May 12, 2008
Kobelco Construction Machinery’s Financial Results for Fiscal Year 2007
(April 1, 2007 - March 31, 2008)

[General Market Conditions]

In the domestic market for construction machinery in fiscal year 2007, demand continued to be strong for hydraulic excavators, although its growth rate has decelerated. In addition to a continuous decline in public works, housing-related work became noticeably sluggish in the midst of the first half of FY2007, due to stricter approval procedures for building certificates. Meanwhile, private capital investment not related to housing construction was comparatively brisk. Furthermore, the decrease in the domestic stock of machines due to the export of used equipment created a demand for new machines.

On the other hand, some causes for concern have become apparent. The prices of raw materials, such as steel, and parts have soared. In the fourth quarter of FY2007, a downward trend was occasionally found in the prices of used equipment exported to China. Even in the used equipment market, which had seen ever-increasing demand, some signs of change have started to appear.

With regard to the overseas construction equipment markets, the downturn in the North American market caused by the sub-prime mortgage issue has lingered. Although the European market was relatively stable compared to the U.S. market, there were signs of uncertainty due to the influence of the sub-prime mortgage issue and an indication of inflation seen in the high prices of crude oil, raw materials and food. Some signs of an economic slowdown were also seen.

However, the Chinese market continued to expand sharply. Demand was active in the Southeast Asian markets, where the impact of the sub-prime mortgage issue was comparatively low. In addition, the markets grew remarkably in the emerging nations. As a result, overall demand continued to increase.

Under these business circumstances, Kobelco Construction Machinery Group tackled many issues toward the establishment of a business enterprise that can weather changes in the second year of its Medium-Term Management Plan (FY 2006-FY 2008).

Especially, in order to meet the demand from customers around the world, Kobelco has aggressively made further investments to increase production in Japan and abroad and modified its production system. The company initiated various measures to increase production in Japan. It also strengthened and improved its production bases in China. Kobelco established a joint venture in China for mini excavators, and it started construction of a plant in Thailand for integrated production.

As a result of these efforts to expand production, Kobelco significantly increased its sales volume at home and abroad, particularly in the Chinese market, where demand has been growing remarkably. Moreover, Kobelco’s latest models, which conform to the Tier 3 exhaust emission regulations and have drastically reduced fuel consumption, were highly praised in the world market and contributed greatly to the expansion of Kobelco's sales volume.

In the financial results for fiscal year 2007 (April 2007-March 2008), Kobelco marked record highs in net sales, operating income, ordinary income and net income for the term, on a consolidated basis.

Financial Results in FY2007

Note: Figures in brackets [ ] show the percentage change as compared with the same period of the previous year.

Domestic consolidated sales rose 8.4% from the previous year to 116.5 billion yen and overseas consolidated sales rose 29.9% from the previous year to 165.3 billion yen. Total consolidated sales rose 20.0% to 281.8 billion yen. Overseas consolidated sales made up 58.7% of total consolidated sales, and the percentage of overseas sales increased further on a consolidated basis.

In addition, Kobelco has been taking a proactive stance in CSR (Corporate Social Responsibility) activities. In November 2007, Kobelco compiled its past activity report and issued the Social Environment Report. Also, in February 2008, Kobelco received the grand prize in the Environmental Awards presented by the Shinagawa Ward Office in Tokyo.

[FY2007: Review by Geographical Area]

Japan

Gross demand for new heavy excavators in Japan increased steadily, although its growth rate has decelerated. Private capital investment was active. In addition, as the number of machines in stock decreased due to the stock adjustment in progress, demand for new heavy excavators increased owing to the need for replacements. On the other hand, gross demand for new mini excavators decreased slightly over the previous year, due to stricter approval procedures for building certificates.

Kobelco consecutively launched new models in the domestic and overseas markets, such as the SK225 SR and 235SRD and the 45-ton models SK460 and480D, all of which conform to the Tier 3 exhaust emission regulations. In addition, the LK-Z series, medium- to large-sized wheel loaders, were fully remodeled and Kobelco simultaneously introduced new models in the Beetle Series, the latest line of mini excavators. Those new models launched into the market enjoyed a reputation for their energy-saving technologies and excellent operating efficiency. Furthermore, the ultra-low noise performance achieved through Kobelco’s latest and unique technology, the INDR system, with which Kobelco started equipping models from last year, was highly praised.

Accordingly, in heavy excavator sales, Kobelco achieved a growth rate exceeding that of gross demand. With regard to mini excavators, the production system at the Ogaki Factory in Gifu Prefecture, which opened in April 2006, has been operating smoothly, and that set Kobelco to achieve a double-digit growth rate for mini excavator sales, although gross demand for mini excavators decreased. From January, Kobelco has been working to readjust its sales prices.

China

In the Chinese market, where demand has been rapidly expanding at a level beyond the initial forecast, the two-site production system, comprised of the first plant in China, Chengdu Kobelco Construction Machinery Co., Ltd. (Chengdu, Sichuan Province) and the second plant, Hangzhou Kobelco Construction Machinery Co., Ltd. (Hangzhou, Zhejiang Province), has been operating smoothly. Consequently, Kobelco recorded the largest production and sales volume in China by taking the opportunity of the growing demand both inland and on the coast.

Especially in the field of heavy excavators, the new models, which conform to the Tier 3 exhaust emission regulations, were given high marks for their energy-saving features and high operating efficiency, on the back of the recent increase in fuel prices. Accordingly, Kobelco achieved a substantial increase in the sale volume of heavy excavators.

Overseas (excluding China)

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

Regarding the Asian-Pacific region, particularly in Southeast Asia, demand was steady in Indonesia and Malaysia, due to an increase in demand at palm plantations and other markets.

In the Southeast Asian region, in 1996, Thai Kobelco Construction Machinery Ltd. was established in Thailand and it has been producing plate work parts for excavators. As a measure to stimulate its business in this area, in August 2007, Kobelco decided to establish a second plant in Thailand as an integrated production facility for hydraulic excavators. Construction was completed as scheduled, and the first complete machine was shipped in April 2008. In July 2008, full-scale production will begin.

In the Indian market, which has been growing significantly, a sales joint venture, Kobelco Construction Equipment India PVT. Ltd., was established and started operation in 2007. It started without any sales or distribution network. However, it succeeded in making a smooth start.

In its alliance with CNH, Kobelco sequentially offered the expertise necessary to meet the Tier 3 exhaust emission regulations for the new models in Europe and the United States. Kobelco increased OEM supply to Europe and to emerging nations, such as Russia and countries in the Middle East, where markets have been expanding rapidly with infrastructure and resource development.

[Key Issues in the Future and Outlook for Fiscal 2008]

In FY 2008, continuous growth is expected in the booming Chinese market. However, it is also necessary to watch for unfavorable factors such as inflation and economic overheating. Stable growth is expected in Southeast Asian countries, where the impact of the sub-prime mortgage issue is comparatively low.

It appears that the North American market will continue to be weak due to concern over inflation and recession, together with a reduction in housing investment. The European market is expected to be strong. However, conditions are difficult to predict since there is concern over inflation caused by price increases in food and raw materials. In addition, there is the possibility of an economic downturn due to sluggish consumer spending. The markets in emerging nations such as BRICs nations, where demand has been rapidly expanding due to infrastructure and resource development, are expected to keep growing dynamically in the future. Thus, although there are some reasons for concern, global demand for construction machinery will continue to be strong.

In this situation where demand has been expanding globally, Kobelco will strengthen its manufacturing capabilities in order to establish a system to cope with growing markets in a timely manner in terms of quality and quantity.

Therefore in FY 2008, Kobelco Construction Machinery Group will aim to realize a “Global Kobelco” and establish a business enterprise that can weather changes. The Group will undertake the following policies and priority items in the last year of its Medium-Term Management Plan (FY2006-FY2008):

• Establishment of a global production system
  Improving the manufacturing capabilities at both the Hiroshima and Ogaki factories and establishing them as the “mother factories for the world.” Insuring a smooth start up of the plant in Thailand. Upgrading the production bases in China, and maintaining and improving production quality.
• Appropriate measures to deal with cost increases
  Stabilization of supply by strengthening procurement capability; establishing flexible measures to cope with surging cost increases
• Making prompt and adaptable responses to changes in the market.
• Implementing further measures to the compliance rules
• Developing new models that conform to the next level of emission regulations
• Promoting the establishment and improvement of sales bases in Asian markets, such as India and Indonesia.
• Strengthening the alliance with CNH, and expanding into emerging nations and other markets

Forecast for FY2008

Notes:
Figures in brackets [ ] show the percentage change as compared with the same period in the previous year.
Figures in parentheses ( ) denote decreases.
The currency exchange rates set for FY2008: US$1=¥105; 1Euro=¥160

*The above forecast is based on the data available as of the date of this announcement. The actual results may significantly differ according to various factors in the future.