November 7, 2007
Kobelco Construction Machinery’s Semiannual Financial Results for Fiscal Year 2007(April 1, 2007–September 30, 2007)

[General Market Conditions]

The domestic market for construction machinery, especially for hydraulic excavators, continued to be strong in the first half of fiscal year 2007, ended September 30, 2007, with demand increasing 4.8% over the same period of the previous year. There were some reasons for concern, such as stagnation in private construction projects and stricter authorization procedures for construction work. However, private capital investment continued to be comparatively brisk. In addition, a decrease in the domestic machine stock due to the export of used equipment created a demand for new machines.

International markets were also strong, with sales increasing 52.1% over the same period last year. The Chinese market as well as the European market continued to expand. Although the U.S. market shrank because of a decline in residential construction influenced by the subprime mortgage issue, the markets in Southeast Asia and emerging countries grew sharply due to infrastructure construction and development of natural resources.

Under these conditions, the Kobelco Construction Machinery Group was able to substantially increase the number of machines sold domestically and overseas, particularly in fast-growing China, on the back of increased global demand. Kobelco’s new models meeting the Tier 3 exhaust emission regulations were well received and contributed to further expanding Kobelco’s market share.

To meet the increase in global demand in the first half of the fiscal year, Kobelco worked on improving its domestic and overseas production systems. This June, Kobelco initiated a joint venture for the production and sale of mini excavators in China, and in October this company launched its products in the Chinese market. In August, Kobelco decided to establish a new plant in Thailand for the integrated production of complete hydraulic excavators. The new plant, which will serve as a production base in the ASEAN region, will start full-fledged operations in April next year. Also, Kobelco has succeeded in enhancing its production capacity at the Hiroshima Factory as the mother plant for the global market. Through these initiatives, Kobelco has taken steps to establishing production systems that are responsive to the current world demand.

However, world demand has expanded quicker than Kobelco anticipated. Consequently, Kobelco has not yet resolved production problems from the previous fiscal year, such as the increase in production costs and sales opportunity loss due to difficulties in parts procurement.

In its semiannual financial results for fiscal 2007 (April 2007–September 2007), Kobelco marked record highs for net sales, operating income, ordinary income and net income, on a consolidated basis.

Semiannual Financial Results for FY2007

Domestic consolidated sales rose 4.8% over the same period last year to 56.0 billion yen and overseas sales increased 52.1% to 88.1 billion yen. Total sales went up 29.4% to 144.1 billion yen. The percentage of overseas consolidated sales to total consolidated sales reached 61.2%.

Through Kobelco’s FY2006-FY2008 Medium-Term Management Plan, which started last year, the Kobelco Construction Machinery Group is working to “create a business enterprise that can weather changes” under the banner slogan, “That’s Kobelco! Your First Choice.” The Kobelco Construction Machinery Group is committed to serving customers’ needs by flexibly responding to changes in the future business environment.

[First half of FY2007: Review by Geographical Area]

Japan

Domestic demand for new hydraulic excavators and mini excavators, Kobelco’s flagship products, grew steadily. As a result, Kobelco's new machine sales increased by 6.3%, over the same period last year, and used machine sales increased by 18.6%. Private investment was active, and, demand for new machines increased as the number of machines in stock decreased from the need for replacement. In the first-half period, Kobelco reinforced the purchasing and marketing of used machines, responding to the growing demand for used machines in overseas markets.

The models that meet the requirements of new emission regulations (Act on Regulation, Etc. of Emissions from Non-road Special Motor Vehicles) have proven to be good sellers. The new models have been successfully accepted in the Japanese market, leading to a 20.7% increase in the sales volume of Kobelco’s hydraulic excavators in the domestic market. This exceeds the market growth rate of 10.6% on a unit basis.

In the mini excavator sector, Kobelco has been enhancing its product competitiveness by focusing on the Ogaki Factory, which opened in April last year. Although demand decreased in the United States, due to declining residential construction and the subprime mortgage issue, the Ogaki Factory is in full production and Kobelco increased its sales volume for mini excavators in the Japanese and overseas markets by 33.5%, over the same period last year.

At the Hiroshima Factory, Kobelco implemented measures to increase its production volume for hydraulic excavators. Kobelco utilized spare production capacity generated by the transfer of mini-excavator production to the Ogaki Factory. It also shifted production of large-sized machines to the Numata Plant in Hiroshima.

As a result, Kobelco succeeded in establishing production systems whereby production capacity will increase by 20% in FY2007 over FY2006 and by 40% in FY2008 over FY2006.

On the other hand, ongoing issues, such as the difficulty in parts procurement caused by strong demand and insufficient production volume over increasing demand, were not solved during the current period.

China

In the Chinese market, where demand continues to grow rapidly, Kobelco's two plants have been operating smoothly. Under a two-location production system, Chengdu Kobelco Construction Machinery Co., Ltd. is located inland in Chengdu, Sichuan Province. The second plant, Hangzhou Kobelco Construction Machinery Co., Ltd. in Hangzhou, Zhejiang Province, is situated on the coast. Kobelco was able to respond to higher demand from inland and coastal areas and increase its production and sales volume far beyond its initial forecast. Kobelco increased its market share as well.

In addition, to make a full-scale entry into the field of mini excavators, whose demand is increasing in the urban areas, Kobelco has established Chengdu Kobelco Mini Excavator Co., Ltd., a joint venture exclusively for these machines, in Chengdu, Sichuan Province in June. The new company launched a highly successful model in October, which meets the needs of the Chinese market.

Overseas (excluding China)

Based on its global alliance with CNH, Kobelco made efforts in 1) enhancing its business focusing on the Asia-Pacific region, which is Kobelco’s main area, and 2) further reinforcing its joint ventures with CNH in the United States and Europe.

In the Asia-Pacific region, especially in Southeast Asia, demand is expected to increase in the medium to long term. To meet this growing demand, it was decided in August that Thai Kobelco Construction Machinery Co., Ltd., a 100% subsidiary of Kobelco Construction Machinery Co., Ltd. producing parts in Thailand, would construct a new plant in a neighboring area. The new plant will produce complete hydraulic excavators and will start operations next April.

A marketing joint venture established in India, Kobelco Construction Equipment India Pvt. Ltd., is steadily expanding its dealer network and successfully launching products in that market.

The Kobelco Construction Machinery Group has been steadily expanding its business by aggressively growing its overseas locations and undertaking marketing initiatives.

In joint venture with its alliance partner CNH Global N.V., Kobelco made progress with licensing its technology to overseas plants to make machines that meet the Tier 3 exhaust emission regulations in Europe and the United States. In addition, Kobelco increased the number of OEM hydraulic excavators supplied to CNH, seizing the opportunity provided by the steady markets in Europe, the fast-growing Russian and Middle Eastern markets and other emerging markets, which are expanding with infrastructure construction and resource development.

[Outlook for FY2007]

The second half of FY2007 projects a number of causes for concern. The U.S. economy is facing problems such as a continuing slowdown in housing investment and the subprime mortgage problem. Other issues include soaring crude oil prices and currency exchange fluctuations. However, the world construction equipment market is anticipated to continue being strong for the foreseeable future. The markets in BRICs (Brazil, Russia, India and China) and other emerging countries are expected to achieve dynamic growth, as typified by the Chinese market, where demand grew rapidly due to infrastructure construction and development of resources.

In this context, the Kobelco Construction Machinery Group is focusing on the creation of a “business enterprise that can weather changes,” which is the biggest challenge in the FY2006-FY2008 Medium-Term Management Plan. In particular, Kobelco will strive to overcome the challenges that arose in the first half of FY2007 and further enhance its production and procurement capabilities as its top priorities for the future.

Forecast for FY2007

Currency exchange rates forecast for the second half of FY2007:
$1 = 115 yen, 1 euro = 155 yen

The forecast above is based on information current as of the date of this announcement. The actual results may significantly differ due to various factors in the future.