABlE GRowTh

11

Ship Business

With record shipbuilding contracts,

2010 was one of our most successful

years to date with 63 commercial ship

orders.

New orders:63(Ships)

KRW7,272 billion

60% of Sales

USD4.59 billion

44% of New orders


OPERATION REvIEw

KRW7,272 billion

Ship Business Offshore Business New Growth Engines Research & Development HSE

DSME boasts world leading technology and competitiveness

in commercial shipbuilding ranging from LNG carriers, LNG-

RVs and supertankers to ultra-large containerships, cape-size

bulk carriers, LPG carriers, and pure car carriers.

Despite a slowdown in shipbuilding orders due to the

ongoing global economic downturn, DSME received 63

commercial ship orders in 2010.

While all projections were for a rapid drop in orders for

traditional major ships like bulk carriers and containerships

as a result of the economic slowdown in the international

markets, we acquired orders for 12 ultra-large containerships

in the latter half of 2010 and now lead the new containership

market. Our sales diversification strategies enabled us to

focus on highly-functional specialized ships, and we were

able to dominate the market by receiving orders for five

open hatch-type bulk carriers and one passenger ship.

We also received orders for eight very large crude carriers

(VLCCs) and five Suez tankers. This success can be attributed

to cost competitiveness achieved through our consistent

cost reduction efforts, product competitiveness through

our continuous facility investment, and our technology

development and intensive focuses on sales capacity.

Recognizing growing demand for green ships, we have

successfully developed a variety of green and energy-saving

technologies and now dominate this vital growing market.

Setting ourselves apart from our competitors, we have

actively developed and applied efficient and innovative new

green technologies to our vessels, such as pre-swirl stators

and LNG-fueled ships, thereby protecting the environment

while simultaneously guaranteeing financial benefits for our

customers.

Thanks to our dedication and effort, nine of our ships

delivered in 2010 received top scores and were ranked

among the world’s best by such renowned industry

publications as Naval Architect, Maritime Reporter, Marine

Log, and Fair Play. Furthermore, our technological prowess

and superior quality has been recognized the world over

with our ships receiving recognition for excellence for over

20 years.

Our naval vessel business includes destroyers, submarines

and patrol boats for the navy and maritime police of

various countries, as well as on-going maintenance. In the

special shipbuilding category, where we build and maintain

submarines and special private ships, we successfully built

the world’s most advanced 10,000-ton Aegis destroyer,

delivering it to the Korean navy in August 2010. We also built

and delivered eight medium-size maritime police patrol

boats, and began construction on a Type-214 submarine after

obtaining the relevant technologies and materials.

We also executed maintenance work for a Type-209

submarine delivered to the Korean navy, and performed

maintenance on an Indonesian navy submarine. We are

currently working on the basic design for a submarine that

meets local needs, and have completed the basic design

for a surface ship which is now moving onto the detailed

design and construction phase. We have also received orders

for training ships and auxiliary ships from Malaysia, and

have taken the No.1 position in Korea in terms of defense

contracts.

13

Offshore Business

2010 was one of our best years for

offshore business with orders in a range

of areas from semi-submersible drilling

rigs to the largest platform plant

installation vessels built to date.

49% of New orders

USD5.09 billion

New orders:10(Ships)

39% of Sales

KRW4,679 billion


OPERATION REvIEw


In 2010, DSME acquired orders for 10 offshore projects,

including five for world-renowned oil companies such

as ExxonMobil, Total and Chevron, paving the way for

sustainable growth in its offshore business. The value of

DSME’s contract with Total for FPSO vessels exceeds KRW

2.14 trillion and will be carried out as a turn-key project, with

construction based on our exclusive technologies and the

experience gained from successfully completing other large-

scale projects.

We also secured an order for the world’s largest platform

plant installation vessels from Allseas Group SA in

Switzerland. Measuring 382 meters in length, 117 meters in

width and 29 meters in height, they will be twice the size of

the largest existing platform installation vessels. Furthermore,

weighing 120,000 tons, they will be three times heavier than

existing VLCCs. With the demand for the disbanding of old

offshore structures expected to surge, we expect even more

opportunities in this field.

In the drillship field, we received an order for one drillship and

one semi-submersible drilling rig from a drilling company in

the U.S., where we have maintained competitive dominance,

acquiring orders for a total of nine semi-submersible drilling

rigs for the same model since 2005.

In 2010, the last in a five-ship order from Transocean was

delivered. With delivery beginning in 2006, we were able to

successfully deliver five drillships of the highest quality on

schedule, reflecting our excellence in the area of drillship

construction.

Our growth in the offshore business has been steady, and we

expect 2011 to be another flourishing year with new energy

development projects occurring across the world due to

ongoing rises in crude oil prices.

15

New Growth Engines

DSME is actively exploring and

developing new environmentally

sustainable technologies including

energy and plant to drive new

growth for decades to come.

WIND POWER BUSINESS

Wind power is one of the fastest-growing markets in the

energy sector. Today, after more than twenty years of

technological and organizational growth, wind energy is

breaking new ground. Numerous new players are appearing

in the international markets with the aim of promoting the

economic and ecological conversion of the energy industry

in their own countries. Expertise in wind energy technology

is in great demand internationally. Performance, experience,

reliability and innovative power are the main criteria being

brought to bear in the wind energy sector in the 21st century.

DSME’s acquisition of wind-turbine developer, DeWind Inc.

was a pivotal move for its advance into the wind energy

market. DeWind focuses on the design, R&D, marketing, and

servicing of wind turbines while components are procured

from third party suppliers. The establishment of DSME

Trenton, a manufacturer of wind energy equipment has

allowed DSME to expand its portfolio in a logical manner to

include a further important area of technological growth.

DSME will provide DSME Trenton with major raw materials

leveraging its strong bargaining power and utilizing its global

supplier network. DSME Trenton is a subsidiary company to

design & manufacture wind towers and blades. The products

will be sold through DeWind’s support in basic design,

outsourcing, operational back-up, etc. In addition, DeWind is

currently developing the larger megawatts on offshore wind

turbine.


OPERATION REvIEw

VISION ROADMAP • Obtainleadingpositionsinbusinessdomains(Shipbuilding/Offshore/Plant/Newrenewableenergy)

• Establishaself-continuouscycleofsustainablegrowth

•No.1inshipbuilding&offshorebusiness

• Enterthetop-tierinenergyplantindustry

• Balancebusinessportfoliowithgrowthandrelevance

2020 World’s No.1 Integrated Heavy Industries Group

2013-2015 Entering the Top Tier

2011-2012 Preparing for Take-off

• Buildafoundationforreshaping

•Launchnewbusinessandproducts(Modularplants,F-LNG,WindPower,etc.)

•Morecreativeculture

Ship Business Offshore BusinessNew Growth Engines Research & Development HSE

( )Vision 2020 World’s No.1 Integrated

Heavy IndustriesGroup

SEASHORE/BARGE-MOUNTED MODULAR PLANTS & OTHERS

Based on our proven offshore integrated technologies, DSME

offers proper business solution near shore. DSME is taking the

leading in developing cutting–edge new building experience

closely related to the barge-mounted modular plant. More

specifically, we constructed BMPP (barge- mounted power

plant) as oil fired power plant at Khanom, Thailand as well as

barge mounted seawater treating plant at Alaska’s Prudhoe

Bay. Furthermore, DSME completed construction of the

Pazflor FPSO (floating production, storage and offloading) for

Total, the world’s largest offshore oil production facility, which

will be installed off of the shores of Angola by the second half

of 2011. Designing and building the equipment required to

develop Pazflor required DSME to marshal the know-how of

hundreds of people at dozens of industrial sites worldwide.

Having the necessary experience in conducting plant

business, DSME is able to provide various modularized

options; At-Shore Barge-mounted Modular Power Plant in

Harbor Area, Floating Barge-mounted Modular Power Plant,

and Onshore Skid-mounted (Truss-based) Modular Power

Plant. Compared to Conventional models, Barge Mounted

Power Plant have definite advantages: high efficiency and

productivity, ability to maintain the original integrity of the

components during transport and the shortest possible

delivery period. By using Barge-Mounted Modular plant

process, we expect to achieve cost reduction, especially in

indirect cost, temporary buildings/facilities cost, field labor

cost and field subcontracting cost. DSME is also looking

forward to developing green energy field such as Coal-

Fired Power Plant with CCS (Carbon Capture Storage). A

CO2 capture plant integrated with a power plant using

commercially-proven components such as carbon dioxide

absorption that use harmless inorganic chemicals, in a

capture technology widely employed in the petrochemical

industry.

17

Research & Development

Our commitment to research and

innovation has allowed us to create

a variety of new innovative green

technologies to ensure a better future.DSME operates research centers staffed with more

than 350 top-notch engineers devoted to fostering

new growth engines, developing products and

technologies, improving the performance of key

products, and enhancing productivity. The Future

Product Business Development Institute works

to develop products that are expected to create

new markets in the future, and conducts studies

on environment-friendly, human-focused business

areas and intelligent robotics. The Ship & Ocean

R&D Institute works to develop the fundamental

technologies and design governing fluid dynamics,

structures, vibration and noise, as well as ship

and plant automation. The Industrial Application

R&D Institute researches welding methods, weld

deformations, measurement technologies and

coating and anti-corrosion for ships and offshore

structures, as well as the early stabilization of new

businesses.

Expenditures in R&D(KRW Billion)

12.9

5.1

24.1

2010

2009

2008


OPERATION REvIEw

In 2010, the Ship & Ocean R&D Institute developed:

environmentally friendly LNG-fueled ships for market

promotion; a standard model and component technology

for the DSME LNG FPSO, a storage system for DSME LNG; the

ducted PASS, a DSME fuel reduction device; a machine that

reduces the formations of air pockets; a VOC-reducing green

shipping system; and technology for evaluating CCS intensity,

while also domestically producing bulk handling system

and DP simulation technology. In the basic design area, the

Institute developed the 55K open hatch bulk carrier, the

DSME NEO Panamax a new RORO vessel, a standard model

for the WTI Vessel DSME, the 53,800GT cruise ship, and the

DSME Suezmax – a twin skeg shuttle tanker.

The Industrial Application R&D Institute conducted research

and development in the following areas to increase

productivity and the competitiveness of major products

while reducing any risk or waste factors: development

of plate coating automation devices; development of

flammable gas measuring devices for spraying; research on

the expanded application of pile welding devices on a fixed

horizontal position; research on high-competency welding

techniques for the overlapping joints of plate block butts;

improvement of large-scale roll devices used to process

curved plates for ships; development of measuring devices

to arrange shafts and pipes; technological developments

for optimal construction of stripe coats and their practical

application; and development of a coating to prevent the

corrosion of decorative goods for the LNGC Weather Deck

SUS and their application to ships.

The Future Product Business Development Institute is

responsible for research into future growth drivers. Its

main task is to support the company’s business objective

by developing products and solidifying the foundation for

modular plant products, discovering new and renewable

energy initiatives, creating offshore and ship products,

and developing intelligent robotic systems. The institute

is coming up with diverse forms of new products and

technologies and component technologies, as well as

identifying and pursuing new businesses. The Institute has

developed technologies in preparation for entering the

wind power generation business; process analysis models

for PFBC power plants that employ CO2 capture and storage

technology; new independent storage tank technology;

navigation and control technologies for unmanned offshore-

exploration submarines; and blade and offshore platform

concept design technologies for offshore wind power

generation systems.

Along with ongoing research into design technologies

to maximize productivity, quality and efficiency in our

core products, DSME is directing its focus toward project

engineering and basic technologies to build high value-

added offshore structures.

We are taking the lead in developing cutting-edge new

products such as LNG-fueled ships, LNG FPSOs, LNG FSRUs,

arctic ships (B/Cs, tankers), arctic drillships, and cruise ships

that will serve as future growth engines. We are also pursuing

new business oriented toward the environment and people

to lead the second phase of our F1 ongoing development

strategy and drive future growth. These drivers include new

energy facilities, equipment related to the environment and

climate, and innovative plants.

Ship Business Offshore Business New Growth EnginesResearch & Development HSE

19

HSEDSME is committed to protecting its

most important resource – its work-

force. Through our comprehensive

health and safety programs, we ensure

the wellbeing of all our employees. Recognizing the importance of health, safety and

the environment (HSE), DSME’s top priority is to

practice ‘HSE First Management’ as it strives to grow

into the world’s leading integrated heavy industries

group.

DSME conducts consolidated HSE management

through its safety and occupational health

management (OHSAS 18001) and environmental

management (ISO 14001) systems. In addition,

DSME acquired KOSHA 18001 (Safety & Health

Management System) cer t i f icates in 2010.

Implementation of our integrated HSE system is

evaluated through a quarterly monitoring system

and internal and external audits – the results of

which are reported to the CEO and analyzed for

areas of improvement.

GHG Emissions(Unit: CO2 Ton/Year)

384,425

426,097

365,959

2010

2009

2008


OPERATION REvIEw

HEALTH

DSME conducts general, special and comprehensive

h e a l t h c a re fo r a l l i t s e m p l oye e s a n d m a n a g e s a

comprehensive health and safety management system.

We actively carry out preemptive health management

for employees and executives to ensure their wellbeing

and good health. In particular, we target high-incident

and prominent diseases such as cardiovascular conditions

for early discovery and prevention. Since 2009, DSME has

implemented health check-ups for all employees and their

spouses, helping employees manage their family’s healthcare

needs. DSME assists its employees’ health management by

promoting healthy lifestyles and habits through anti-smoking

and fat reduction programs. These and other endeavors

earned DSME an award from the Minister of Health and

Welfare in 2007 for its anti-smoking campaign in the

workplace. In addition, DSME’s workforce and management

conducted a blood donation campaign in 2009, receiving an

achievement award on World Blood Donor Day.

SAFETY

DSME conducts multifaceted and systematic programs

to provide the safest workplace possible and regards

safety as a top priority in corporate management. DSME

operates an HSE management performance system for each

division, which manages the system of safety checks, safety

education, prevention of accidents, implementation of the

HSE management program, and the ergonomics program.

By indexing each item in real time, DSME has strengthened

its programs to prevent accidents and quantify daily safety

management. Moreover, the HSE system has worked to boost

morale and prevent accidents through a safety mileage

system that award divisions and individuals that excel in safe

practices.

DSME operates a three-stage safety education program for

all new employees, with effective training also provided

through experience-based programs at the HSE experience

zone, and practical safety education for division-specific

areas.

ENVIRONMENT

Since declaring its intention to become the industry’s

first ‘green shipbuilder’, DSME has conducted strong

environmental management to become a global green

company and exert strong green management.

DSME operates an enterprise-wide campaign aimed to

reduce waste by 20% in order to respond to global warming

and reduce its carbon footprint, and to fulfill its climate

change commitments. Since signing a voluntary agreement

to lower volatile organic compounds (VOCs), the level of

VOC usage has dropped by 29.7% compared to 2006. DSME

voluntarily prepares for environmental regulations at home

and abroad by forming related task forces and organizations,

and has established a greenhouse gas inventory.

In 2010, DSME reduced wastes through water recycling and

the recycling of waste paints and resources, saving KRW 1,958

million.

DSME spent KRW 13.56billion in four environmental

categories including pollution prevention, pollution

treatment, environmental risk management and social

environment in 2010. DSME also dedicated a total of KRW

6.97billion toward the promotion of environmentally friendly

programs such as waste reduction and recycling.


21

Board of Directors

The BOD is primarily responsible for protecting the interests of

shareholders and ensuring the overall soundness of the company’s

management. To effectively carry out its role, the BOD operates within

a governance framework that assures its complete independence and

transparency.


BOARD OF DIRECTORS

Nam, Sang Tae DSME, President & CEO

Kim, You hun DSME, Senior Executive

Vice President & CFO

Lee, Young ManDSME, Senior Executive

Vice President & General Manager of Shipyard

Song, hee JoonProfessor of Public Administration at

Ewha Womans University

Kim, Ji hongProfessor of KDI School of

Public Policy & Management

Kim, Young ilThe Former Secretary General of

Global Korean Forum

23

Leading the way forward toward a better tomorrow, DSME is actively working to develop and refine cost-efficient, environmentally-friendly technologies. Though innovation and a meaningful commitment to environmentally sustainable development, we have become market leaders in a range of green-technologies.

our active commitment to green innovation has led DSME to create better, more efficient products that meet all of our clients’ future needs, while at the same time helping preserve our environment for the next generation. We will not only deliver a better future for our shareholders and workforce, but for our children and grandchildren to come.

FoR A BETTER ToMoRRow

Management’s Discussion & Analysis 26 / Independent Auditor’s Report 29 Non-Consolidated Financial Statements 30 / Notes to Non-Consolidated Financial Statements 37

Financial Review


FINANCIAL REvIEw

401.7

780.1

577.5

201020092008

n e t i n c o m e

( K R w B i l l i o n )

25

Management Discussion & Analysis

1. Overview

2010 was another successful year for Daewoo Shipbuilding & Marine Engineering Co., Ltd.(DSME) in which we delivered an excellent profit result in challenging trading conditions. DSME posted sales of KRW 12,074,505 million in 2010, down 3% (KRW 368,014 million) year on year. However, our operating income reached KRW 1,011,077 million, with an income before tax of KRW 1,024,332 million and a net income of KRW 780,132 million. As such, we saw record levels profitability and financial stability. DSME’s record 2010 profit result was driven by strong performances from strengthening our leading position in the global shipbuilding & offshore products.

We achieved a profit rate of 8.4% despite declining volumes and other challenges including the downturn in global logistical volumes and the higher costs of imported raw materials amid the ongoing global financial crisis. Leading the shipbuilding industry with outstanding performance in commercial ships, offshore products, DSME now stands out as a top performance among the many competitors in the renewable energy field as well.

2. Performance Results

Sales

Sales for 2010 reached over KRW 12 trillion, with operating income reaching over KRW 1 trillion. This shows a year-on-year increase of 47.7% for operating income, 33.4% for income before taxes, and 35.1% for net income. DSME re-joined rejoined the ‘10-1 trillion club’ with over KRW 10 trillion in revenue and KRW 1 trillion in operating profit for the first time since 2008, reflecting the outstanding enhancements made to DSME’s corporate scale and profitability. Only 24 companies joined the ‘10-1 trillion club’ this year, and DSME’s inclusion can be attributed to our employees’ unsparing effort and devotion to cutting costs and increasing productivity, despite the numerous difficulties facing us – such as the downturn in the shipbuilding market and other negative externalities resulting from the financial crisis.

The number of orders settled in 2010 amounted to KRW 11,489,066 million – a sharp increase of 174% from the previous year. This strong increase in order volume was driven by a greater focus on our key competencies in shipbuilding and specialized vessels, and we expect this trend to remain in the years to come. In the shipbuilding business, sales focused on high-function, specialized vessels in line with our business diversification strategies. As such, DSME has paved the way to achieve stable future revenue by retaining a differentiated market position from our Chinese counterparts that mostly focuses on conventional bulk carriers and tankers. Our experiences and technical know-how accumulated through many successfully implemented large-scale projects have been recognized worldwide in terms of plant orders in the offshore sector. We are now planning to establish the groundwork to move into high value-added products, while also initiating new businesses based on our diversified portfolio and strong technological prowess.

Summary of Income Statements

2010 2009 2008

Sales 12,074.5 12,442.5 11,074.6

Gross Profit 1,397.0 978.7 1,324.8

Operating Income 1,011.1 684.5 1,031.6

Income before Taxes 1,024.3 768.1 579.7

Net Income 780.1 577.5 401.7

(KRW Billion)


FINANCIAL REvIEW

Profitability

DSME showed strong improvements in our profitability, with gross profit rising from 7.87% in 2009 to 11.57% in 2010. This growth can be attributed to the aforementioned diversification in our product line, the production of value-added products through continued R&D activities and cost reduction on the production sites. This growth in profit is even more impressive considering the skyrocketing costs of raw material such as steel products in 2010, which resulted in many companies suffering from lower than projected profit margins.

Our operating income reached KRW 1,011,076 million, an increase of 47.7% from the previous year. As a result, DSME was able to once again rejoin the ‘10-1 trillion club.’ In addition, depreciation and other expenses were set due to the possibility of a recovery in SG&A expenses and manufacturing costs. Severance benefits and development costs also increased as we moved to improve employee welfare. These achievements reflect DSME’s unprecedented qualitative growth and contribute to our employees’ wellbeing. Furthermore, DSME’s goal of enhancing Korea’s national competitiveness was steadily implemented, with our higher profitability maximizing shareholder value.

For non-operating income, income gained from derivatives held to hedge volatile risks such as fluctuations in exchange and interest rates reached KRW 28,366 million, showing that DSME can achieve stable growth despite the changes in the external environment. Net income, in particular, reached a record-high of KRW 780,131 million. This excess in revenue will pave the way for DSME to become a global leader in the field as it will be reinvested back into various growth ventures and research activities to maximize value for the future.

Status of Orders The growth rate for new orders in shipbuilding increased by 157%, while offshore business achieved a growth rate of 239%. This dramatic growth is partially a result of the significant decline in sales orders in 2009, with sales in 2010 reaching numbers similar to 2008, marking a significant turnaround since the global economic crisis.

In the shipbuilding sector, 12 new orders came in for large-scale containerships – a high value-added product. In the offshore business, we signed order contracts with several different countries, and are projected to witness further increases in orders for such value-added products in 2011. At a time when the competition to secure natural resources is getting fiercer, we expect the business volume in offshore plants to increase. As such, our seasoned experience and superior technical know-how will enable us to secure the edge when competing with global players.

Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial Statements Notes to Non-Consolidated Financial Statements

Status of Orders (Ships) (USD Billion)

250

200

150

100

50

02008 2008

22842.8

11.6

3.6

10.33

34.9 33.84

58

29

78

190200

2009 20092010 2010

50

40

30

20

10

0

Order Backlog

New Orders

27

3. Financial Structure

Assets & Liabilities DSME’s total assets amounted to KRW 14,176,729 million, down KRW 959,629 million (6.4%) from the 2009 level of KRW 15,136,358 million. This has been mostly driven by a KRW 534.3 billion reduction in raw materials and by increases in loan loss provisions worth KRW 845.5 billion. Excluding these factors, a similar pattern with the previous year can be found. Liabilities, meanwhile, amounted to KRW 10,133,496 million, down KRW 1,745,283 million (14.69%) from 2009’s figure of KRW 11,878,779. This can be attributed to a reduction in liabilities recognized in conjunction with a year on year increase of KRW 1,614,859 million in derivatives revenue.

Shareholders’ EquityShareholders’ equity amounted to KRW 4,043,234 million, up KRW 785,655 million compared to 2009’s figure of KRW 3,257,579 million, and was mostly driven by increases in net income. This improved profitability is reflected in DSME’s improved debt-to-equity ratio of 250.63%, down 364.65% from the previous year. Overall, DSME’s financial stability has strengthened dramatically.

4. Future Outlook Global economic growth in 2011 is projected to maintain the downward trend of the past two years as inflation continues to drive up the price of raw materials. The challenges ahead for DSME will become even more severe due such externalities as the challenge from Chinese shipyards and Singapore shipyards. However, despite these challenges, we will continue to bolster R&D to maintain competitiveness for our major key products. We aim to continue obtaining revenues of over KRW 10 trillion and operating income of KRW 1 trillion by improving our management fundamentals through business efficiency such as securing additional growth engines, optimizing the workforce, and enhancing our contribution to social causes and charities. We will also strive to reach an order volume of over USD 11 billion by bolstering our efforts to receive new orders. In particular, given that the offshore business is under the global spotlight amid high oil prices, our order volume is projected to flourish.

Summary of Statements of Financial Position

2010 2009 2008

Current Assets 7,297.4 9,020.0 9,382.4

Property, Plant and Equipment 4,054.0 4,008.5 2,638.5

Other Assets 2,825.3 2,107.9 3,932.7

Total Assets 14,176.7 15,136.4 15,953.6

Advances from Customers 4,272.6 4,909.4 5,702.9

Other Current Liabilities 3,851.9 4,483.5 4,163.8

Other Liabilities 2,009.0 2,485.9 4,019.0

Total Liabilities 10,133.5 11,878.8 13,885.7

Total Shareholders’ Equity 4,043.2 3,257.6 2,067.9

(KRW Billion)

Asset Soundness

(%)

100

80

60

40

20

02008

95.1

10.6

64.561.0

96.0 95.1

2009 2010

Current Ratio

Debt-to-equity Ratio (Borrowings / Equity)


FINANCIAL REvIEW

Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial Statements Notes to Non-Consolidated Financial Statements

Independent Accountants’ Review Report English Translation of a Report Originally Issued in Korean

To the Shareholders and Board of Directors of Daewoo Shipbuilding & Marine Engineering Co., Ltd.

We have audited the accompanying non-consolidated statement of financial position of Daewoo Shipbuilding & Marine Engineering Co., Ltd. (the “Company”) as of December 31, 2010, and the related statements of income, appropriation of retained earnings, changes in shareholders’ equity and cash flows for the year ended December 31, 2010, all expressed in Korean Won. These financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these financial statements based on our audit. The nonconsolidated statements for the year ended December 31, 2009 were audited by KPMG Samjong Accounting Corp. whose report, dated February 5, 2010, expressed an unqualified opinion.

We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010, and the results of its operations, changes in its retained earnings and its shareholders’ equity and its cash flows for the year then ended in conformity with accounting principles generally accepted in the Republic of Korea.

Accounting principles and auditing standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the financial position, results of operations, changes in shareholders’ equity and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those knowledgeable about Korean accounting procedures and auditing standards and their application in practice.

March 7, 2011

This report is effective as of March 7, 2011, the auditors’ report date. Certain subsequent events or circumstances may have occurred between the auditors’ report date and the time the auditors’ report is read. Such events or circumstances could significantly affect the accompanying financial statements and may result in modifications to the auditors’ report.

Notice to Readers

Asset Soundness

29

Non-Consolidated Statements of Financial PostionAs of December 31, 2010 and 2009

ASSETS

CURRENT ASSETS:

Cash and cash equivalents (Notes7and17) ￦ 478,177 ￦ 805,660

Short-term financial instruments (Notes3,7and12) 30,000 101,091

Short-term investment assets (Note4) 185 5,886

Trade notes and accounts receivable, less allowance for doubtful accounts of ￦12,794 million in 2010 and ￦4,339 million in 2009 (Notes7,12,17and28) 4,311,759 4,315,813

Short-term loans (Notes7and17) 82,054 31,407

Other receivables, net of allowance for doubtful accounts of ￦203,487 million in 2010 and ￦207,864 million in 2009 (Notes5,7and17) 61,505 150,805

Advanced payments 618,317 1,047,641

Prepaid construction costs 360,723 298,118

Current firm commitment assets (Note20) 711,599 1,111,184

Current portion of currency forward assets (Note20) 67,690 13,052

Current deferred income tax assets (Note26) 49,587 100,310

Inventories (Notes9and12) 454,824 989,217

Other current assets 70,944 49,774

Total current assets 7,297,363 9,019,958

NON-CURRENT ASSETS:

Long-term financial instruments(Note3) 35 35

Long-term investment securities(Notes4,7and12) 222,348 119,135

Investment securities using the equity method(Notes5and6) 575,390 509,749

Long-term loans net of allowance for doubtful accounts of ￦1,960 million in 2010 and nil in 2009(Notes5,7,17and19) 360,450 203,575

Property, plant and equipment , net of accumulated depreciation and government subsidies of ￦1,224,171 millionin 2010 and ￦1,080,692 million in 2009(Notes8,9,11,12,14,16and31) 4,054,020 4,008,492

Intangible assets(Notes10and31) 24,630 2,642

Long-term trade notes and accounts receivable, less present value discount of ￦102,904 million in 2010 and ￦14,186 million in 2009(Note17) 1,382,867 211,658

Firm commitment assets(Note20) 73,734 983,175

Currency forward assets(Note20) 119,549 18,691

Other non-current assets 66,343 59,248

Total non-current assets 6,879,366 6,116,400

Total Assets ￦ 14,176,729 ￦ 15,136,358

2010 2009(KRW million)

Seeaccompanyingnotestonon-consolidatedfinancialstatements.


FINANCIAL REvIEW

2010 2009

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:

Trade payables(Notes7and17) ￦ 1,024,504 ￦ 931,642

Short-term borrowings(Notes7,12,14and17) 1,036,968 996,493

Accounts payable-other(Notes7and17) 418,064 416,495

Accrued expenses(Notes7and17) 146,097 88,086

Advances from customers(Notes12,20and30) 4,272,597 4,909,434

Current portion of long-term borrowings(Notes7,12,14and17) 176,665 163,735

Current portion of capital lease liabilities(Notes8,16and17) 5,792 83,031

Provision for construction loss(Notes18and30) 8,098 391

Current firm commitment liabilities(Note20) 67,366 27,874

Current portion of currency forward liabilities(Note20) 745,939 1,593,332

Other current liabilities 222,357 182,367

Total current liabilities 8,124,447 9,392,880

NON-CURRENT LIABILITIES:

Debenture, net (Notes13and17) 669,909 498,385

Long-term borrowings(Notes7,12,14and17) 582,460 442,909

Long-term accounts payable-other(Note17) 122,935 143,183

Accrued severance benefits, net of severance insurance deposits and others of￦231,463 million in 2010 and￦187,119 million in 2009(Note15) 74,833 77,884

Provision for construction warranty costs(Note18) 74,591 72,012

Firm commitment liabilities(Note20) 122,121 21,881

Currency forward liabilities(Note20) 78,607 985,806

Capital lease liabilities(Notes8,16and17) 3,029 9,044

Deferred income tax liabilities(Note26) 280,563 234,794

Total non-current liabilities 2,009,048 2,485,898

Total Liabilities 10,133,495 11,878,778

SHAREHOLDERS’ EQUITY:

Capital stock(Note21) 961,954 961,954

Capital surplus(Note21) 728 200

Capital adjustments(Notes5and22) (29,949) (31,643)

Accumulated other comprehensive income(Notes4,5,8,20,23and26) 965,021 865,684

Retained earnings(Note24) 2,145,480 1,461,385

Total Shareholders’ Equity 4,043,234 3,257,580

Total Liabilities and Shareholders’ Equity ￦ 14,176,729 ￦ 15,136,358

(KRW million)

Management’s Discussion & Analysis Independent Auditor’s ReportNon-Consolidated Financial Statements Notes to Non-Consolidated Financial Statements


31

Non-Consolidated Statements of IncomeFor the years ended December 31, 2010 and 2009

SALES (Notes6,7,9,20,30and31) ￦ 12,074,505 ￦ 12,442,519

COST OF SALES (Notes7,20and30) 10,677,528 11,463,815

GROSS PROFIT 1,396,977 978,704

SELLING AND ADMINISTRATIVE EXPENSES (Notes25and31) 385,900 294,181

OPERATING INCOME(Note31) 1,011,077 684,523

NON-OPERATING INCOME (EXPENSES):

Interest income (expense), net(Note7) 3,209 (278)

Gain (Loss) on foreign currency transactions, net (8,521) 235,819

Loss on foreign currency translation, net (Note17) (26,449) (1,622)

Gain (Loss) on disposal of property, plant and equipment, net 974 (3,710)

Gain (Loss) on valuation of securities using the equity method, net(Note5) 20,526 (69,061)

Loss on valuation of firm commitment, net(Note20) (335,043) (691,376)

Gain on valuation of currency forward contracts, net 329,441 713,627

Gain (Loss) on currency forward transactions, net 33,966 (169,834)

Reversal of construction warranty costs 11,155 4,387

Others, net (16,003) 65,578

13,255 83,530

INCOME BEFORE INCOME TAX 1,024,332 768,053

INCOME TAX EXPENSE (Note26) 244,200 190,549

NET INCOME ￦ 780,132 ￦ 577,504

NET INCOME PER SHARE (Note27) ￦ 4,127 ￦ 3,055

2010 2009(KRW million, except per share amounts)



FINANCIAL REvIEW

For the years ended December 31, 2010 and 2009

Non-Consolidated Statements of Appropriations of Retained Earnings

2010 2009

UNAPPROPRIATED RETAINED EARNINGS:

Unappropriated retained earnings carried over from prior years ￦ 13,121 ￦ 3,465

Change in retained earnings using the equity method (1,513) (137,824)

Net Income 780,132 577,504

791,740 443,145

TRANSFER FROM VOLUNTARY RESERVES:

Reserve for research and human resource development - 10,000

Reserve for loss on disposal of treasury stock - 8,999

- 18,999

APPROPRIATION OF RETAINED EARNINGS

Legal reserve 9,500 9,500

Dividends :10% on par value at ￦500 per share in 2010 and 2009 94,523 94,523

Reserve for facility construction 630,000 230,000

Reserve for research and human resource development 50,000 115,000

784,023 449,023

UNAPPROPRIATED RETAINED EARNINGS TO BE CARRIED FORWARD TO SUBSEQUENT YEAR ￦ 7,717 ￦ 13,121

(KRW million)



33

Non-Consolidated Statements of Changes in Shareholders’ Equity For the years ended December 31, 2010 and 2009

(KRW million)


Accumulated other Capital Capital comprehensive Retained

Capital stock surplus adjustments income (loss) earnings Total

Balance at January 1, 2009 ￦ 961,954 ￦ 200 ￦ (30,843) ￦ 20,328 ￦ 1,116,228 ￦ 2,067,867

Dividend - - - - (94,523) (94,523)

Balance after appropriations 961,954 200 (30,843) 20,328 1,021,705 1,973,344

Changes in capital adjustments - (800) - - (800)

Gain on valuation of longterminvestment securities - - - (8,428) - (8,428)

Changes in valuation of equity method accounted investments - - - 55,254 - 55,254

Changes in retained earning using the equity method - - - - (137,824) (137,824)

Gain on revaluation of plant, property and equipment - - - 798,530 - 798,530

Net income - - - - 577,504 577,504

Balance at December 31, 2009 ￦ 961,954 ￦ 200 ￦ (31,643) ￦ 865,684 ￦ 1,461,385 ￦ 3,257,580

Balance at January 1, 2010 ￦ 961,954 ￦ 200 ￦ (31,643) ￦ 865,684 ￦ 1,461,385 ￦ 3,257,580

Dividend - - - - (94,523) (94,523)

Balance after appropriations 961,954 200 (31,643) 865,684 1,366,862 3,163,057

Changes in capital surplus - 528 - - - 528

Changes in capital adjustments - - 1,694 - - 1,694

Gain on valuation of longterm investment securities - - - 112,424 - 112,424

Loss on valuation of derivatives - - - (2,364) - (2,364)

Changes in valuation of equity method accounted investments - - - (9,959) - (9,959)

Changes in retained earning usingthe equity method - - - - (1,514) (1,514)

Loss on revaluation of plant, property and equipment - - - (764) - (764)

Net income - - - - 780,132 780,132

Balance at December 31, 2010 ￦ 961,954 ￦ 728 ￦ (29,949) ￦ 965,021 ￦ 2,145,480 ￦ 4,043,234


FINANCIAL REvIEW


Non-Consolidated Statements of Cash Flows

2010 2009

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income ￦ 780,132 ￦ 577,504

Adjustments to reconcile net income to net cash used in operating activities:

Depreciation 160,926 152,622

Amortization of intangible assets 372 6,133

Other bad debt expenses 99,649 3,450

Loss on foreign currency translation, net 26,443 1,548

Loss (Gain) on disposal of property, plant and equipment, net (974) 3,710

Loss on disposal of investment assets 13 26

Loss (Gain) on disposal of long-term investment securities, net (5,322) 1,349

Loss (Gain) on valuation of securities using the equity method, net (20,526) 69,061

Provision for severance benefits 74,792 61,871

Gain on valuation of currency forward contracts, net (329,441) (713,627)

Loss on valuation of firm commitment, net 335,043 691,376

Provision for (Reversal of) construction loss, net 7,707 (110,328)

Provision for construction warranty costs, net 12,791 20,246

Others, net 13,212 (2,399)

374,685 185,038

Changes in assets and liabilities resulting from operations:

Increase in trade notes and accounts receivable (1,322,991) (1,090,114)

Decrease (Increase) in other receivables 92,923 (328,853)

Decrease (Increase) in accrued income (32,814) 26,295

Decrease (Increase) in advanced payments 427,691 (78,494)

Decrease (Increase) in prepaid construction costs (62,605) 77,669

Decrease (Increase) in prepaid expenses 12,182 (2,435)

Decrease in inventories 534,393 656,303

Decrease in long-term trade notes and accounts receivable 16,566 -

Decrease in current deferred income tax assets 52,783 7,667

Decrease in non-current deferred income tax assets - 67,920

Decrease in firm commitment assets 1,113,714 2,014,481

Increase in currency forward contracts (1,583,765) (2,151,336)

Increase (Decrease) in trade payables 95,272 (11,553)

Increase (Decrease) in accounts payable-other 6,682 (305,225)

Increase in accrued expenses 58,390 30,300

Increase (Decrease) in income tax payable 26,830 (161,410)

Decrease in advances from customers (636,837) (793,434)

Increase in withholdings 15,383 10,529

(KRW million)


35


Non-Consolidated Statements of Cash Flows

2010 2009

Increase (Decrease) in long-term accounts payable-other ￦ (18,212) ￦ 128,872

Decrease (Increase) in severance insurance deposits (16,324) 29,840

Increase in retirement pension assets (28,181) (62,000)

Payment of severance benefits (33,500) (73,218)

Increase in non-current deferred income tax liabilities 14,276 2,464

Others, net (11,578) (36,400)

(1,279,722) (2,042,132)

Net cash used in operating activities (124,905) (1,279,590)

CASH FLOWS FROM INVESTING ACTIVITIES:

Decrease in short-term loans 12,808 25,024

Decrease in short-term financial instruments, net 71,091 648,247

Decrease of long-term investment securities, net 19,771 2,472

Increase of investment securities using the equity method (53,930) (112,893)

Increase of guarantee deposits, net (9,361) (8,751)

Increase in long-term loan (223,644) (72,024)

Increase of property, plant and equipment, net (204,828) (483,207)

Increase of intangible assets (22,360) (620)

Others, net 5,142 (3,431)

Net cash used in investing activities (405,311) (5,183)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from short-term borrowings 50,752 1,012,201

Proceeds from debenture 167,835 497,898

Proceeds from long-term borrowings 368,294 632,712

Repayment of current portion of long-term borrowings (206,592) (224,572)

Payment of capital lease liabilities (83,033) (4,476)

Payment of dividends (94,523) (94,524)

Net cash provided by financing activities 202,733 1,819,239

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (327,483) 534,466

CASH AND CASH EQUIVALENTS, AT BEGINNIG OF THE PERIOD 805,660 271,194

CASH AND CASH EQUIVALENTS, AT END OF THE PERIOD ￦ 478,177 ￦ 805,660

(KRW million)



FINANCIAL REvIEW

1. THE COMPANY: Daewoo Shipbuilding & Marine Engineering Co., Ltd. (the “Company”) was established on October 1, 2000 as a spin-off of Daewoo

Heavy Industry Co., Ltd.. The Company’s major business is the building and sale of various ships, including special purpose ships and construction of plants. The Company’s shares have been listed on the Korea Exchange since February 2, 2001, and its global depositary receipts (GDR) have been listed on the Luxembourg Stock Exchange since June 10, 2003. As of December 31, 2010, the Company’s major stockholders consist of the Korea Development Bank (“KDB”) (31.26%) and Korea Asset Management Corporation (“KAMCO”) (19.11%).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Financial Statement Presentation

The Company maintains its official accounting records in Korean Won and prepares financial statements in the Korean language (Hangul) in conformity with financial accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying financial statements have been condensed, restructured and translated into English (with certain expanded descriptions) from the Korean language financial statements. Certain information included in the Korean language financial statements, but not required for a fair presentation of the Company’s financial position, results of operations, changes in shareholders’ equity or cash flows, is not presented in the accompanying financial statements.

The financial statements included herein, to be submitted to the annual meeting of shareholders, were approved by the board of directors on February 28, 2011.

Implementation of the Statements of Korean Accounting Standards (“SKAS”)

The Company prepares its financial statements in accordance with the Statements of Korean Accounting Standards (SKAS). Among the SKAS that have been amended or newly enacted during 2010, there are no standards that have effects on the preparation of the Company’s financial statements. The Company applies the same, in all material respect, accounting policies that have been adopted in the previous year’s financial statements.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and in banks and short-term financial instruments with original maturities of less than ninety days, which can be converted into cash and whose risk of value fluctuation arising from changes of interest rates is not material.

Revenue Recognition

Revenues from construction contracts are recognized using the percentage-of-completion method, measured by the units of work performed. Revenues from other sales are recognized upon delivery of goods. Under the percentage-of-completion method, revenues are recognized based on the percentage of costs incurred over total estimated costs for each contract. The expenditures incurred before the construction contract is entered into are recognized as prepaid construction costs, if they are directly related to making a contract, separately identifiable and reliably measurable, and the possibility of construction contract is probable. The prepaid construction costs are transferred to construction cost at the commencement of the construction.

When the Company expects loss from construction contract, the loss is immediately recognized as provision for construction losses and charged to cost of sales or cost of construction in the same period. In addition, if the Company has an obligation for

Notes to Non-Consolidated Financial StatementFor the year ended December 31, 2010 and 2009

Management’s Discussion & Analysis Independent Auditor’s Report Non-Consolidated Financial StatementsNotes to Non-Consolidated Financial Statements

37

construction warranty after the construction is completed, the estimated construction warranty expense is included in cost of

construction when the construction is completed, and recorded as provision for construction warranty.

Allowance for Doubtful Accounts

The Company provides an allowance for doubtful accounts based on management’s estimate of collectability of individual accounts and prior year’s collection experience.

Inventories

Inventories are stated at cost which is determined by using the moving average method, except for materials-in-transit for which costs are determined using individual specific identification method. The Company maintains perpetual inventory, which is adjusted to physical inventory counts performed at year end. When the market value of inventories (net realizable value for finished goods or merchandise and current replacement cost for raw materials) is less than the carrying value, the carrying value is stated at the lower of cost or market.

The Company applies the lower of cost by group of inventories and loss on inventory valuation is presented as a deduction from inventories. Among the loss on inventory valuation, ordinary loss is charged to cost of sales and unusual loss is recognized in non-operating expenses. Meanwhile, when the circumstances that previously caused inventories to be written down below cost no longer exist and the new market value of inventories subsequently recovers, the valuation loss is reversed to the extent of the original valuation loss and the reversal is deducted from cost of sales.

Investments in Securities Other Than Those Accounted for Using the Equity Method

Classification of Securities

At acquisition, the Company classifies securities into one of the three categories; trading, held-to-maturity or available-for-sale. Trading securities are those that are acquired principally to generate profits from short-term fluctuations in prices. Held-to- maturity securities are those with fixed or determinable payments and fixed maturity that the Company has the positive intent and ability to hold to maturity. Available-for-sale securities are those not classified as either held-to-maturity or trading securities. Trading securities are classified as current assets, whereas available-for-sale and held-to-maturity securities are classified as non-current assets, except for those whose maturity dates or whose likelihood of being disposed of are within one year from the date of the statements of financial position, which are classified as current assets.

Valuation of Securities

Securities are recognized initially at cost, which includes the market price of the consideration given to acquire them and incidental expenses. If the market price of the consideration is not reliably determinable, the market prices of the securities purchased are used as the basis for measurement. If neither the market prices of the consideration given nor those of the acquired securities are available, the acquisition cost is measured at the best estimates of its fair value.

Meanwhile, in order to determine cost of securities for the calculation of realized gain or loss on disposal, the Company applies specific identification method for its debt securities and moving average method for its equity securities.

After initial recognition, trading securities are valued at fair value, with unrealized gains or losses included in current operations. Held-to-maturity securities are stated at amortized cost. The difference between acquisition cost and face value of held-to- maturity securities is amortized over the remaining term of the securities by applying the effective interest method and added to or subtracted from the acquisition costs and interest income of the remaining period. Available-for-sales securities are also



FINANCIAL REvIEW

valued at fair value, with unrealized gains or losses included in accumulated other comprehensive income (loss), until the securities are sold or if the securities are determined to be impaired and the lump-sum cumulative amount of accumulated other comprehensive income (loss) is included in current operations. However, available-for-sales securities that are not traded in an active market and whose fair values cannot be reliably estimated are accounted for at their acquisition costs.

Securities are evaluated at each date of the statements of financial position to determine whether there is any objective evidence of impairment loss. When any such evidence exists, unless there is a clear counter-evidence that recognition of impairment is unnecessary, the Company estimates the recoverable amount of the impaired security and recognizes any impairment loss in current operations. The amount of impairment loss of the heldto-maturity security or non-marketable equity security is measured as the difference between the recoverable amount and the carrying amount. The recoverable amount of held-to maturity security is the present value of expected future cash flows discounted at the securities’ original effective interest rate.

For available-for-sale debt or equity security, the amount of impairment loss to be recognized in the current period is determined by subtracting the amount of impairment loss of debt or equity security already recognized in prior period from the amount of amortized cost in excess of the recoverable amount for debt security or the amount of the acquisition cost in excess of the fair value for equity security.

If the realizable value subsequently recovers, in case of a security stated at fair value, the increase in value is recorded in current operations, up to the amount of the previously recognized impairment loss; for a security stated at amortized cost or acquisition cost, the increase in value is recorded in current operation, however its recovered value shall not exceed the amortized cost assuming if no impairment had been previously recognized.

When transfers of securities between categories are needed because of changes in an entity’s intention and ability to hold those securities, such transfer is accounted for as follows: trading securities cannot be reclassified into available-for-sale and held-to- maturity securities, and vice versa, except when certain trading securities lose their marketability. Available-for-sale securities and held-to-maturity securities can be reclassified into each other after fair value recognition. When held-to-maturity security is reclassified into available-for-sale security, the difference between the book value and fair value is reported in an accumulated other comprehensive income (loss). Whereas, when an available-for-sale security is reclassified into held- to-maturity securities, the difference is reported in accumulated other comprehensive income (loss) and amortized over the remaining term of the securities using the effective interest method.

Investment Securities Accounted for Using the Equity Method

Investments in equity securities in companies in which the Company is able to exercise significant influence over the operating and financial policies of the investees are accounted for using the equity method.

1) Accounting for changes in the Company’s portion of an investee’s net equity

Changes in the investor’s share of equity interest in an associate are adjusted to the balance of investment in the associate and accounted for in accordance with the source of changes in the net assets of the associate. ① If changes in the net assets of an associate arise as a result of net income or net loss for the current period, changes in the Company’s share of equity interest in the associate are accounted for as an item of current earnings. ② If an associate’s beginning balance of retained earnings has been changed, changes in the Company’s share of equity interest in the associate are included in beginning balance of retained earnings. ③ If changes in the net assets of an associate arise as a result of an increase or decrease in equity, excluding the associate’s net income or net loss for the current period and changes in the associate’s beginning balance of retained earnings, the resulting change in the Company’s share of equity interest in the associate is included in the Company’s accumulated other comprehensive income (loss).


39

If an associate’s beginning balance of retained earnings has been changed because of a material error correction and if the effect of such change on the financial statements of the investor is immaterial, the resulting change in the Company’s share of equity interest in the associate is included in the Company’s current earnings in accordance with SKAS for accounting changes and corrections of errors. If an associate’s beginning balance of retained earnings has been changed because of the investee’s accounting changes, the resulting change in the Company’s share of equity interest in the associate is reflected in the Company’s beginning balance of retained earnings in accordance with SKAS for accounting changes and corrections of errors.

At the date of an associate’s dividend declaration, the Company subtracts the amount of dividend receivable directly from the carrying amount of the investment in the associate. However, in the case of an associate’s stock-dividend declaration, no accounting treatment is made since there is no change in the net assets of the associate.

2) Investment difference

Investment difference arises on the date of acquisition of an investment in an associate because of factors such as the associate’s ability to earn future profits in excess of normal profits. Such difference is treated as goodwill and accounted for in accordance with Korea Accounting Standards on business combinations. When the Company is able to exercise significant influence through an in-stage acquisition of an associate’s shares, investment difference is calculated as if the shares were acquired in a lump-sum purchase on the same date significant influence became exercisable. The Company calculates the investment difference if its share of equity interest in an associate increases as a result of an increase (or decrease) in contributed capital with (or without) consideration. Such difference is treated as goodwill and accounted for in accordance with Korea Accounting Standards on business combinations.

3) Accounting for the difference between the fair value and book value of the net assets of the associate

At the date of acquisition of an investment in an associate, among the difference between the fair value and book value of the identifiable assets and liabilities of an associate, the amount relating to the Company’s share of equity interest in the associate is amortized or reinstated in accordance with the associate’s methods of accounting for assets and liabilities.

4) Elimination of unrealized gains or losses from intercompany transaction

The Company calculates its proportionate equity-share of the unrealized gains or losses from transactions with investees; and the amount reflected in the carrying amount of the Company’s investment, as of the statements of financial position end date, is recognized as unrealized intercompany gain or loss. Unrealized gains are accounted for as a reduction of the carrying amount of the investment in the associate, while unrealized losses are added to the carrying amount of the investment in the associate. However, when the investee is a subsidiary of the Company, unrealized gains and losses resulting from sale of assets to the investee (downstream transactions), are eliminated entirely.

5) Impairment losses

If the amount recoverable from an investment in an associate (hereinafter referred to as the recoverable amount) is less than its carrying amount, the Company considers recognition of an impairment loss. Pursuant to Korea Accounting Standards for investments in securities, the Company determines whether there is objective evidence that impairment loss has been incurred. The recoverable amount is determined as the higher of value in use or expected amount of net cash inflows from disposal of the investment in the associate. The amount of impairment loss is included in current earnings. If there is any amount of unamortized investment difference when the investor recognizes impairment loss on an investment in an associate, the remaining balance of the investment difference is reduced first. If the recoverable amount of an investment in an associate increases after recognizing an impairment loss, the amount of increase is recognized as current income to the extent of the impairment loss previously recognized. In such a case, the carrying amount of the investment shall not exceed the carrying amount that would have been determined, as of the date of the recovery, if no impairment loss were recognized in prior



FINANCIAL REvIEW

periods. However, since recovery of impairment loss recognized by reducing the balance of unamortized investment difference is not permitted, no accounting treatment is made for such recovery.

6) Translation of financial statements of overseas investees

For overseas investees whose financial statements are prepared in foreign currencies, the equity method of accounting is applied after assets and liabilities are translated in accordance with the accounting treatments for the translation of the financial statements of overseas’ subsidiaries for consolidated financial statements. The Company’s proportionate share of the difference between assets net of liabilities and shareholders’ equity after translation into Korean won is accounted for as “increase (decrease) in equity of associates” included in accumulated other comprehensive income (loss).

Property, Plant and Equipment

Property, plant and equipment are recorded at cost, except for assets revalued in accordance with the Asset Revaluation Law of Korea and revaluation model of current amended SKAS No5. Routine maintenance and repairs are expensed as incurred. Expenditures that result in the enhancement of the value or extension of the useful lives of the facilities involved are capitalized as additions to property, plant and equipment. The interest incurred on borrowings in connection with the acquisition of property and plant and equipment are charged to current operation.

When the book value of an asset exceeds the recoverable value of the asset due to obsolescence, physical damage or a sharp decline in market value, and the amount is material, the impairment of assets is recognized and the asset is recognized at reduced value and the resulting impairment loss is charged to current operations.

If the recoverable amount of the impaired asset exceeds its carrying amount in subsequent reporting period, the amount equal to the excess is treated as reversal of the impairment loss; however, it cannot exceed the carrying amount that would have been determined had no impairment loss been recognized.

Depreciation is computed using the declining balance method except for buildings, structures and electric equipment that are depreciated by using the straight-line method, based on the following estimated economic useful lives.

An asset whose use is discontinued and held for disposal or retirement is no longer depreciated and the carrying amount of the asset upon discontinuance of its use is reclassified to an investment asset, which is tested for impairment at each year. An asset whose use is discontinued and held for future use is depreciated and the depreciation expense is recorded as a non- operating expense.

Intangible Assets

Intangible assets are stated at cost, net of amortization computed using the straight-line method over the estimated economic useful lives (2~10 years) of related assets. Development costs are amortized over the estimated economic useful life from the usable date of the related productions. Ordinary development and research expenses are charged to current operations. If the recoverable amount of an intangible asset becomes less than its carrying amount as a result of obsolescence, sharp decline in market value or other causes of impairment, the carrying amount of an intangible asset is adjusted to its recoverable amount and the reduced amount is recognized as impairment loss.


Useful lives (years)

Buildings and buildings on capital lease 25 ~ 50

Structures 12 ~ 50

Machinery 12

Vessels and aircrafts 15

Others 6

41

If the recoverable amount of a previously impaired intangible asset exceeds its carrying amount in subsequent periods, the amount equal to the excess is recorded as reversal of impairment loss. However, the reversal amount cannot exceed the previously recognized loss amount.

Government Subsidies and Others

If the Company acquires an item of property, plant, and equipment free of charge or for a price less than its fair value, such as through government subsidies, the asset is accounted for at its fair value at the date of acquisition. The amount of government subsidy and any other form of similar non-reciprocal transfer of assets are presented as a contra-asset of the asset’s acquisition cost and are reversed over the useful life of the asset equivalent to respective depreciation amount each period. When the asset is disposed of, the remaining balances of government subsidy or non-reciprocal transfer is reflected in calculating the gain or loss on disposal.

In addition, government subsidies and any other form of similar non-reciprocal transfers which do not have a repayment obligation, is recognized as deduction of the related expenses. If there is no matching expense; the Company recognizes it as revenue or non-operating income. Government subsidies and any other forms of similar non-reciprocal transfers which have repayment obligations are recorded as liabilities.

Foreign Currency Transactions and Translation

The Company maintains its accounts in Korean Won. Transactions in foreign currencies are recorded in Korean Won based on the prevailing rates of exchange on the transaction date. Accounts with balances denominated in foreign currencies are recorded and reported in the accompanying financial statements at the exchange rates prevailing at the date of the statements of financial position. The balances have been translated using the Basic Rate announced by Seoul Money Brokerage Services, Ltd., which is ￦1,138.9 and ￦1,167.6 to US$1.00 at December 31, 2010 and 2009, respectively. Foreign currency assets and liabilities of overseas business branches or offices are translated at the exchange rate at the date of the statements of financial position and income and expenses at the weighted average rate of the reporting period. Translation gains and losses arising from the translation procedures are offset against each other and the net amounts are recognized as an overseas operations translation debit and credit in accumulated other comprehensive income (loss).

Accrued Severance Indemnities

Under Korean labor regulations, all employees with more than one year service are entitled to receive severance indemnities, based on the length of service and the rate of pay, upon termination of their employment. The Company has subscribed to severance insurance and defined benefit pension plan in accordance with the Labor Standard Law, which restricts severance payment directly to the eligible employees and directors, and the severance insurance payments and the assets managed under the defined benefit pension plan are recognized as severance insurance deposits and pension plan assets, respectively, and presented as deductions from accrued severance indemnities

Actual severance payments made in 2010 and 2009 are ￦33,500 million and ￦73,218 million for the years ended December 31, 2010 and 2009, respectively.

Derivatives

All derivative instruments are accounted for at fair value with the valuation gain or loss recorded as an asset or liability. If the derivative instrument is not part of a transaction qualifying as a hedge, the adjustment to fair value is reflected in current operations. The accounting for derivative transactions that are part of a qualified hedge based both on the purpose of the

transaction and specific criteria is accounted for as either a fair value hedge or a cash flow hedge. Fair value hedge accounting is applied to a derivative instrument designated as hedging the exposure to changes in the fair value of an asset or liability or a



FINANCIAL REvIEW

firm commitment (hedged item) that is attributable to a particular risk. The gain or loss both on the hedging derivative instruments and on the hedged item attributable to the hedged risk is reflected in current operations. Cash flow hedge accounting is applied to a derivative instrument designated as hedging the exposure in expected future cash flows of an asset or liability or a forecasted transaction that is attributable to a particular risk. The effective portion of gain or loss on a derivative instrument designated as a cash flow hedge is recorded as an accumulated other comprehensive income (loss) and the ineffective portion is recorded in current operations. The effective portion of gain or loss recorded as an accumulated other comprehensive income (loss) is reclassified to current earnings in the same period during which the hedged forecasted transaction affects earnings. If the hedged transaction results in the acquisition of an asset or the incurrence of a liability, the gain or loss in accumulated other comprehensive income (loss) is added to or deducted from the asset or the liability.

Leases

The Company classifies and accounts for leases as either operating or capital leases, depending on the terms of the lease. Leases where the Company assumes substantially all the risks and rewards of ownership are classified as capital leases. All other leases are classified as operating leases.

The assumption of substantially all the risks and rewards of ownership is evidenced when one or more of the criteria listed below are met:

- Ownership of the leased property will be transferred to the lessee at the end of the lease term

- The lessee has a bargain purchase option, and it is reasonably certain at the inception of the lease that the option will be exercised.

- The lease term is equal to 75% or more of the estimated economic useful life of the leased property.

- The present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90% of the fair value of the leased property.

- In addition, if the leased property is specialized to the extent that only the lessee can use it without any major modification, it would be considered a capital lease.

Where the Company is a lessee under a capital lease, the present value of future minimum lease payments is capitalized and a corresponding liability is recognized. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease.

Income Tax Expense

The Company recognizes deferred income tax assets or liabilities for the temporary differences between the carrying amount of an asset and liability and tax base. A deferred income tax liability for taxable temporary difference is fully recognized except to the extent in accordance with related SKAS, while a deferred tax asset for deductible temporary difference is recognized to the extent that it is almost certain that future taxable profit will be available against which the deductible temporary difference can be utilized.

Deferred income tax asset (liability) is classified as current or non-current asset (liability) depending on the classification of related asset (liability) in the balance sheet. Deferred income tax asset (liability), which does not relate to specific asset (liability) account in the balance sheet such as deferred income tax asset recognized for tax loss carry-forwards, is classified as current or non-current asset (liability) depending on the expected reversal period. Deferred income tax assets and liabilities in the same tax jurisdiction and in the same current or noncurrent classification are presented on a net basis.


43

Current and deferred income tax expense are included in income tax expense in the statement of income and additional income tax or tax refunds for the prior periods are included in income tax expense for the current period when recognized. However, income tax resulting from transactions or events, which was directly recognized in shareholders’ equity in current or prior periods, or business combinations, is directly adjusted to equity account or goodwill (or negative goodwill).

valuation of Receivables and Payables at Present value

Receivables and payables arising from long-term cash loans, borrowings and other similar transactions are stated at present value. The difference between the nominal value and present value of these receivables or payables is amortized using the effective interest rate method. The amount amortized is included in interest expense or interest income.

Earnings per Share

Basic earnings per share is net income per share of common stock and is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is net income per share of common stock and dilutive securities and is calculated by dividing diluted net income by the sum of the numbers of shares of common stock outstanding and dilutive securities.


3. RESTRICTED FINANCIAL INSTRUMENTS: Deposits with withdrawal restrictions as of December 31, 2010 and 2009 are summarized as follows (KRW million):

4. SECURITIES: (1) Short-term investment securities Short-term investment securities as of December 31, 2010 and 2009 are summarized as follows (KRW million):

Account 2010 2009 Description

Short-term financial instruments ￦ 30,000 ￦ 30,091 Deposits for contract performance

″ CD, Deposits for deferment of corporate income tax payment - 51,000 and others

Long-term financial instruments Guarantee deposits for checking 35 35 accounts

￦ 30,035 ￦ 81,126

Book value

Description 2010 2009

Held-to-maturity-securities:

Government and public bonds ￦ 185 ￦ 686

Other debt securities - 5,200

￦ 185 ￦ 5,886


FINANCIAL REvIEW


(2) Long-term investment securities Long-term investments securities as of December 31, 2010 and 2009 are summarized as follows (KRW million):

(i) Available-for-sales securities as of December 31, 2010 and 2009 consist of the following (KRW million):

(*1) As the respective fair values cannot be reliably estimated, the book values of ￦15,082 million and ￦39,314 million as of December 31, 2010 and 2009, respectively, of

unlisted securities are stated as their acquisition costs

(*2) Equity-Linked Securities (ELS) are stated at fair value with realized gain on valuation of available-for-sale securities in accordance with the Financial Supervisory Service’s

response letter.

(*3) Impairment loss of ￦26,287 million is recognized for the year ended December 31, 2010, and a reversal of impairment loss of ￦10 million is recognized for the year

ended December 31, 2009.


Available-for-sales securities:

Equity securities ￦ 201,273 ￦ 102,525

Debt securities 15,000 15,000

216,273 117,525

Held-to-maturity securities:

Government and public bonds 6,075 1,610

￦ 222,348 ￦ 119,135

2010

Acquisition Unrealized gain Accumulated Description cost (*1) impairment (*3) Book value

Equity securities ￦ 79,119 ￦ 149,186 ￦ (27,032) ￦ 201,273

Debt securities 15,000 - - 15,000

￦ 94,119 ￦ 149,186 ￦ (27,032) ￦ 216,273

Deferred tax effect ￦ (32,821)

2009

Acquisition Unrealized gain Gain Accumulated Description cost (*1) (*2) impairment (*3) Book value

Equity securities ￦ 95,439 ￦ 5,052 ￦ 2,778 ￦ (744) ￦ 102,525

Debt securities 15,000 - - - 15,000

￦ 110,439 ￦ 5,052 ￦ 2,778 ￦ (744) ￦ 117,525

Deferred tax effect ￦ (1,111)

45

(ii) The changes in valuation of available-for-sale securities included in accumulated other comprehensive income (loss) for the years ended December 31, 2010 and 2009 are as follows (KRW million):

(iii) The carrying value and fair value of the Company’s available-for-sale debt securities and held-to-maturity securities as of December 31, 2010 and 2009 by contractual maturity are as follows (KRW million):


2010

Beginning Changes Realization from Ending Description balance in valuation disposal and others balance

Equity securities ￦ 5,052 ￦ 148,644 ￦ (4,510) ￦ 149,186

Debt securities - - - -

￦ 5,052 ￦ 148,644 ￦ (4,510) ￦ 149,186

Deferred tax effect ￦ (1,111) ￦ (32,702) ￦ 992 ￦ (32,821)

2010

Available-for-sales debt securities Held-to-maturity securities

Maturity Book value Fair value Book value Fair value

Within 1 year ￦ - ￦ - ￦ 185 ￦ 185

After 1 year through 5 years 15,000 15,000 6,075 6,075

￦ 15,000 ￦ 15,000 ￦ 6,260 ￦ 6,260

2009

Available-for-sales debt securities Held-to-maturity securities

Maturity Book value Fair value Book value Fair value

Within 1 year ￦ - ￦ - ￦ 5,886 ￦ 5,886

After 1 year through 5 years 15,000 15,000 1,610 1,610

￦ 15,000 ￦ 15,000 ￦ 7,496 ￦ 7,496

2009

Beginning Changes Realization from Ending Description balance in valuation disposal and others balance

Equity securities ￦ 15,858 ￦ (12,417) ￦ 1,611 ￦ 5,052

Debt securities - - - -

￦ 15,858 ￦ (12,417) ￦ 1,611 ￦ 5,052

Deferred tax effect ￦ (3,489) ￦ 2,732 ￦ (354) ￦ (1,111)


FINANCIAL REvIEW


5. INVESTMENT SECURITIES USING THE EQUITY METHOD: (1) Investment securities using the equity method as of December 31, 2010 and 2009 are as follows (KRW million):

2010

% of Acquisition Net asset Company ownership cost value Book value

DW Mangalia Heavy Industries S.A. (*1) 51.00 ￦ 44,805 ￦ (206,125) ￦ -

DSEC Co., Ltd. (*2) 70.07 14,117 78,295 76,108

Welliv Corp. 100.00 23,617 66,250 59,957

DSME Construction Co., Ltd. 95.06 81,434 84,873 26,961

DSME Shandong Co., Ltd. 100.00 76,154 170,598 126,475

Shinhan Machinery Co., Ltd. 89.22 62,981 65,429 89,874

DSME E&R Co., Ltd. 100.00 35,973 32,965 32,965

DeWind Co. 100.00 49,956 16,286 16,286

Samwoo Heavy Industry Co., Ltd.(*3) 76.57 30,296 28,089 27,019

DSME CANADA Holding Ltd.(*4) 100.00 23,624 22,154 22,154

NIDAS Marine Ltd. 46.00 1,285 697 697

KLDS Maritime S.A. 50.00 20,666 25,820 25,820

DK Maritime S.A. 50.00 62,643 66,030 66,030

Korea Marine Fund Corp. 23.53 2,000 2,799 2,799

D&H Solutions AS (*4) 50.00 10 (1,960) -

PT. Syabas Usaha Migas (*5) 40.00 3,592 12 2,245

￦ 533,153 ￦ 452,212 ￦ 575,390

(*1) Due to the accumulation loss of DW Mangalia Heavy Industries S.A. has a book value of zero, as such, the Company discontinued applying the equity method. The

Company accounts for the unrecognized loss on valuation of equity method investment as an allowance for doubtful accounts recorded for the respective equity

method investee. The accumulated allowance as of December 31, 2010 is ￦201,363 million, which includes a reversal amount of ￦3,155 million due to a decrease in the

unrealized loss.

(*2) Due to DSEC Co., Ltd.’s IPO process, it held all of the Company’s shares in safe custody for the year ended December 31, 2010.

(*3) As of June 30, 2010, the Company acquired equity securities of Samwoo Heavy Industry Co., Ltd. and Samwoo Propeller Co., Ltd. for ￦17,163 million and ￦13,133 million,

respectively, and on July 1, 2010, Samwoo Propeller Co., Ltd. merged with Samwoo Heavy Industry Co., Ltd..

(*4) The Company acquired 100% and 50% of the shares of DSME CANADA Holding Ltd. and D&H Solutions AS, respectively, in 2010 and recognized them as investment

securities accounted for using the equity method. Meanwhile, in relation to the loss accumulation of D&H Solutions AS, the unrecognized loss on valuation of ￦1,960

million, is recognized against allowance for doubtful accounts recorded for the respective equity method investee.

(*5) The Company reclassified the investment in equity securities of PT. Syabas Usaha Migas, into investment securities accounted for using the equity method, which were

acquired in June, 2009 and previously accounted for as other investment.

47

2009

% of Acquisition Net asset Company ownership cost value Book value

DW Mangalia Heavy Industries S.A. (*1) 51.00 ￦ 44,805 ￦ (205,499) ￦ -

DSEC Co., Ltd. 70.07 14,117 60,785 57,421

Welliv Corp. 100.00 23,617 61,471 55,178

DSME Construction Co., Ltd. (*2) 95.06 81,434 80,426 50,055

DSME Shandong Co., Ltd. 100.00 76,154 137,691 89,017

Shinhan Machinery Co., Ltd. 89.22 62,981 44,407 81,076

DSME E&R Co., Ltd. 100.00 35,973 34,000 33,993

DeWind Co. (*3) 100.00 49,956 42,790 42,791

NIDAS Marine Ltd. 46.00 1,285 214 214

KLDS Maritime S.A. 50.00 20,666 27,361 27,361

DK Maritime S.A. 50.00 62,643 69,795 69,795

Korea Marine Fund Corp. 23.53 2,000 2,848 2,848

￦ 475,631 ￦ 356,289 ￦ 509,749

(*1) Due to the accumulation loss of DW Mangalia Heavy Industries S.A. has a book value of zero, as such, the Company discontinued applying the equity method. The

Company recognized ￦205,282 million as an extended investment, ￦139,717 million as unrecognized loss on valuation of securities using the equity method prior to

2009, ￦99,472 million as loss on valuation of securities using the equity method for 2009, ￦5,629 million as negative adjustment to equity in equity method investees

prior to 2009 and ￦39,533 million as adjustment to equity in equity method investees for 2009.

(*2) The Company additionally acquired 42.21% newly issued shares of DSME Construction Co., Ltd. and paid ￦62,937 million for the shares.

(*3) In 2009, the Company acquired 100% of equity securities of DeWind Co. for ￦49,956 million and recognized as investment securities using the equity method.

Notes to Non-Consolidated Financial Statement

(2) The changes in the investment securities using the equity method for the years ended December 31, 2010 and 2009 are as follows (KRW million):

2010

Beginning Acquisition Gain Other net Ending Company balance (Disposal) (Loss) changes (*1) balance

DW Mangalia Heavy Industries S.A. (*1) ￦ - ￦ - ￦ 6,389 ￦ (6,389) ￦ -

DSEC Co., Ltd. 57,421 - 19,185 (498) 76,108

Welliv Corp. 55,178 - 4,779 - 59,957

DSME Construction Co., Ltd. 50,055 - (24,089) 995 26,961

DSME Shandong Co., Ltd. 89,017 - 41,273 (3,815) 126,475

Shinhan Machinery Co., Ltd. 81,076 - 8,811 (13) 89,874

DSME E&R Co., Ltd. 33,994 - 140 (1,169) 32,965

DeWind Co. 42,790 - (25,704) (800) 16,286

Samwoo Heavy Industry Co., Ltd. - 30,296 (3,827) 550 27,019

DSME CANADA Holding Ltd. - 23,624 (1,067) (403) 22,154

NIDAS Marine Ltd. 214 - 943 (460) 697


FINANCIAL REvIEW


2010


KLDS Maritime S.A. 27,361 - (1,012) (529) 25,820

DK Maritime S.A. 69,795 - (2,093) (1,672) 66,030

Korea Marine Fund Corp. 2,848 - 105 (154) 2,799

D&H Solutions AS - 10 (1,936) 1,926 -

PT. Syabas Usaha Migas - - (1,370) 3,615 2,245

￦ 509,749 ￦ 53,930 ￦ 20,527 ￦ (8,816) ￦ 575,390

2009


DW Mangalia Heavy Industries S.A. ￦ - ￦ - ￦ (99,472) ￦ 99,472 ￦ -

DSEC Co., Ltd. 41,971 - 15,450 - 57,421

Welliv Corp. 29,489 - 4,944 20,745 55,178

DSME Construction Co., Ltd. 4,680 62,937 (19,072) 1,510 50,055

DSME Shandong Co., Ltd. 76,299 - 23,724 (11,006) 89,017

Shinhan Machinery Co., Ltd. 44,465 - 8,693 27,918 81,076

DSME E&R Co., Ltd. 33,960 - 34 - 33,994

DeWind Co. - 49,956 (4,199) (2,967) 42,790

NIDAS Marine Ltd. 1,303 - (1,187) 98 214

KLDS Maritime S.A. 27,792 - 1,701 (2,132) 27,361

DK Maritime S.A. 75,190 - (8) (5,387) 69,795

Korea Marine Fund Corp. 2,618 - 330 (100) 2,848

￦ 337,767 ￦ 112,893 ￦ (69,062) ￦ 128,151 ￦ 509,749

(*1) Other net changes consist of changes in additional paid-in capital and other capital, retained earnings arising from application of the equity method, capital variation

of equity method, negative capital variation of equity method and others. Among other changes, reversal of allowance for doubtful accounts on other accounts

receivable from DW Mangalia Heavy Industries S.A amounting to ￦3,155 million, dividends of ￦498 million and ￦160 million received from DSEC Co., Ltd. and Korea

Marine Fund Corp., respectively, allowance for doubtful accounts on a loan to D&H Solutions AS amounting to ￦1,960 million and the equity securities of PT. Syabas

Usaha Migas of ￦3,592 million which had been recognized as other investments and are reclassified as investment securities accounted for using the equity method.

(*1) Other net changes consist of changes in retained earnings arising from application of the equity method, positive and negative capital variation of equity method and

others. Other net changes include allowance for doubtful accounts on other accounts receivable from DW Mangalia Heavy Industries S.A amounting to ￦204,518

million and dividends received from Korea Marine Fund Corp. amounting to ￦100 million.

49


(3) Unrealized profits (losses) that occurred in transactions with affiliates under the equity method that the Company eliminated for the years ended December 31, 2010 and 2009 are as follows (KRW million):

(4) The changes in the investment differences as of December 31, 2010 and 2009 are as follows (KRW million):

2010

Plant Company Current assets & intangible assets Total

DW Mangalia Heavy Industries S.A. ￦ (4,762) ￦ - ￦ (4,762)

DSEC Co., Ltd. 2,187 - 2,187

Welliv Corp. - 6,293 6,293

DSME Construction Co., Ltd. - 57,912 57,912

DSME Shandong Co., Ltd. (9,761) 53,884 44,123

￦ (12,336) ￦ 118,089 ￦ 105,753

2009

Plant Company Current assets & intangible assets Total

DW Mangalia Heavy Industries S.A. ￦ (214) ￦ - ￦ (214)

DSEC Co., Ltd. 3,364 - 3,364

Welliv Corp. - 6,293 6,293

DSME Construction Co., Ltd. - 30,593 30,593

DSME Shandong Co., Ltd. (7,471) 56,145 48,674

￦ (4,321) ￦ 93,031 ￦ 88,710

2010

Beginning Increase Amortization Ending Company balance (decrease) (Reversal) balance

DSME Construction Co., Ltd. ￦ 222 ￦ - ￦ 222 ￦ -

Shinhan Machinery Co., Ltd. 36,669 - 12,224 24,445

DSME E&R Co., Ltd. (6) - (6) -

Samwoo Heavy Industry Co.,Ltd. - (1,717) (172) (1,545)

PT. Syabas Usaha Migas - 2,791 558 2,233

￦ 36,885 ￦ 1,074 ￦ 12,826 ￦ 25,133

2009

Beginning Increase Amortization Ending Company balance (decrease) (Reversal) balance

DSME Construction Co., Ltd. ￦ 443 ￦ - ￦ 221 ￦ 222

Shinhan Machinery Co., Ltd. 48,893 - 12,224 36,669

DSME E&R Co., Ltd. (13) - (7) (6)

￦ 49,323 ￦ - ￦ 12,438 ￦ 36,885


FINANCIAL REvIEW


(5) The summarized financial information of affiliated companies as of and for the year ended December 31, 2010 is as follows (KRW million):

Investment securities accounted for using the equity method as of December 31, 2010 are valued based on the provisional financial statements of investees as of the same date of the statement of financial position of the Company, which have not been audited nor reviewed by an external auditor. In order to verify the reliability of such unaudited and unreviewed financial statements, the Company performed the following procedures and found no significant exceptions:

i) obtained the signature from the chief executive officer of the equity method investee asserting that the unaudited and unreviewed financial statements are accurate,

ii) examined whether the major transactions identified by the Company, including public disclosures, were appropriately reflected in the unaudited and unreviewed financial statements, and

iii) performed an analytical review on the unaudited and unreviewed financial statements.

2010

Net income Company Assets Liabilities Sales (loss)

DW Mangalia Heavy Industries S.A. ￦ 932,784 ￦ 1,336,951 ￦ 621,077 ￦ (51,797)

DSEC Co., Ltd. 272,279 160,540 331,541 25,701

Welliv Corp. 102,763 36,513 116,409 4,808

DSME Construction Co., Ltd. 174,164 84,881 334,227 2,694

DSME Shandong Co., Ltd. 580,226 414,857 309,632 31,492

Shinhan Machinery Co., Ltd. 236,691 163,356 240,583 20,536

DSME E&R Co., Ltd. 58,142 23,866 181,607 1,401

DeWind Co. 160,728 136,039 113 (18,164)

Samwoo Heavy Industry Co., Ltd. 312,898 276,215 41,926 (5,746)

DSME CANADA Holding Ltd. 22,154 - - (1,067)

NIDAS Marine Ltd. 16,122 14,257 7,061 665

KLDS Maritime S.A. 258,403 206,763 33,853 751

DK Maritime S.A. 417,279 285,220 14,349 (4,186)

Korea Marine Fund Corp. 12,224 330 2,782 428

D&H Solutions AS 1,579 5,498 2,362 (3,871)

PT. Syabas Usaha Migas 23,355 23,323 92 (2,029)

51

(6) Details of adjustments, for the purpose of applying the equity method of accounting, on the financial statements of investees are as follows (KRW million):

2010

Net asset value Net asset value Company before adjustment Adjustment after adjustment Reason

DSME Shandong Co., Ltd ￦ 165,369 ￦ 5,229 ￦ 170,598 Valuation of currency forwards

DSME E&R Co., Ltd. Application of the equity 34,276 (1,311) 32,965 method to certain investments

DeWind Co. Amortization of goodwill & Application of the equity 24,689 (8,403) 16,286 method to certain investments

NIDAS Marine Ltd. Application of the equity 1,865 (350) 1,515 method to certain investments

2010

% of Type Company ownership Cost Description

Jointly controlled entities KLDS Maritime S.A. (*1) Korea Line Corporation’s 50.00 USD 22,100 percentage of ownership: 50%

Jointly controlled entities DK Maritime S.A. (*2) Korea Line Corporation’s 50.00 USD 59,800 percentage of ownership: 50%

Jointly controlled entities D&H Solutions AS (*3) 50.00 NOK 3,500 Hemla II AS: 50%

Jointly controlled entities PT. Syabas Usaha Migas (*4) DSME E&R Co., Ltd.: 40%, GNG Holdings Inc.: 15%, 40.00 USD 2,500 Panco Energy: 5%

Relationship Company name

Ultimate parent company Korea Development Bank Subsidiaries DW Mangalia Heavy Industries S.A., DSEC Co., Ltd., Welliv Corp., DSME Construction Co., Ltd., DSME Shandong Co., Ltd., Shinhan Machinery Co., Ltd., DSME E&R Co., Ltd., DeWind Co., Samwoo Heavy Industry Co., Ltd., Busan International Distribution Center Co., Ltd., DSME CANADA Holding Ltd., DSME Trenton Ltd., DeWind Europe GmbH NIDAS Affiliates using the equity Marine Ltd., KLDS Maritime S.A., DK Maritime S.A, Korea Marine Fund method and others Corp., DSME Oman LLC, DSME SMC Co., Ltd., D&H Solutions AS, PT Syabas Usaha Migas, DSME FAR EAST LLC, DSME BRAZIL LLC, SBM Shipyards Ltd., ZVEZDA-DSME LLC and 21 other entities


6. JOINT VENTURES: Details of joint venture investments as of December 31, 2010 are as follows (USD in thousands, NOK in thousands):

7. RELATED PARTY TRANSACTIONS: (1) The Company’s related parties as of December 31, 2010 are as follows:

(*1) The Company has received orders for two ships from KLDS Maritime S.A.

(*2) The Company has received orders for four ships from DK Maritime S.A.

(*3) The Company acquired shares of Hemla II AS for the purpose of utilization of its capabilities of manufacturing of marine products and operation of mining areas.

(*4) The Company has invested in overseas oil fields in Cheffe, Indonesia in the form of a consortium consisting of the Company, DSME E&R Co., Ltd., GNG Holdings Inc. and

Panco Energy(total ownership % of the Company and DSME E&R Co., Ltad. : 80%).


FINANCIAL REvIEW

(2) Related party transactions of the Company for the years ended December 31, 2010 and 2009 are as follows (KRW million):


Relationship Company Transaction 2010 2009

Parent company The Korea Interest income and others ￦ 10,007 ￦ 26,391

Development Bank(KDB) Interest expense and others 28,876 60,804

Subsidiaries DW Mangalia Sales 6,110 28,902

Heavy Industries Interest income and others 21,233 20,826

S.A(DMHI) Interest expense and others 367 -

DSEC Co., Ltd. (DSEC) Sales 2,425 70

Interest income and others 157 908

Purchases 76,518 79,844

Interest expense and others 3 -

Welliv Corp. (Welliv) Sales 2,178 -

Interest income and others 29 2,453

Purchases 10,585 43,806

Interest expense and others 36,782 -

DSME Construction Sales 7 -

Co., Ltd. (DSMEC) Interest income and others 102 183

Purchases 170,852 176,867

DSME Shandong Interest income and others 74 231

Co., Ltd. (DSSC) Purchases 435,976 495,659

Shinhan Machinery Co., Sales 4,744 3,178

Ltd.(SHMC) Interest income and others 1,006 960

Purchases 217,278 232,219

DSME E&R Co., Ltd. Sales 451 -

(DSME E&R) Interest income and others 243 733

Purchases 89,350 34,271

Interest expense and others 3,185 -

DeWind Co. (DeWind) Sales 1,476 -

Interest income and others 5,101 764

Samwoo Heavy Sales 1,116 -

Industry Co., Ltd.(SWHI) Interest income and others 227 -

Purchases 35,994 -

DSME CANADA

Holding Ltd. (DSMECH) Sales 140 -

Busan International Sales 1 -

Distribution Interest income and others 82 -

Center Co., Ltd. (BIDC) Purchases 27,417 -

53


Relationship Company Transaction 2010 2009

Equity method NIDAS Marine Limited (NIDAS) Interest income and others 131 130

KLDS Maritime S.A.(KLDS) Sales - 203,775

Interest income and others 1,873 -

DK Maritime S.A.(DK) Sales 456,380 22,911

Interest income and others 2,545 -

D&H Solutions AS (D&H) Interest income and others 56 -

Others DSME Oman LLC (DSMEO) Interest income and others 223 73

Interest expense and others 987 -

DSME SMC Co., Ltd. Interest income and others 1 -

(DSME SMC) Interest expense and others 103 -

Total sales ￦ 475,028 ￦ 258,836

Total interest income and others 43,090 53,652

Total purchases 1,063,970 1,062,666

Total interest expense and others 70,303 60,804

(3) Intercompany receivables and payables as of December 31, 2010 and 2009 are as follows (KRW million):

2010

Receivables Payables

Financial Long-term Long & Accrued instruments Trade Other loans short-term expenses Relationship Company and others receivables receivables and others borrowings and others

Parent company KDB ￦ 240,879 ￦ - ￦ - ￦ 483 ￦ 557,998 ￦ 199,006

Subsidiaries DMHI - 37,662 212,331 193,107 - -

DSEC - 1,754 44 2,848 - 29,826

Welliv - - - 35 - 4,740

DSMEC - 1 13 13 - 49,407

DSSC - 8,053 2,118 30,106 - 4,972

SHMC - 427 190 10,800 - 58,804

DSME E&R - 14 381 29 - 14,967

DeWind - 1,476 - 135,483 - -

SWHI 15,000 631 531 30,764 - 23,833

DSMECH 140 - - - -

BIDC - - - 5,000 - 7,519

Equity method NIDAS - - 4,097 - -

KLDS - 22,778 - 1,931 - -

DK - 204,849 - 71 - 22,600

D&H - - - 4,709 - -

Others DSMEO - - - 9,578 - -

DSME SMC - - 1 - - -

￦ 255,879 ￦ 277,785 ￦ 215,609 ￦ 429,054 ￦ 557,998 ￦ 415,674


FINANCIAL REvIEW


The above transactions include the currency forward contract qualified for fair value hedging with KDB, and the unsettled contract balance is US$ 903 million as of December 31, 2010 and details of allowance for doubtful accounts, and collateral and guarantee in respect of account balances with related parties as of December 31, 2010 are as follows (KRW million):

2009

Receivables Payables

Financial Long-term Long & Accrued instruments Trade Other loans short-term expenses Relationship Company and others receivables receivables and others borrowings and others

Ultimate parent company KDB ￦ 281,429 ￦ - ￦ - ￦ 904 ￦ 347,470 ￦ 501,325

Subsidiaries DMHI - 27,767 212,644 152,657 - -

DSEC - 354 72 - - 25,438

Welliv - - - - - 1,956

DSMEC - - 18 14,891 - 3,135

DSSC - 8,395 3,966 198,267 - 3,541

SHMC - 448 738 13,281 - 53,642

DSME E&R - - 34 79 - 13,119

DeWind - - - 53,306 - -

Equity method NIDAS - - - 4,300 - -

KLDS - 25,112 - - - -

DK - - - - - 101,303

Others DSMEO - - - 1,318 - -

￦ 281,429 ￦ 62,076 ￦ 217,472 ￦ 439,003 ￦ 347,470 ￦ 703,459

Collateral Relationship Company Account balance & guarantee Allowance

Subsidiary DMHI Receivables ￦ 37,662 ￦ - ￦ 4,741

Other receivables 212,331 - 201,384

Long-term loans 114,640 162,863 -

DSSC Receivables 8,053 - 8,053


Equity KLDS Receivables 22,778 - 2,278

Method DK Receivables 204,849 - 1,549

D&H Long-term loans 4,556 - 1,960

The above transactions included the currency forward contract of fair value hedging with KDB, and the unsettled contract balance is US$ 1,986 million as of December 31, 2009.

55

Details of allowance for doubtful accounts, collateral and guarantee in respect of account balances with related parties as of December 31, 2010 are as follows (KRW million):


Collateral Relationship Company Account Balance & Guarantee Allowance

Subsidiary DMHI Receivables ￦ 27,767 ￦ - ￦ 211


Long-term loans 130,771 166,967 -

Subsidiary DSEC Receivables 8,395 - 4,128


(4) Key management compensation for the years ended December 31, 2010 and 2009 are as follows (KRW million):

(5) The Company has provided guarantees or collateral for related parties as of December 31, 2010 and 2009 as follows (KRW in millions, USD in thousands):


Salaries ￦ 2,139 ￦ 1,914

Severance benefits 452 245

Share-based payment - 239

￦ 2,591 ￦ 2,398

2010

Company Type of guarantee Guaranteed amount Lender

DSEC (*1) Performance of contracts $ 251,000 NASSCO

DeWind (*2) Performance of contracts $ 9,644 Willmar Municipal Utilities and others

DMHI (*3) Borrowing & others $ 67,500 Woori Bank Bahrain branch

Joint liability on guarantees Bank issued R/G for new project $ 300,000 order of DMHI


FINANCIAL REvIEW

(*1) The Company has provided guarantees to DSEC Co., Ltd. in regard to the latter’s performance of contracts and warranties for material supply contracts amounting to

US$ 1 million and US$ 250 million, respectively.

However, the Company has indemnification rights related to warranty, as DSEC Co., Ltd. has similar guarantee contracts with its own suppliers.

(*2) As part of DeWind Co.’s acquisition, the Company has transferred DeWind Co.’s, a subsidiary, performance guarantee provided by CTC, a seller to DeWind Co., in

relation to the turbine supply contract,. Of the guaranteed amount, US$ 4.8 million is covered under the current machinery insurance program. In addition, the

Company has escrow deposits to fund any liability arising from the guarantee agreement.

(*3) The Company has provided guarantees in connection with DW Mangalia Heavy Industries S.A.’s short-term borrowings and Usance L/C for short-term liquidity up

to US$ 50 million and US$ 10 million, respectively. Additionally, accounts receivable in relation to ship building are pledged as collateral for borrowings. Also, for

reinforcement of credit, the Company has provided joint liability on guarantees to the bank issued R/G.

(6) Guarantees provided by related parties as of December 31, 2010 and 2009 are as follows (USD, EUR in thousands):

2009

Company Type of guarantee Guaranteed amount Lender

DSEC (*1) Performance of contracts $ 251,000 NASSCO

DSMEC Performance of contracts ￦ 49,200 PLDNC

DeWind (*2) Performance of contracts $ 9,644 Willmar Municipal Utilities and others


2010

Provided guarantees Related liabilities

Type of Guaranteed Type of Liabilities Relationship Company guarantee amount liabilities amount

Parent company KDB Short-term Usance $ 380,000 borrowings $ 205,563

€ 15,797

Advanced payment bonds and others 993,455 - -

$ 205,563

$ 1,373,455 € 15,797

2009

Provided guarantees Related liabilities

Type of Guaranteed Type of Liabilities Relationship Company guarantee amount liabilities amount

Parent company KDB Usance $ 380,000 Usance $ 193,302

Advanced payment bonds and others 1,259,783 - -

$ 1,639,783 $ 193,302

57

2010

Number of % Fair value/ Relationship Company shares of ownership Net asset value Book value

Other DSME Oman LLC 350,000 70.00 ￦ 924 ￦ 924

Other DSME FAR EAST LLC - 100.00 - -

Other DSME BRAZIL LLC - 50.00 - -

Other SBM Shipyards Ltd. 6,000,000 33.33 7 7

Other ZVEZDA-DSME LLC - 19.00 8 8

2009

Number of % Fair value/ Relationship Company shares of ownership Net asset value Book value

Other DSME Oman LLC 350,000 70.00 ￦ 924 ￦ 924

(7) Securities and bonds invested to related parties, which are not included in Note 5 as of December 31, 2010 and 2009, are as follows (KRW million):


8. PROPERTY, PLANT AND EQUIPMENT: (1) The changes in property, plant and equipment for the years ended December 31, 2010 and 2009 are as follows (KRW million):

2010

Beginning Ending balance Acquisition Disposal Depreciation Others (*2) balance

Land ￦ 1,516,563 ￦ 4,273 ￦ 1,449 ￦ - ￦ 104,678 ￦ 1,624,065

Land on capital lease 104,678 - - - (104,678) -

Buildings 606,447 2,440 - 26,205 63,160 645,842

Buildings on capital lease 56,271 - - - (56,271) -

Structures 762,901 71 - 29,752 2,304 735,524

Machinery 327,048 4,458 314 46,631 13,467 298,028

Vehicles 48,890 2,442 51 12,313 - 38,968

Ships and aircraft 138,096 322 - 12,719 8,302 134,001

Tools 64,314 2,811 36 20,634 11,427 57,882

Furniture and fixtures 21,656 5,995 232 8,201 144 19,362

Furniture and fixtures on capital lease 17,028 - - 4,471 - 12,557

Construction-in- progress 344,600 184,090 - - (40,899) 487,791

￦ 4,008,492 ￦ 206,902 ￦ 2,082 ￦ 160,926 ￦ 1,634 ￦ 4,054,020


FINANCIAL REvIEW

(2) The details of the published price of the Company’s land announced by the National Tax Service are as follows (KRW million):

(3) Land and land on capital lease is stated at the revalued amounts as of October 1, 2009. The fair values of the assets are based on the results of an appraisal by Kaaram Appraisal Co., Ltd., an independent appraiser.

In 2009, the Company adopted the revaluation model for the first time and the land under the cost model would have been ￦602,225 million. For the year ended December 31, 2009, the Company recognized other comprehensive income of ￦798,530 million, net of tax and revaluation loss of ￦937 million.

(*1) The Company has entered into a sale-leaseback (capital lease) contract for its computer equipment and recognized the respective assets as furniture and fixtures on

capital lease.

(*2) As of December 31, 2010, others include capital lease land and capital lease building transferred to land and building and advanced payments transferred to

Construction-in-progress amounting to ￦1,634 million in total. As of December 31, 2009, others include government subsidies used for acquisition of tangible assets

amounting to ￦35 million, and acquisition of furniture and fixtures amounting to ￦20,381 million based on a sale and lease back transaction, accounted for as capital

lease.

2009

Beginning Gain on Ending balance Acquisition Disposal revaluation Depreciation Others (*2) balance

Land ￦ 512,722 ￦ 942 ￦ 256 ￦ 983,524 ￦ - ￦ 19,631 ￦ 1,516,563

Land on capital lease 65,184 - - 39,494 - - 104,678

Buildings 471,185 3,001 3,722 - 23,835 159,818 606,447

Buildings on capital lease 57,486 - - - 1,215 - 56,271

Structures 501,484 1,104 832 - 24,442 285,587 762,901

Machinery 252,380 33,015 964 - 43,588 86,205 327,048

Vehicles 30,549 22,471 - - 11,610 7,480 48,890

Ships and aircraft 96,024 4,633 - - 12,331 49,770 138,096

Tools 71,066 9,428 32 - 20,199 4,051 64,314

Furniture and fixtures 46,024 5,874 20,399 - 12,049 2,206 21,656

Furniture and fixtures on capital lease (*1) - - - - 3,353 20,381 17,028

Construction-in- progress 534,346 425,037 - - - (614,783) 344,600

￦ 2,638,450 ￦ 505,505 ￦ 26,205 ￦ 1,023,018 ￦ 152,622 ￦ 20,346 ￦ 4,008,492

Book value Published price

Location Area (1,000 m2) 2010 2009 2010 2009

Geoje, Kyungnam 4,664 ￦ 1,592,337 ￦ 1,589,513 ￦ 705,963 ￦ 693,430

Yongin, Kyunggi 117 31,728 31,728 14,113 14,910

4,781 ￦ 1,624,065 ￦ 1,621,241 ￦ 720,076 ￦ 708,340


59

9. INSURED ASSETS: (1) Assets insured as of December 31, 2010 are as follows (KRW in millions, USD and EUR in thousands):

Additionally, the Company maintains comprehensive and liability coverage for vehicles, business interruption, employee indemnification, and industrial disaster and gas casualties as of December 31, 2010.

(2) The Company incurred ordinary research and development expenses of ￦65,398 million and ￦65,063 million for the years ended December 31, 2010 and 2009, respectively.

Type Properties Coverage Insurance company

Fire insurance Company house & others ￦ 243,156 Meritz Fire & Marine Insurance Co., Ltd. & others

General property Inventories & tangible Assets ￦ 1,327,475 Korean Fire Protection Association

Hull insurance Ships ￦ 152,876 Hanwha Non-Life Insurance Co., Ltd. & others

Aviation insurance Helicopter & others $ 30,500 Hanwha Non-Life Insurance Co., Ltd.

Ship building Insurance Shipbuilding $ 4,517,682 Hyundai Fire & Marine insurance Co., Ltd.

Protection and Indemnity insurance Ships $ 1,000,000 Ship-owners (MARSH Korea)

Liability insurance High-pressure gas ￦ 300 Meritz Fire & Marine Insurance Co., Ltd.

Directors & officers ￦ 30,000 Hanwha Non-Life Insurance Co., Ltd.

Others ￦ 1,155,665 Korean Fire Protection Association

$ 5,313,300 Hyundai Fire & Marine Insurance Co., Ltd. and others

€ 330 Hyundai Fire & Marine Insurance Co., Ltd.

€ 2,909,472

$ 10,861,482

€ 330


10. INTANGIBLE ASSETS: (1) The changes in intangible assets for the years ended December 31, 2010 and 2009 are as follows (KRW million):

2010 2009

Development Industrial property Development Industrial property costs rights & others costs rights & others

Beginning balance ￦ - ￦ 2,642 ￦ 5,120 ￦ 3,035

Acquisition and transfer 21,619 741 - 620

Amortization - (372) (5,120) (1,013)

Ending balance ￦ 21,619 ￦ 3,011 ￦ - ￦ 2,642


FINANCIAL REvIEW

11. GOVERNMENT SUBSIDIES: (1) The Company received government subsidies, totaling ￦7,023 million from the Ministry of Labor’s Tongyeong Office in relation to

the operation of a job training consortium for small and medium-sized enterprises. Of the ￦5,635 million received for purchasing property and equipment and others, ￦5,381 million and ￦38 million is recorded as a reduction of property and equipment, and education and training expenses, respectively; the remaining balance of ￦216 million has been returned to the government. Also, the Company received ￦1,388 million for defraying operating expenses, of which ￦1,351 million used and ￦7 million unused is recorded as non-operating profit and loss and unearned income, respectively; the remaining balance of ￦30 million has been returned to the government.

(2) The Company entered into an agreement with the Ministry of Knowledge and Economy for the development of certain equipment. Out of the total amount received amounting to ￦17,375 million, ￦964 million was recorded as unearned income and ￦2,551 million as withholdings for the year ended December 31, 2010.

12. PLEDGED ASSETS AND GUARANTEES: (1) As of December 31, 2010, certain portion of the Company’s assets pledged as collateral for borrowings are summarized as follows (KRW

in millions, USD and EUR in thousands):

Pledged Assets Book value amount Guarantee for Borrowings Lender

Short-term financial Performance Gyeongsangnam-do instruments ￦ 10,000 ￦ 10,000 of contracts ￦ - (Provincial government)

〃 Performance Masan Regional Maritime

10,000 10,000 of contracts - Affairs and Port office

Long-term investment securities 198 198 Borrowings 520 Korea Housing Guarantee Co., Ltd.

Borrowings Tangible assets 475,200 in Won 242,500 KDB

Borrowings in foreign $ 256,026 〃￦ 1,730,554 $ 880,000 currencies € 15,797 〃

￦ 243,020

￦ 495,398 $ 256,026

￦ 1,750,752 $ 880,000 € 15,797


61

Provided for Lender 2010

Daewoo Corp. AKA ￦ 16,267

Korea Line Corp. KDB 355,576

KLDS Korea Finance Corp. & others 205,200

Blue Pearl Inc. Korea Finance Corp. & KDB 124,176

Blue Topaz Inc. Korea Finance Corp. & KDB 124,176

Daewoo-Mangalia Ltd. Samsung Fire & Marine Insurance Ltd. & others 52,000

￦ 877,395

(2) Guarantees provided to others except for affiliates as of December 31, 2010 are as follows (KRW million):

(3) As of December 31, 2010, the Export-Import Bank of Korea and others have provided performance guarantees amounting to ￦289,064 million, US$10,197 million, EUR 176 million to the Company in relation to exports of ships and other. In return, the Company has provided shipbuilding materials, ships under construction and certain receivables as collateral to aforementioned institutions.

13. DEBENTURES: Debentures as of December 31, 2010 and 2009 are as follows (KRW in millions, USD in thousands):

(1) Debentures in local currency

(2) Debentures in foreign currency

(*) ML: Month Libor


Type Maturity date Annual interest rate (%) 2010 2009

Unsecured debenture 2012. 04. ,01 6.39 ￦ 500,000 ￦ 500,000

Less: Discount on debentures (926) (1,615)

Book value ￦ 499,074 ￦ 498,385

2010 2009

Annual interest Type rate (%) Foreign currency Won equivalent Foreign currency Won equivalent

Unsecured debenture 6ML(*)+3.10 US$ 150,000 ￦ 170,835 US$ - ￦ -


FINANCIAL REvIEW

14. SHORT-TERM AND LONG-TERM BORROWINGS: (1) Short-term borrowings as of December 31, 2010 and 2009 are as follows (KRW million):

① Short-term borrowings in local currency

②Short-term borrowings in foreign currency (KRW in millions & USD, EUR, GBP and NOK in thousands):

(*1) EXIM: The Export-Import Bank of Korea

The long-term borrowings in Won will be paid in installments or on maturity. Additionally, tangible assets and others have been pledged as collateral for long-term borrowings.

(2) Long-term borrowings as of December 31, 2010 and 2009 are as follows (KRW million):

①Long-term borrowings in local currency

(*) ML: Month Libor

Lender Description Annual interest rate (%) 2010 2009

1.00, Industrial financial KDB Loans for facility & others debentures+1.90~3.22 ￦ 242,500 ￦ 3,300

Industrial financial Korea Finance Corp. Loans for facility debentures+1.90 40,000 -

Korea Housing Guarantee Co., Ltd. Loans for operation 1.00 520 520

Woori Bank Loans for facility 2.00 400 400

283,420 4,220

Less: current portion of long-term borrowings (652) (852)

Long-term borrowings, net ￦ 282,768 ￦ 3,368

Lender Annual interest rate (%) 2010 2009

EXIM (*1) - ￦ - ￦ 172,660

EXIM (*1) - - 156,359

Korea Exchange Bank - - 100,000

SC First Bank - 7,982 7,987

￦ 7,982 ￦ 437,006

2010 2009

Annual interest Foreign Foreign Lender rate (%) currencies Won equivalent currencies Won equivalent

Nong Hyup & others 6ML(*)+1.26 US$ 619,793 ￦ 705,883 US$ 479,177 ￦ 559,487

EUR 50,498 76,434 - -

GBP 147 259

NOK 5,633 1,090 - -

EXIM 3ML(*)+1.62 ~1.72 US$ 215,401 245,320 - -

￦ 1,028,986 ￦ 559,487


63


②Long-term borrowings in foreign currencies (KRW in millions, USD in thousands):

2010 2009

Annual interest Lender rate (%) Foreign currency Won equivalent Foreign currency Won equivalent

3ML+ KDB 0.76~2.19 $ 50,463 ￦ 57,472 $ 101,465 ￦ 118,471

Hana Bank 8.95 50,000 56,945 50,000 58,380

KNOC (*) 2.50 9,479 10,506 9,235 10,783

6ML+ EXIM 2.73~4.50 128,000 145,779 50,000 58,380

SC Singapore & others (ABL) - - - 125,250 146,242

Daewoo Yield-up 6ML+4.90 Co., Ltd. (SPC) ~5.00 180,000 205,003 180,000 210,168

417,942 475,705 515,950 602,424

Less: current portion of long-term borrowings (154,546) (176,013) (139,502) (162,883)

Long-term borrowings, net $ 263,396 ￦ 299,692 $ 376,448 ￦ 439,541

The above long-term borrowings in foreign currency will be repaid in installments, and certain tangible assets have been pledged as collateral in relation to such long-term borrowings.

(3) The annual maturity of long-term borrowings as of December 31, 2010 is as follows (KRW million):

(*) Korea National Oil Corporation

Foreign currency Period Local currency (Won equivalents ) Total

2012.1.1~2012.12.31 ￦ 61,072 ￦ 143,406 ￦ 204,478

2013.1.1~2013.12.31 120,932 28,473 149,405

2014.1.1~2014.12.31 80,232 72,890 153,122

Thereafter 20,532 54,923 75,455

￦ 282,768 ￦ 299,692 ￦ 582,460


FINANCIAL REvIEW

15. ACCRUAL FOR RETIREMENT AND SEVERANCE BENEFITS: (1) Accrual for retirement and severance benefits as of December 31, 2010 and 2009 are as follows (KRW million):

(2) The financial instruments, which the pension plan assets consist of as of December 31, 2010 and 2009 are as follows (KRW million):

The Company has partially funded the accrual for retirement and severance benefits through severance insurance deposits amounting to 45.7% and 46.7% of the reserve balances of retirement and severance benefits as of December 31, 2010 and 2009, respectively, with Korea Development Bank and others. In accordance with the National Pension Law of Korea, a portion of its severance benefits, which has been transferred, in cash, to the National Pension Fund by March 1999, is presented as a deduction from accrual for retirement and severance benefits.

16. LEASES:

(1) The Company entered into a capital lease contract on March 1, 2006 with the 7th Cocrap in relation to the lease of its office premises, and recognized related land and building as capital lease assets and the present value of future minimum lease payments as capital lease liabilities. During 2010, upon the completion of the lease, the capital lease assets transferred to Company. In addition, the Company entered into a capital lease contract in a form of a sale-leaseback on April 21, 2009, with HP financial service in relation to the lease of its computer equipments, and recognized the equipments as capital lease assets and the present value of future minimum lease payments as capital lease liabilities.

(2) The gross amounts of land, building and related accumulated depreciation recorded under capital leases are as follows (KRW million):


Beginning balance ￦ 265,003 ￦ 276,349

Accrued 74,792 61,871

Paid (33,499) (73,217)

Ending balance ￦ 306,296 ￦ 265,003


KDB pension deposits ￦ 77,408 ￦ 50,000

Mirae Asset derivative-linked securities 12,773 12,000

￦ 90,181 ￦ 62,000

2010 2009

Furniture and Furniture and Land Building fixtures Land Building fixtures

Acquisition value ￦ - ￦ - ￦ 20,381 ￦ 65,184 ￦ 60,730 ￦ 20,381

Revaluation - - - 39,494 - -

Accumulated depreciation - - (7,824) - (4,459) (3,353)

Book value ￦ - ￦ - ￦ 12,557 ￦ 104,678 ￦ 56,271 ￦ 17,028


65


(3) Future minimum lease payments under the lease contracts as of December 31, 2010 are as follows (KRW million):

2010

Description Minimum Lease Payments

Due within a year ￦ 6,197

Due after one year through five years 3,099

Total minimum lease payments 9,296

Interest expense payable (474)

Present value of net minimum capital lease payments ￦ 8,822

17. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES: Assets and liabilities denominated in foreign currencies as of December 31, 2010 and 2009 are as follows (KRW in millions, foreign

currencies in thousands):

2010 2009

Account Foreign currencies Won equivalent Foreign currencies Won equivalent

Assets:

Cash and cash equivalents US$ 50,476 ￦ 57,487 US$ 32,059 ￦ 37,432

〃 EUR 36 54 EUR - -

Accounts receivable US$ 3,776,690 4,301,261 US$ 3,634,396 4,243,521

Long-term accounts receivable US$ 1,304,567 1,485,771 US$ 181,276 211,658

Accounts receivable-other US$ 125,510 142,943 US$ 124,742 145,649

〃 EUR 47,948 72,574 EUR 43,500 72,831

Accrued income US$ 34,226 38,979 US$ 13,906 16,237

〃 EUR 5,378 8,141 EUR 2,503 4,190

Long-term accrued income US$ 9,434 10,745 US$ 10,033 11,714

Short-term loans US$ 72,047 82,054 US$ 19,957 23,302

Long-term loans US$ 318,210 362,409 US$ 174,353 203,575

Total US$ 5,691,160 US$ 4,190,722

EUR 53,362 ￦ 6,562,418 EUR 46,003 ￦ 4,970,109

Liabilities:

Short-term borrowings US$ 835,194 ￦ 951,203 US$ 479,177 ￦ 559,487

〃 EUR 50,498 76,434 EUR - -

GBP 147 258 GBP - -

〃 NOK 5,633 1,090 NOK - -

Trade payables EUR 21,693 32,834 EUR 28,265 47,323

〃 GBP 2,157 3,791 GBP 4,951 9,296

〃 JPY 1,096,660 15,321 JPY 113,143 1,429

〃 NOK 7,261 1,405 NOK 21,146 4,260

〃 SEK - - SEK 199 32

〃 US$ 141,705 161,387 US$ 102,403 119,566


FINANCIAL REvIEW

The Company recognized gain on foreign currency translation amounting to ￦48,782 million and loss on foreign currency translation amounting to ￦75,230 million as non-operating income (loss) in relation to the above foreign currency translation.

Accounts payable-other CAD - - CAD 59 65

〃 SEK 1 - SEK 1 -

〃 EUR 2,557 3,871 EUR 5,308 8,888

〃 GBP 3,306 5,812 GBP 27 51

〃 NOK - - NOK 10 2

SGD 4,013 3,548 SGD - -

CNY 15 3 CNY - -

〃 US$ 261,684 298,032 US$ 228,809 267,158

Accrued expenses EUR 5,749 8,702 EUR 6,555 10,975

US$ 2,004 2,282 US$

Deposit received EUR 6,321 9,567 EUR 6,710 11,235

〃 CAD 149 169 CAD 149 165

〃 US$ 22,678 25,828 US$ 10,891 12,717

Long-term accounts payable-other US$ 107,942 122,935 US$ 122,630 143,183

Current portion of long-term borrowings US$ 154,546 176,013 US$ 139,502 162,883

Long-term borrowings US$ 263,396 299,692 US$ 376,448 439,541

Current portion of capital lease liabilities US$ 5,086 5,792 US$ 4,789 5,592

Capital lease liabilities US$ 2,660 3,030 US$ 7,746 9,044

Debentures US$ 150,000 170,835 US$ - -

Total CAD 149 CAD 208

EUR 86,818 EUR 46,838

GBP 5,610 GBP 4,978

JPY 1,096,660 JPY 113,143

NOK 12,894 NOK 21,156

SEK 1 SEK 200

SGD 4,013 SGD -

CNY 15 CNY -

US$ 1,946,895 ￦ 2,379,834 US$ 1,472,395 ￦ 1,812,892

2010 2009

Account Foreign currencies Won equivalent Foreign currencies Won equivalent


67


18. PROVISIONS: Changes in provisions for the years ended December 31, 2010 and 2009 are as follows (KRW million):

2010

Account name Beginning balance Increase Decrease Ending balance

Provision for construction loss ￦ 391 ￦ 20,703 ￦ (12,996) ￦ 8,098

Provision for construction warranty costs 72,012 23,946 (21,367) 74,591

￦ 72,403 ￦ 44,649 ￦ (34,363) ￦ 82,689

2009

Account name Beginning balance Increase Decrease Ending balance

Provision for construction loss ￦ 110,719 ￦ - ￦ (110,328) ￦ 391

Provision for construction warranty costs 65,941 24,634 (18,563) 72,012

Provision for contingent losses 17,910 - (17,910) -

￦ 194,570 ￦ 24,634 ￦ (146,801) ￦ 72,403

19. COMMITMENTS AND CONTINGENCIES:

(1) The Company pledged 15 blank notes and 7 notes with an aggregate face value of ￦3,731 million to financial institutions as collateral for certain borrowings as of December 31, 2010.

(2) As of December 31, 2010, the Company is a plaintiff in litigations with claims exposure of ￦3,781 million and the Company is a defendant in litigations with claims exposure of ￦11,158 million and US$ 46,892 thousand.

(3) The Company formed a consortium with Korea National Oil Corporation to invest in overseas oil fields and the Company has a 9.75% ownership in the consortium. The Consortium invested in the KNOC WEST 321 lot and the KNOC EAST 323 lot in Nigeria, with Equator Exploration Ltd. from England and a local enterprise in Nigeria. As a result of the investment, the Consortium owns 60% of total shares of those mining lots, with the Company’s interest equaling 5.85%. The Consortium acquired the right to develop the mining lots.

The Company recorded the amount of its investment as a component of other investments and has provided to the Nigerian government a contract performance guarantee in regard to the investment amounting to US$ 27,295 thousand and has been provided a guarantee in the same amount by Nonghyup.

(5) The Company formed a consortium with Korea National Oil Corporation to invest in overseas oil fields and the Company’s shareholding in the consortium is 5%. The Consortium, with Kazmunay Gas, invested in Zhambyl region’s mining lots in Kazakhstan, owning 27% of total shares with the Company’s interest equaling 1.35%. In July 2007, the Company had originally bought a 5% stake in a Dutch corporation of the consortium, KC.KAZAKH B.v, and executed an agreement with a Kazakhstan’s national oil company, Kazmunay Gas, for mining lot development in Kazakhstan.

The Company recorded the entire investment of ￦800 million as a component of other investments and ￦8,900 million as long-term loans.


FINANCIAL REvIEW

(6) The Company formed a consortium with DSME E&R Corporation, its subsidiary, and two other parties, Panco Energy and GNG Holdings Inc. to invest in overseas oil fields in Cepu, Indonesia. The Company directly owns 40% of the consortium and 80% with an ownership of 40% through DSME E&R, a wholly owned subsidiary of the Company. Exxon Mobil is the operator of the consortium and a national oil company of Indonesia, Pertamina, and four other local public companies joined the consortium. During January 2009, the consortium entered into a conditional underwriting agreement for the purchase of the shares of PT. Syabas Usaha Migas which owns 49% of PT PJUC, one of those four local public companies owning 2.24% of total shares in the mining lot. The Company’s indirect ownership interest in the consortium is 0.44% and 0.88% together with the shares of DSME E&R.

The Company recorded the entire investment of ￦2,200 million in Syabas Usaha Migas as a component of investments accounted for using the equity method and ￦10,900 million as long-term loans.

(7) The Company entered into bank overdraft agreements with Nonghyup and others with aggregate limit amounting to ￦30,000 million and a credit facility arrangement with the Korea Development Bank and others regarding the opening of letter of credit with the limit set at US$1,254,000 thousand. In addition, the Company entered into payment guarantee agreements with the Korea Development Bank and others with the limit set at US$ 20,863,498 thousand.

20. DERIVATIVE INSTRUMENTS:

(1) The Company has outstanding currency forward contracts with the Korea Development Bank and others for hedging risks or trading purposes. Details of the outstanding forward contracts as of December 31, 2010 and 2009 are as follows (foreign currency in thousands):

Outstanding contract balance


For fair value hedging US$ 9,875,338 US$ 12,637,100

〃 EUR 530,383 EUR 93,371

〃 NOK - NOK 443

〃 JPY - JPY 3,721,500

〃 GBP 42,395 GBP -

〃 SGD 27,639 SGD -

For cash flows hedging US$ 110,000 US$ -

For trading US$ 700,000 US$ 490,000

〃 EUR 1,697 EUR 14,610

Total US$ 10,685,338 US$ 13,127,100

EUR 532,080 EUR 107,981

NOK - NOK 443

JPY - JPY 3,721,500

GBP 42,395 GBP -

SGD 27,639 SGD -


69

2010

Firm Firm Currency Adjustment Cost of Other income commitment commitment forwards asset to sales sales (expense) (*2) Others (*4) assets (*1) liabilities (*1) (liabilities)

For fair value hedging (*1) ￦ (1,183,378) ￦ 4 ￦ 1,019 ￦ - ￦ 785,333 ￦ 189,487 ￦ (628,817)

For cash flow hedging (*3) - - (1,880) (87,283) - - (3,119)

For trading - - 27,346 - - - (5,317)

￦ (1,183,378) ￦ 4 ￦ 26,485 ￦ (87,283) ￦ 785,333 ￦ 189,487 ￦ (637,307)

2009

Firm Firm Currency Adjustment Cost of Other income commitment commitment forwards asset to sales sales (expense) (*2) Others (*4) assets (*1) liabilities (*1) (liabilities)

For fair value hedging (*1) ￦ (1,923,067) ￦ 13,396 ￦ (88,151) ￦ (162,683) ￦ 2,094,358 ￦ 49,755 ￦ (2,541,752)

For trading - - (59,433) - - - (5,643)

￦ (1,923,067) ￦ 13,396 ￦ (147,584) ￦ (162,683) ￦ 2,094,358 ￦ 49,755 ￦ (2,547,395)

(2) Details of adjustment for and valuation of currency forward contracts for the years ended December 31, 2010 and 2009 are as follows (KRW million):

21. STOCKHOLDERS’ EQUITY: (1) The Company has retired 1,000,000 shares of treasury stock acquired for ￦15,416 million on August 23, 2004 by approval at the board

of directors’ meeting. Accordingly, the number of shares issued has decreased. However, the amount of paid-in capital has not been reduced. The Company has 400,000,000 authorized shares of common stock (￦5,000 par value), of which 191,390,758 shares are issued as of December 31, 2010.

(2) There are no changes in capital stock for the year ended December 31, 2010 and 2009.

(*1) The Company entered into foreign exchange forward contracts, qualifying firm commitments, for foreign exchange hedging purposes, of KRW against US$ and EUR,

and amounting to firm commitment assets of ￦785,333 million and ￦2,094,358 million as of December 31, 2010 and December 31, 2009, respectively, and ￦189,487

million and￦49,755 million as firm commitment liabilities as of December 31, 2010 and December 31, 2009, respectively.

(*2) The Company entered into certain knock-in contracts, which become contracted automatically in cases where the spot rates exceed designated levels in designated

periods, and the Company recorded ￦4,288 million of gain on valuation of such currency forward contracts as of December 31, 2009.

(*3) The Company has entered into an interest rate swap contract with Goldman Sachs to hedge the exposure to changes in interest rates adopting the cash flow hedge

accounting and recognized ￦2,364 million (after tax effect) as loss on exchange of derivatives (other comprehensive loss).

(*4) Others consist of ￦84,164 million of advances from customers and ￦3,119 million of accumulated other comprehensive income.



FINANCIAL REvIEW

22. CAPITAL ADJUSTMENTS: Details of capital adjustments as of December 31, 2010 and 2009 are as follows (KRW million):

23. ACCUMULATED OTHER COMPREHENSIVE INCOME: Details of other comprehensive income as of December 31, 2010 and 2009 are as follows (KRW million):

24. RETAINED EARNINGS: Retained earnings as of December 31, 2010 and 2009 are as follows (KRW million):

(*1) The Korean Commercial Code requires the Company to appropriate as legal reserve an amount equal to at least 10 percent of cash dividends paid for each

accounting period, until the reserve equals 50 percent of stated capital. The legal reserve may be used to reduce a deficit or transferred to capital stock.

(*2) Under the Tax Exemption and Reduction Control Law, the Company is allowed certain deductions from taxable income for research and manpower development by

appropriating retained earnings. The reserve is generally added back to taxable income after certain grace periods and may be used to pay dividends.

2010 2009

Treasury stock ￦ (30,000) ￦ (30,000)

Other capital adjustments 51 (1,643)

￦ (29,949) ￦ (31,643)

2010 2009

Gain on valuation of long-term investment securities ￦ 116,365 ￦ 3,941

Gain on valuation of equity method investments 59,338 66,891

Loss on valuation of equity method investments (6,084) (3,679)

Loss on valuation of derivatives (2,364) -

Gain on revaluation of assets 797,766 798,531

￦ 965,021 ￦ 865,684

2010 2009

Legal reserve (*1) ￦ 48,740 ￦ 39,240

Reserve for research and human resource development (*2) 115,000 10,000

Reserve for facility expansion 1,120,000 890,000

Reserve for dividend equalization 70,000 70,000

Reserve for loss on disposal of treasury stock - 9,000

Unappropriated retained earnings 791,740 443,145

￦ 2,145,480 ￦ 1,461,385


71

25. SELLING AND ADMINISTRATIVE EXPENSES: Details of selling, general and administrative expenses for the years ended December 31, 2010 and 2009 are as follows (KRW million):

2010 2009

Salaries (Note 7) ￦ 69,055 ￦ 73,899

Provision for retirement and severance benefits (Notes 7 and 15) 5,926 5,998

Other employee benefits 22,168 17,295

Rent 4,416 6,981

Entertainment 989 834

Depreciation (Notes 8 and 31) 5,655 7,037

Amortization(Notes 10 and 31) - 940

Taxes and public dues 4,037 2,597

Advertising 2,990 3,009

Research and development (Notes 10 and 11) 61,931 59,678

Bad debt expense (Note 7) 99,649 3,450

Supplies 1,121 1,444

Printing 1,035 1,042

Communications 1,018 923

Water, light and heating 440 497

Repairs and maintenance 1,927 2,133

Insurance 1,912 1,295

Travel 9,050 7,950

Commissions 69,838 71,234

Training (Note 11) 4,539 4,941

Maintenance service fees 11,463 12,624

Warranty 3,631 4,934

Stock compensation - 523

Others 3,110 2,923

￦ 385,900 ￦ 294,181



FINANCIAL REvIEW

26. INCOME TAX EXPENSE: Income tax expense for the years ended December 31, 2010 and 2009 and deferred tax assets (liabilities) as of December 31, 2010 are as

follows:

(1) Components of income tax expense

Income tax expense for the years ended December 31, 2010 and 2009 consists of the following (KRW million):

(2) The reconciliation between income before income tax and income tax expense

The reconciliation between income before income tax and income tax expense for the years ended December 31, 2010 and 2009 are as follows (KRW million):


Income tax payable ￦ 177,141 ￦ 112,498

Changes in deferred income tax from temporary differences 96,492 308,004

Total amount of income tax effect 273,633 420,502

Income tax directly reflected to shareholders’ equity (29,433) (229,953)

Income tax expense ￦ 244,200 ￦ 190,549

Deferred income tax assets (liabilities) from temporary differences, net at ending of the period ￦ (230,976) ￦ (134,484)

Deferred income tax assets (liabilities) from temporary differences, net at beginning of the period (134,484) 173,520

Changes in deferred income tax from temporary differences ￦ 96,492 ￦ 308,004


Income before income tax ￦ 1,024,332 ￦ 768,053

Income tax expense by applying income tax rate 247,862 185,845

Adjustments:

Nondeductible expenses 5,719 4,999

Tax credits and others (12,132) (11,322)

Differences due to change of tax rate (1,544) (12,818)

Refund of prior years’ income tax 345 (44)

Temporary differences except for deferred income taxes and others 3,950 23,889

Income tax expense ￦ 244,200 ￦ 190,549

Effective tax rate 23.84% 24.81%


73

(3) The changes in temporary differences and deferred income tax assets (liabilities) The changes in temporary differences and deferred income tax assets (liabilities) for the years ended December 31, 2010 2009 are

as follows (KRW million):

2010

Temporary differences Tax assets (Liabilities)

Beginning Increase Ending Beginning Ending Description balance (*1) (decrease) (*1) balance balance balance

Loss on revaluation of land ￦ 937 ￦ - ￦ 937 ￦ 206 ￦ 206

Reserve for research and manpower development (115,000) (50,000) (165,000) (25,300) (36,300)

Provision for construction warranty costs 72,013 2,578 74,591 15,843 16,410

Provision for construction loss 391 7,707 8,098 95 1,959

Loss on foreign currency translation, net 58,507 86,326 144,833 13,745 35,391

Gain (Loss) on valuation of foreign exchange forward contracts, net 340,108 (385,929) (45,821) 82,306 (9,950)

Loss on valuation of the equity method & others, net 249,964 (18,523) 231,441 7,327 (238)

Dividends income (equity method) 780 658 1,438 95 175

Other capital surplus (equity method) (228) (550) (778) (28) (50)

Changes in capital adjustments using the equity method 800 (1,947) (1,147) - (252)

Changes in AOCI using the equity method (80,917) 11,049 (69,868) (17,704) (16,615)

Gain on valuation of long-term investment securities, net (5,052) (144,134) (149,186) (1,111) (32,821)

Loss on valuation of derivatives, net - 3,119 3,119 - 755

Gain on revaluation of land (accumulated other comprehensive income), net (1,023,757) 980 (1,022,777) (225,227) (225,011)

Allowance for advanced depreciation (234,939) 141 (234,798) - -

Others 65,977 92,026 158,003 15,269 35,365

Total ￦ (670,416) ￦ (396,499) ￦ (1,066,915) ￦ (134,484) ￦ (230,976)



FINANCIAL REvIEW

(*1) The income tax rate used in computing deferred income tax asset (liabilities) is the expected corporate income tax rate, which is applicable to the period when the

temporary differences reverse.

(*2) Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be

utilized.

2009

Temporary differences Tax assets (Liabilities)

Beginning Increase Ending Beginning Ending Description balance (*1) (decrease) (*1) balance balance balance

Loss on revaluation of Land ￦ - ￦ 937 ￦ 937 ￦ - ￦ 206

Reserve for research and manpower development (10,000) (105,000) (115,000) (2,420) (25,300)

Provision for construction warranty costs 65,941 6,072 72,013 14,506 15,843

Provision for construction loss 110,719 (110,328) 391 26,794 95

Loss on foreign currency translation, net 43,182 15,325 58,507 8,547 13,745

Loss on valuation of foreign exchange forward contracts, net 503,414 (163,306) 340,108 119,133 82,306

Loss on valuation of the equity method & others, net 43,653 206,311 249,964 9,303 7,327

Dividends income (equity method) 680 100 780 80 95

Other capital surplus (equity method) (228) - (228) (28) (28)

Changes in capital adjustments using the equity method - 800 800 - -

Changes in AOCI using the equity method (19,134) (61,783) (80,917) (11,175) (17,704)

Gain on valuation of long-term investment securities, net (15,858) 10,806 (5,052) (3,489) (1,111)

Gain on revaluation of land (accumulated other comprehensive income), net - (1,023,757) (1,023,757) - (225,227)

Allowance for advanced depreciation (234,965) 26 (234,939) - -

Others 55,615 10,362 65,977 12,269 15,269

Total ￦ 543,019 ￦ (1,213,435) ￦ (670,416) ￦ 173,520 ￦ (134,484)


75


(4) Deductible temporary differences, not recognized due to uncertainty of its realization, are as follows (KRW million):

(*1) The Company did not recognize deferred income tax assets related to the deductible temporary differences caused by investment securities using the equity method

as the probability of its disposition in the near future is uncertain.

(*2) Allowance for advanced depreciation is excluded from the recognition of deferred tax due to uncertainty of its realization as of December 31, 2010 and 2009.

(5) Deferred income tax assets (liabilities) directly adjusted to capital as of December 31, 2010 and 2009 are summarized as follows (KRW million):


Loss on valuation of equity method (*1) ￦ 232,522 ￦ 216,662

Investment securities using the equity method (capital surplus) (550) (100)

Investment securities using the equity method (capital adjustments) - 800

Investment securities using the equity method (accumulated other comprehensive income) 5,654 (442)

Dividend income (equity method) 643 346

Allowance for advanced depreciation (*2) (234,798) (234,939)

Total ￦ 3,471 ￦ (17,673)

2010 2009

Deferred Deferred income tax income tax assets assets Description Amount Tax effect (liabilities) Amount Tax effect (liabilities)

Investment securities using the equity method (capital surplus) ￦ 99 ￦ - ￦ (22) ￦ - ￦ - ￦ -

Changes in capital adjustments using the equity method 1,147 - (252) - - -

Gain (Loss) on valuation of long-term investment securities 144,134 - (31,710) (10,806) - 2,377

Loss on valuation of foreign exchange forward contracts (cash flow hedge) (3,119) - 755 - - -

(Negative) Changes in valuation of equity method accounted investments (other comprehensive income) (4,952) - 1,089 61,783 - (6,529)

Gain (Loss) on revaluation of plant, property and equipment (981) - 216 1,023,757 - (225,227)

Investment securities using the equity method (retained earnings) (2,229) - 491 (137,250) - (574)

Total ￦ 134,099 ￦ - ￦ (29,433) ￦ 937,484 ￦ - ￦ (229,953)


FINANCIAL REvIEW

(6) Income tax refundable and income tax payable, and deferred tax assets and liabilities as of December 31, 2010 and 2009 are as follows (KRW million):

27. EARNINGS PER SHARE: (1) Basic earnings per share for the years ended December 31, 2010 and 2009 are as follows (KRW):

Diluted earnings per share for the years ended December 31, 2010 and 2009 is identical to basic earnings per share, since there are no dilutive potential common shares and dilutive effect.

(2) The weighted average number of common shares outstanding for the years ended December 31, 2010 and 2009 is calculated as follows:


Deferred income tax assets ￦ 144,980 ￦ 191,626

Deferred income tax liabilities 375,956 326,110

Income tax payable 176,796 112,542

Income tax refundable (47,598) (10,174)


Net income ￦ 780,131,505,575 ￦ 577,504,048,264

Net income applicable to common stock 780,131,505,575 577,504,048,264

Weighted average number of common shares outstanding 189,046,888 189,046,888

Earnings per share ￦ 4,127 ￦ 3,055

2010

Weighted Description Number of shares Days average shares

Common stock 191,390,758 365 191,390,758

Treasury stock (2,343,870) 365 (2,343,870)

189,046,888 189,046,888

2009

Weighted Description Number of shares Days average shares

Common stock 191,390,758 365 191,390,758

Treasury stock (2,343,870) 365 (2,343,870)

189,046,888 189,046,888


77

28. STATEMENTS OF COMPREHENSIVE INCOME: Statements of comprehensive income for the years ended December 31, 2010 and 2009 are as follows (KRW million):

29. NON-CASH INVESTING AND FINANCING ACTIVITIES: Significant non-cash investing and financing activities for the years ended December 31, 2010 and 2009 are summarized as follows (KRW

million):

Statements of comprehensive income for the years ended December 31, 2010 and 2009 are as follows (KRW million):


Net income ￦ 780,132 ￦ 577,504

Other comprehensive income (loss): Gain (Loss) on valuation of long-term investment securities, net of tax effect of ￦(31,710) and ￦2,377 in 2010 and 2009, respectively 112,424 (8,428)

Loss on valuation of cash flow hedging derivatives, net of tax effect of ￦755 and nil in 2010 and 2009, respectively (2,364) -

Adjustment of equity in equity method investees, net of tax effect of ￦1,089 and ￦(6,529) in 2010 and 2009, respectively (9,959) 55,254

Gain(Loss) on revaluation of plant, property and equipment, net of tax effect of ￦216 and ￦(225,227) in 2010 and 2009, respectively (765) 798,530

Comprehensive income ￦ 879,468 ￦ 1,422,860

2010 2009

Transfer of construction-in-progress to tangible assets ￦ 42,532 ￦ 615,130

Transfer of advanced payments to construction-in-progress 1,633 -

Transfer of capital lease land & buildings to land and buildings 160,949 -

Acquisition of furniture and fixtures on capital lease - 20,381

Revaluation of land and capital lease land - 1,023,018

Transfer to current portion of long-term debt 223,958 -

Transfer to current portion of long-term loan 64,971 -



FINANCIAL REvIEW

30. CONSTRUCTION CONTRACTS: (1) The changes in ongoing construction contracts for the year ended December 31, 2010 are as follows (KRW million):

(*1) Other items consist of increases or decreases due to fluctuation of foreign exchange rates.

(*2) Increase or decrease of sales related to firm commitment assets (liabilities) is excluded.

(2) Details of the significant profits and losses related to ongoing construction contracts as of December 31, 2010 are as follows (KRW million):

31. SEGMENT INFORMATION: (1) The Company has three reportable operating segments. General information on segments of the Company as of December 31, 2010

is as follows:

(3) The Company has recorded provision for losses on construction contracts of ￦8,098 million as of December 31, 2010.

2010

Beginning Revenue Ending balance New contracts Other (*1) recognized (*2) balance

Shipbuilding ￦ 19,175,969 ￦ 4,962,765 ￦ (268,765) ￦ (8,155,197) ￦ 15,714,772

Offshore plants 8,528,012 6,526,301 (16,716) (4,979,422) 10,058,175

Others 93,871 - 110,183 (123,264) 80,790

￦ 27,797,852 ￦ 11,489,066 ￦ (175,298) ￦ (13,257,883) ￦ 25,853,737

2010

Advances Accounts Accumulative revenues Accumulative cost from customers receivable-trade

Shipbuilding ￦ 4,790,657 ￦ 3,982,883 ￦ 3,553,701 ￦ 2,325,794

Offshore 7,813,691 6,982,874 802,056 1,932,133

Others 150,379 57,702 998 29,511

￦ 12,754,727 ￦ 11,023,459 ￦ 4,356,755 ￦ 4,287,438

Segment Items Major customer Proportion of sales

Liquefied natural gas (“LNG”) Shipbuilding containers and other Exmar N.V. and others 60.2%

Offshore plants Platforms and other Total E&P Angola and others 38.8%

Others Apartments, welding machines and other Various 1.0%

100.0%


79

(2) Financial information on segments of the Company for the years ended December 31, 2010 and 2009 is as follows (KRW million):

2010

Shipbuilding Offshore plants Other Total

Sales ￦ 7,272,321 ￦ 4,678,921 ￦ 123,263 ￦ 12,074,505

Operating income 636,666 674,496 85,815 1,396,977

Plant and intangible assets 3,857,313 (*) 221,337 4,078,650

Depreciation and other expenses 161,299 (*) (*) 161,299

2009

Shipbuilding Offshore plants Other Total

Sales ￦ 7,811,604 ￦ 4,542,546 ￦ 88,369 ￦ 12,442,519

Operating income 474,890 433,153 70,661 978,704

Plant and intangible assets 3,793,228 (*) 217,906 4,011,134

Depreciation and other expenses 158,231 (*) (*) 158,231


(*) Plant, intangible assets, depreciation and certain other expenses could not be segregated reasonably into the various segments. Accordingly, such amounts are all

included in the shipbuilding segment.

(3) Adjustments to operating income for the years ended December 31, 2010 and 2009 are as follows (KRW million):

2010 2009

Total operating income of segments ￦ 1,396,977 ￦ 978,704

Non allocated selling, general and administrative expenses (385,900) (294,181)

￦ 1,011,077 ￦ 684,523


FINANCIAL REvIEW

33. SUBSEQUENT EVENTS: On January 4, 2011, Doosan Engine Co., Ltd. listed its stocks on Korea Exchange, the Company revalued the relevant investment

securities (acquisition price: ￦9,350 million) to the market value and recognized a gain on valuation amounting to ￦134,570 million (before tax effect) as a component of other comprehensive income.

34. PLANNING AND ADOPTION OF K-IFRS: In accordance with the road map for IFRS adoption announced in March 2007, the Company is required to present financial statements

prepared in accordance with K-IFRS beginning January 1, 2011. Since 2009, the Company has been preparing for the IFRS adoption and is currently processing, in phases, preliminary analysis of effects, establishment of accounting policies and financial reporting system, and parallel application of the financial reporting systems under the current accounting standards and K-IFRS.

The Company established an overall implementation plan for the preliminary analysis of its effect and preparation for IFRS adoption in 2009 and is currently in process of establishing accounting policies and an appropriate financial reporting system. In addition, the Company plans to stabilize its financial reporting system through parallel application of the current accounting standards and K-IFRS starting 2010 and disclose its financial statements in accordance with K-IFRS beginning January 1, 2011.

As a result of preliminary analysis of effects of the differences between current accounting standards and K-IFRS, the Company anticipates that the accounting treatments of items such as post-employment benefits, changes of consolidation scope, deferred taxes and others will have effects on its financial information.

32. RESULTS OF OPERATIONS FOR THE LAST INTERIM PERIOD: The unaudited financial performance for the three months ended December 31, 2010 and 2009 is summarized as follows (KRW million,

except per share amounts):

For the three months For the three months ended ended December 31, 2010 December 31, 2009

Sales ￦ 3,570,677 ￦ 3,176,315

Operating Income 303,854 200,321

Net income 233,110 82,893

Earnings per share 1,233 438


81

English Translation of a Report Originally Issued in Korean

To the Representative Director of

Daewoo Shipping & Marine Engineering Co., Ltd.

We have reviewed the accompanying Report on the Management’s Assessment of IACS (the “Management’s

Report”) of Daewoo Shipping & Marine Engineering Co., Ltd. (the “Company”) as of December 31, 2010. The

Management’s Report, and the design and operation of IACS are the responsibility of the Company’s management.

Our responsibility is to review the Management’s Report and issue a review report based on our procedures. The

Company’s management stated in the accompanying Management’s Report that “based on the assessment of the

IACS as of December 31, 2010, the Company’s IACS has been appropriately designed and is operating effectively

as of December 31, 2010, in all material respects, in accordance with the IACS Framework established by the Korea

Listed Companies Association.”

We conducted our review in accordance with the IACS Review Standards established by the Korean Institute of

Certified Public Accountants. Those standards require that we plan and perform a review, objective of which is

to obtain a lower level of assurance than an audit, of the Management’s Report in all material respects. A review

includes obtaining an understanding of a Company’s IACS and making inquiries regarding the Management’s

Report and, when deemed necessary, performing a limited inspection of underlying documents and other limited

procedures.

The Company’s IACS represents internal accounting policies and a system to manage and operate such policies

to provide reasonable assurance regarding the reliability of financial statements prepared, in accordance with

accounting principles generally accepted in the Republic of Korea, for the purpose of preparing and disclosing

reliable accounting information. Because of its inherent limitations, IACS may not prevent or detect a material

misstatement of the financial statements. Also, projections of any evaluation of effectiveness of IACS to future

periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the

degree of compliance with the policies or procedures may deteriorate.

Based on our review, nothing has come to our attention that causes us to believe that the Management’s Report

referred to above is not fairly stated, in all material respects, in accordance with the IACS Framework established by

the Korea Listed Companies Association.

Our review is based on the Company’s IACS as of December 31, 2010, and we did not review its IACS subsequent to

December 31, 2010. This report has been prepared pursuant to the Acts on External Audit for Stock Companies in

the Republic of Korea and may not be appropriate for other purposes or for other users.

March 7, 2011

Independent Accountants’ Review Report on Internal Accounting Control System (“IACS”)


FINANCIAL REvIEW

English Translation of a Report Originally Issued in Korean

To the Board of Directors and Audit Committee of

Daewoo Shipping & Marine Engineering Co., Ltd.

I, as the Internal Accounting Control Officer (“IACO”) of Daewoo Shipping & Marine Engineering Co., Ltd. (“the

Company”), assessed the status of the design and operation of the Company’s IACS for the year ended December 31,

2010.

The Company’s management including IACO is responsible for designing and operating IACS. I, as the IACO, assessed

whether the IACS has been appropriately designed and is effectively operating to prevent and detect any error or

fraud which may cause any misstatement of the financial statements, for the purpose of preparing and disclosing

reliable financial statements. I, as the IACO, applied the IACS Framework established by the Korea Listed Companies

Association for the assessment of design and operation of the IACS.

Based on the assessment of the IACS, the Company’s IACS has been appropriately designed and is operating

effectively as of December 31, 2010, in all material respects, in accordance with the IACS Framework.

January 24, 2011

Report on the Assessment of Internal Accounting Control System (“IACS”)

Yoo Hoon Kim

Internal Accounting Control Officer

Sang Tae Nam

Chief Executive officer


83

Irvine

Houston

Corporate History

1973~1999Legacy Begins

2006~2010 Going Green, Surging Ahead

2000~2005 New Developments

1973 BeginsconstructionoftheOkpoShipyard

1978 DaewooShipbuilding&HeavyMachineryCo,Ltd(DSHM)takesownershiptheOkpoShipyard

1981 HoldstheOkpoShipyarddedicationceremony

1989 KoreangovernmentappointsDSHManindustrialrationalizationcompany

1994 DSHMmergesintoDaewooHeavyIndustriesLtd.(DHI)

1997 EstablishesDaewoo-MangaliaHeavyIndustriesLtd.inRomania

1999 AnnouncesDaewooConglomerate’srestructuringplan

BeginscorporateworkoutprogramforDHI

2006 EstablishesDSMEConstructionCo

2007 Wins$6billionExportTowerAwardatthe44thTradeDayCeremony

Hitsanewrecordnumberoforders,surpassing$20billion

2008 WinsKoreaITInnovationAward

Achievesasafetyresultof10millionman-hourswithIIFintheQatargasProject

ReceivesISO27001Certification

2009 WinsTOPExportAward

EstablishesDeWindCorporation

World’slargestfloatingdockmakesdebutsattheDSMEyard

2010 Rejoinsthe’KRW10trillioninrevenue–KRW1trillioninoperatingprofitclub’

SignsanagreementwithRussianUnitedShipbuildingCorporation(USC)tobuildajointshipyardinZvezda

2000 DHI’sShipbuildingandHeavyMachineryDivisionbecomesanindependentcompany,spunofffromtheformerDaewooConglomerate

2001 Concludescorporateworkoutprogram,stockslistedontheKoreaStockExchange

2002 ChangesofficialcorporatetitletoDSME

2003 IssuesGlobalDepositaryReceipts

2005 EstablishesDSMEShandongCo.,Ltd.(DSSC)inShandong,China


Houston

London

Oslo

Greece

Luanda

Rio de Janerio

Oman

Dubai

Singapore

Sanghai

Shandong

SeoulOkpo

Tokyo

Nigeria

Mangalia

Global NetworkHead Office

SEOUL

85,Da-dong,Jung-gu,Seoul,Korea

Tel:+82-2-2129-0114

Fax:+82-2-756-4390

Ship Yards

OKPO

1Aju-dong,Geoje-si,Gyeongnam,Korea

Tel:+82-55-680-2114

Fax:+82-55-681-4030

MANGALIA

DMHI1,PortuluiStreet905500,

Mangalia,Romania

Tel: +40-241-70-6200

Fax: +40-241-75-6060

Affiliates

KOREA

•DSECCo.,Ltd.

•KoreaMarineFundCorp.

•WellivCorp.

•DSMEE&R

•DSMEConstructionCo.,Ltd.

•ShinhanMachineryCo.,Ltd.

•SamwooHeavyIND.CO.,LTD.

CHINA

DSMEShandongCo.,Ltd.

OMAN

DSMEOmanL.L.C

USA

DeWindCo.inCalifornia

NIGERIA

NDSInternationalEnterpriseLtd.

Overseas Offices

Dubai

Greece

Houston

London

Luanda

Oslo

Perth

Rio de Janeiro

Shanghai

Singapore

Tokyo

CORPORATE HISTORy ∙ GLOBAL NETwORK

Perth

85

Outstanding Vessels in 2010

CAP INES 4,600TEUCONTAINERSHIPOwner:B.SchulteDelivery:Jan.27,2010

DAR SALWA 318KVLCCOwner:KOTCDelivery:Oct.13,2010

BARCELONA KNUTSEN173.4CBMLNGCOwner:KuntsenDelivery:Apr.21,2010

ARCTURUS VOYAGER320KVLCCOwner:MaranTankerDelivery:Jul19,2010

MSC SAVONA14,000TEUCONTAINERSHIPOwner:CPOFFENDelivery:Mar.19,201

EXPEDIENT150.9KCBMLNG-RVOwner:EXMARNVDelivery:Apr.2,2010

VIRGO STAR317KVLCCOwner:VelaDelivery:Jun.23,2010

AGROS4,380TEUCONTAINERSHIPOwner:MARLOWNAVIGATIONDelivery:Jul.29,2010

CMA CGM CORTE REAL13,300TEUCONTAINERSHIPOwner:CMACGMDelivery:Aug.16,2010

85,Da-dong,Jung-gu,Seoul,Korea

Tel:+82-2-2129-0114/Fax:+82-2-756-4390

www.dsme.co.kr

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