investing in future engines · 2009-07-03 · investing in future engines 12 stx engine our...

Investing in Future Engines 2008 AnnuAl RepoRt

to the Ocean, toward the World, for the Future

Introduction04 Message from the Chairman06 Message from the President08 Financial Highlights10 2008 at a Glance

Investing in Future Engines12 Dreaming Higher14 Moving Wider16 Making Brighter

Review of Operations20 Medium Speed Diesel

Engines22 Military Diesel Engines24 Electronic Communication

Equipments26 New Growth Power

28 Audit Report68 Board of Directors70 Affiliates72 Global Network

Contents

STX Engine is achieving legendary success through passion and resolve to be the world's best.We have grown into one of the world's foremost engine makers by remaining passionately committed to our business

and by overcoming constant challenges over the past three decades. our engines for commercial ships, the defense

industry, and various industrial uses are highly competitive in global markets.

the technological expertise we have acquired over the years has enabled us to diversify our portfolio by advancing into

related industries such as diesel power plants, solar and wind power generation systems and gas turbines. We have also

been making steady progress in electronic communications systems, addressing new needs in the defense and

shipbuilding sectors while establishing future growth drivers. to realize our future ambitions, we continue to cultivate

some of the world's leading technologies maintain with a creative and challenging spirit. In the process, we are emerging

as a leader in the diesel engine industry and one of the world's best enterprises.

STX Group will actively seek new growth opportunities in the global market with cumulated core competencies.

04STX Engine

Message from the Chairman

05Annual Report 2008

Dear Shareholders,

I want to genuinely thank you for your supports and trust in StX Group.

It has been 8 years since I became a chairman. And during the course, the status of StX Group has been elevated remarkably.

I am convinced that it was attributable to your solid supports and interests.

Despite the adverse business environment in 2008, we surpassed our sales target of KRW25 trillion to record KRW28 trillion.

In the shipping and trading area, we accomplished a historic high performance, and in the shipbuilding and machineries area,

we have consolidated three pillars of production bases in Korea, China, and europe with the completion of a shipbuilding and

offshore structure fabrication complex in Dalian, China, as well as the successful launch of StX europe. In addition, we advanced

into the offshore plant market and expanded energy business, a promising future growth engine, including photovoltaic

business and resource development.

In 2009, StX Group will actively seek new growth opportunities in the global market with cumulated core competencies. our

detailed management policies are as follows: pioneering new overseas markets, maximizing synergy with three global

production pillars, securing world-class production competitiveness, expanding growth platform by intensifying investments in

R&D and nurturing talent, establishing a business manage system meeting global standards, and strengthening risk

management system.

through all these, we at StX Group including overseas subsidiaries aim to achieve our business goals of KRW38 trillion in new

orders, KRW30 trillion in sales, and KRW1 trillion in profits before income tax in 2009. We will make the utmost efforts to turn

difficulties into opportunities by marching toward our goals, as we have done to accomplish a solid growth.

once again I would like to extend my appreciation to all shareholders for your supports and interests, and I wish you good

health and happiness.

Duk-Soo Kang Chairman

06STX Engine

Message from the President

Amid an uncertain global economic environment, we continue to reinforce our core competencies, develop new technologies and cultivate new markets. In the process we have established a solid platform for the next century.


To Our Customers and Shareholders:

let me begin by thanking you for your support during the past year.

the business environment was difficult in 2008, but we still managed to achieve a record ￦1.51 trillion in sales and ￦206.1

billion in operating profit. Importantly, new orders from the defense sector surged 49 percent year on year.

our corporate image and stature were elevated in 2008 after we received the Korean government's uS$800 Million export

tower and Quality Management Award. We were also commended by the Ministry of national Defense for exceptional security.

As part of our cost-cutting program, we completed our new integrated management innovation system, InnoVIS. our ongoing

R&D program enables us to continue improving the performance of the engines we produce. At the same time, we have been

expanding into the emerging markets and now are selling power plant engines in turkey and Brazil. the groundwork has been

laid for us to make further inroads into the Middle eastern and latin American markets.

our efforts to reach the top of the global engine market will continue unabated during 2009. to this end, we will pursue the

following management directives under the

the banner of achieving “sustainable management”: (1) maximize new orders received in order to build a platform for steady

growth, (2) strengthen our financial structure through careful risk management, (3) install a just-in-time (JIt) production system,

(4) continue to improve quality, (5) boost the competitiveness of internal communication by fully incorporating InnoVIS into

everyday operations, and (6) secure next-generation growth drivers.

In the course of carrying out these directives, we aim to achieve ￦1.85 trillion in new orders and ￦1.7 trillion in sales during

2009. our people will work hard as a team to meet these ambitious goals. Importantly, sales of engines for the defense industry

and power plants will represent a larger portion of our sales portfolio, which has been disproportionately weighted toward

marine engines. Achieving a more balanced business structure will allow us to continue growing and advancing during an

economic downturn.

In the coming year, we at StX engine are committed to giving back to you for your support. We look forward to working with

you and invite you watch us closely as we move a step closer to our ultimate goal: to be the best in the business.

Dong-hak ChungPresident

2008 Financial Highlights

Sales

Operating Profit

Profit before income tax

Net Profit

EBITDA

2008

1,367,689

186,929

121,389

87,745

203,015

2007

1,372,133

92,581

105,409

87,034

107,338

(in thousands of u.S. dollars)

Total Assets

Cash and cash equivalents

equity-method investments

Total Liabilities

Interest bearing liabilities

Total Equity

2008

1,464,569

40,728

383,397

1,023,998

27,562

440,571

2007

1,106,042

83,713

249,084

786,058

0

319,984

(in thousands of u.S. dollars)

* the Company operates primarily in Korean won and its official accounting records are maintained in Korean won in accordance with the

Generally Accepted Accounting principles in the Republic of Korea. the u.S. dollar amounts, provided herein, represent supplementary

information solely for the convenience of the reader.

> Exchange Rate

·IS (Average Yearly) ⇒ 2008 : 1,102.6￦/$, 2007 : 929.2￦/$

·BS (Year-end) ⇒ 2008 : 1,257.5￦/$, 2007 : 938.2￦/$

Operating Results

Financial Position

08STX Engine

2008

2007 7.8%

EBITDA Margin 13.5%

2008

2007 31.9%

ROE23.1%

2008

2007 28.9%

Equity Ratio30.1%

2008

2007 0.0%

Interest-Bearing Debt to Equity6.2%

Medium Speed Diesel Engines80.7%

Electronic Communication Equipments 7.1%

Military Diesel Engines

12.2%

Sales by Business Segment (2008)


10STX Engine

2008 at a glance

>> Multifunction Console in '07 KFDA Yearbook ●

the Korea Federation of Design Associations included StX engine's unique

multifunction console among the top 100 products listed in the 2007 edition of Creatio, a

prestigious yearbook for Korean industrial designs.

>> Wind Farm Completed on Jeju Is ●●

Korean Southern power ordered five 3MW wind turbine generator systems as the

second phase of the Hangyeong Wind Farm project on Korea's Jeju Island in May 2006. StX

engine completed the installation in February 2008. these are the highest capacity wind

generator systems commercially available.

>> DNV Certification for Genset Engine Control System ●●●

Det norske Veritas (DnV) formally approved StX engine's integrated control

systems for shipboard generator engines. this certification is testimony to our technological

sophistication and product credibility.

>> Environment-friendly Heavy-duty Engine ●

StX engine has completed development of l27/38 and l32/40 engines that

generate 22 percent less nox emissions than competing models do. thus, the company now

can provide the environment-friendlier versions in sizes ranging from small to heavy duty.

>> Foothold in Brazilian Power Plant Engine Market ●●

In March, StX engine signed a ￦120 billion contract to supply a diesel power

plant to termomanaus ltDA, an independent power producer with a long-term operator

permit from the Brazilian government.

>> Flexible Coupling Technology Tested Successfully ●●●

the flexible coupling for marine engines is installed between the diesel engine

and the reduction gear. It transmits the torque from the engine to the reduction gear and

dampens torsion vibration, helping to protect the shaft system. In March StX engine

completed an in-house performance test of an engine equipped with a flexible coupling

system (the SCR-SA-064S10) developed in-house.

>> “Environmentally-friendly Enterprise” Designation Again ●●●●

In 1996, StX engine became the first in Korea's heavy industries sector to be

named an “environmentally-Friendly enterprise” by the Korean Ministry of environment. the

company received the designation for the third year in a row in 2008, bolstering the image of

being one of Korea's leading “green” companies.

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>> Large Order for Onboard Generator Sets ●

In August, StX engine signed a ￦162 billion contract with a major Korean

shipbuilder for 165 medium-duty generator sets. the equipment will be supplied between

october 2009 and June 2012.

>> 4-stroke Common Rail Engine ●●

StX completed development of Korea's first four-stroke common rail diesel

engine for marine use. the electronic control system raises combustion efficiency and reduces

exhaust emissions, enabling the company to comply with ever-stricter environmental

regulations.

>> Korea's Largest Underwater Acoustic Laboratory ●●●

the underwater Acoustic laboratory was dedicated at the Yong-in Factory

(Gyeonggi province) in october. the facility will be used to test underwater radar systems for

military vessels.

>> Integrated Management Innovation System ●

StX engine, StX Heavy Industries, and StX enpaco officially launched the InnoVIS

system in november. the integrated management innovation system is part of efforts to

reduce operating costs and overcome the current economic downturn.

>> Corporate Value Reflected in Numerous Awards ●●

StX engine was presented with the Minister of Knowledge economy prize in the

precision Instrumentation technology category at the 38th annual Korea precision Industries

Competition, sponsored by the Ministry of Knowledge economy. Also in 2008, the company

received the Quality Management prize in the overall Corporate category at the 34th annual

national Quality Management Awards and a Minister of national Defense Commendation as

an “exceptional Security enterprise.”

>> Trade Day Award ●●●

Korea's 45th annual trade Day fell on December 2, and StX engine received the

uS$800 Million export tower. this marks the fourth straight year that the company's export

record has been honored with the prestigious award.

>> Major Orders for Defense Industry Engines ●●●●

In December StX engine concluded a ￦164 billion contract with Samsung

techwin for high-speed diesel engines to be mounted on Army vehicles. the company also

signed a ￦73.5 billion contract to supply high-speed engines for naval vessels to Korea's

Defense Acquisition program Administration.

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Dreaming Higher

Investing in Future Engines

12STX Engine

Our ambitions continue to grow with the steady rise in our technological expertise.

Our ongoing R&D program has enabled us to lead the domestic engine market and achieve sales of ￦1.5 trillion in 2008. We also localized the development of a flexible coupling system and completed Korea's first four-stroke common rail engine during the year. These achievements serve as a platform for improving our engine efficiency and sell more engines. Moreover, we completed Korea's largest underwater acoustic laboratory, which will raise the competitiveness of our engines for the defense industry.

Dreaming Higher


1.5 KRW in trillionsSales

Our hard work and passion are paying off with higher revenues from both the domestic and overseas markets.

We have long remained at the top of the Korea engine market and won an order from a Brazilian customer for 40 power plant engines in 2008. Our next goal is to advance aggressively into the Latin American and African diesel power plant markets, where demand is expected to grow continuously. In addition, we aggressively promoted our new high-voltage engine factory, completed in 2007, to obtain new orders, starting with domestic customers. As a result, our operating profit in 2008 totaled ￦206.1 billion, which was double the figure for the previous year. In the future, we will step up our marketing activities, making the most of our global reputation as a top-class engine maker.

Expanding Wider


14STX Engine

Operating Income 206.1


206.1 KRW in billions

Growing Brighter


16STX Engine

Our strategic management activities are repositioning STX Engine as one of the world's premier engine manufacturers capable of sustainable growth.

Amid uncertain global market conditions, we are engaging in environmental management and corporate social responsibility programs that represent future value. In the process, we are building a company that can grow continuously. Our all-out technology development effort is preparing us forever-stricter environmental regulations. We recently completed a cleaner operating heavy-duty engine and a four-stroke common rail marine engine. As a result, the Korean government named us an “Environmentally-Friendly Enterprise” for the third straight year. Meanwhile, we are committed to growing in partnership with society and are involved in various scholarship and community development programs. Such efforts have helped us to amass an order backlog of ￦4 trillion and serve as a core corporate value for sustainable growth.

Order Backlog 4 KRW in trillions

Review of OperationsSTX Engine has been dedicated to manufacturing diesel engines for ships and the defense industry for more than 30 years. The technology and

experience acquired over that time is now being applied to make strides into the power plant alternative energy, gas turbine and electronic

communications equipment sectors.

_ Medium Speed Diesel Engines

_ Military Diesel Engines

_ Electronic Communication Equipments

_ New Growth Power

The robust growth and advances into overseas

markets achieved in 2008 will be maintained in 2009.

The outstanding business competencies and product competitiveness gained in 2008 have increased the volume of new

orders. At the same time, sustainable growth opportunities have been obtained for the future through diversification into

important new business areas. Moreover, the Dalian Complex begins engine production in 2009, which will bring tangible

results to the efforts to globalize operations in recent years. Competitiveness will be strengthened still more as STX Engine

rises among the ranks of the world's top engine makers.

20STX Engine

Medium Speed Diesel Engines

Review of Operations

80%

>> Portion in Sales (2008)>> Sales (KRW in billions)

2008 1,216.0

2007

2006

1,059.2

667.1


We are leading the market with our extensive experience and

cutting-edge technology development.

We have developed and commercialized an electronic control system that raises fuel

efficiency and Korea's first four-stroke common rail diesel engine for marine use, which lowers harmful

exhaust emissions. Our common rail marine diesel (model: L(V)32/40) delivers a maximum output of

9,000kW. It will be mounted in containerships, LNG carriers, drillships and other value-added vessels that

are the mainstay of the Korean shipbuilding industry today.

In March 2008, we completed testing of technology developed in-house for a flexible

coupling system (model: SCR-SA-064S10). The flexible coupling for marine engines helps to protect the

shaft system. It is installed between the diesel engine and the reduction gear to transmit the torque

from the engine to the reduction gear and dampen torsion vibration. Until now, we have had to rely on

entirely imports for this important piece of equipment, but now we are in a position to mass-produce

it ourselves and expand our market. That same month, DNV, the Norwegian ship classification society,

officially approved our integrated control system for shipboard generator engines. This certification

provides global recognition of the technological sophistication and credibility of these systems.

Such accomplishments resulted in an excellent performance record for 2008. In August, we

concluded a contract with a major Korean shipyard to supply 165 medium-duty generator sets,

totaling ￦162 billion. Delivery begins in October 2009 and will be completed in June 2012. The

onboard generator engines will be installed on thirty-nine commercial vessels (VLCCs and

containerships mostly) and eight patrol boats for the Korean Maritime Police. New orders for medium

speed engines, including the medium-duty generator sets mentioned above, surpassed ￦1.87 trillion

in 2008, and the order backlog at year's end was more than ￦3.44 trillion. An intense marketing

campaign will also be conducted in 2009, promoting the company's strong production capabilities to

build the optimal product portfolio. Of course, quality competitiveness and R&D capabilities will be

bolstered further as well as STX Engine climbs to the top of the intensely contested global market for

marine engines.

Medium Speed Diesel Engines

5 million HP

22STX Engine


Military Diesel Engines

The superb capabilities of STX Engine are clearly evident in the new orders received during

2008, including a single contract well in excess of ￦100 billion. In August, we concluded an agreement

with Samsung Techwin to supply ￦164 billion in military diesel engines. These high-speed diesels

(model: MT881) will be used to power K9 self-propelled howitzers and K10 ammunition resupply

vehicles for the ROK Army. STX Engine managed to win such a massive contract because of the

outstanding high-speed engine technology and excellent production capabilities acquired from more

than 20 years of continuous R&D.

Another military diesel engine contract, worth ￦73.5 billion, was also received in August

2008. The Defense Acquisition Program Administration and ROK Navy will mount these high-speed

marine engines (model: 16V1163) on the 400-ton PKX-A, the replacement for the aging patrol boats

currently in service. The global shipbuilding and marine shipping industries plummeted during the

second half of 2008, while the market for marine diesel engines was very slow as well. However, the

military diesel engine contracts saved the day.

The credibility we have gained from our outstanding factory management played an

important role in the winning of these contracts. The Ministry of National Defense conducted a security

inspection of STX Engine in June 2008. The inspectors recognized the excellent corporate security

capabilities achieved from the involvement of top management, the improved reliability of systems to

counter a rapidly changing information and communication environment, and the stronger facility

security enforcement by the company. At the end of the year, the Ministry selected STX Engine as an

“Exceptional Security Enterprise.”

The military diesel engine business achieved a record ￦367.8 billion in new orders during

2008 and had a ￦518.5 billion order backlog at year's end. This solid growth platform will help us to

further strengthen our quality competitiveness and R&D competencies so that we may rise to the top

of the global market for marine and military diesel engines.


We are producing military diesel engines on the basis of

our outstanding technology and credibility.

1 million HP

12%


2008 184.5

2007

2006

160.6

166.7

24STX Engine


Electronic Communication Equipments

8%


2008 107.5

2007

2006

55.0

35.7


We develop and produce electronic communications devices and

systems that are world class in both function and design.

STX Engine possesses essential proprietary technologies related to underwater acoustic

systems, radar systems, tactical communication systems and battle systems. These assets have been

applied to develop and produce a wide range of advanced electronic communications hardware for

the defense industry.

To develop more cutting-edge technology we completed the five-month construction

project for the new Underwater Acoustic Laboratory at the Yong-in Factory in October 2008. The three-

story structure will be used to test the underwater radar systems that we produce for the military.

Facilities include Korea's largest water tank for testing underwater acoustic sensors. The tank measures

20m long by 12m wide by 10m deep and holds 2,400 tons of water.

In January 2008, the multifunction control console developed at the STX Engine Electronic

Communication Research Laboratory was included among the top 100 designs in the 2007 edition of

Creatio, published by the Korea Foundation of Design Associations. Each January KFDA puts out a

yearbook to introduce the very best designs created by Korean companies in diverse fields during the

previous twelve months. The judges highly rated the ergonomic structural design of the console, which

is very user friendly. They also liked the “Korean-style MFCC” design concept, which establishes a new

kind of identity rarely seen in the business of military hardware.

Thus, we are investing heavily in both technology and design development in order to lead

the marketplace. These investments provide a strong competitive advantage over time. Our electronic

communication equipment business won ￦150.4 billion in new orders during 2008, and the order

backlog totaled ￦199.8 billion at the end of the year. Research and marketing activities will continue

unabated in 2009 in order to maintain the growth momentum.

Electronic Communication Equipments

26STX Engine

We received a ￦120 billion order for diesel power plant engines from Termomanaus LTDA

of Brazil in March 2008. The independent power producer was granted a fifteen-year license from the

Brazilian government in 2007. The contract calls for STX Engine and MAN Diesel of Germany to supply

40 diesel engines to a power plant being built in the Joao Pessoa region, in the Northeast. Thirty-eight

of these will be 9,000kW models and two will be 4,500kW models, bringing the plant's total output

capacity to 340MW. Startup is scheduled for January 1, 2010. Brazil is highly dependent upon

hydroelectric power, and the diesel-powered facilities will be used intensively to supply electricity

during the dry season.


New Growth Power


We are laying the groundwork for new growth businesses by

advancing aggressively into diesel engines for power plants built on land.

Audit ReportThe strong advances we made in growth and global market diversification during 2008 will continue in 2009.

STX Engine is applying marine diesel engine know-

how and technology built up over the past 30 years to make

progress in the diesel power plant, electronic communications,

wind power generation and gas turbine sectors.

The volume of new orders increased in 2008 on the back of our outstanding business competencies and product

competitiveness. Moreover, we diversified into key next-generation sectors to establish a foundation for continued growth

in the days ahead. In 2009, our factory at Dalian, China will begin to produce engines as well, brining tangible results to the

globalization efforts that we have made in recent years. As a result, we will elevate our competitiveness still more as we rise

to the top of the global engine industry.

30_Independent Auditors’ Report

31_Non-Consolidated Balance Sheets

33_Non-Consolidated Statements of Income

34_ Non-Consolidated Statements of Appropriation of

Retained Earnings

35_Non-Consolidated Statements of Changes in Equity

36_Non-Consolidated Statements of Cash Flows

38_Notes to Non-Consolidated Financial Statements

67_ Independent Accountants’ Review Report on Internal

Accounting Control System

The Board of Directors and Stockholders

STX Engine Co., Ltd.:

We have audited the accompanying non-consolidated balance sheets of STX Engine Co., Ltd. (the “Company”) as of December 31, 2008 and 2007, and

the related non-consolidated statements of income, appropriation of retained earnings, changes in equity and cash flows for the years then ended.

These non-consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on

these non-consolidated financial statements based on our audits.

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 about 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 non-consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company

as of December 31, 2008 and 2007 and the results of its operations, the appropriation of its retained earnings, the changes in its equity and its cash

flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea.

Without qualifying our opinion, we draw attention to the following:

As discussed in note 2 (a) to the non-consolidated financial statements, accounting principles and auditing standards and their application in

practice vary among countries. The accompanying non-consolidated financial statements are not intended to present the financial position, results

of operations, changes in 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 non-consolidated financial statements

may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying non-consolidated financial

statements are for use by those knowledgeable about Korean accounting principles and auditing standards and their application in practice.

As discussed in note 8 to the non-consolidated financial statements, the Company purchases raw material from STX Enpaco co., Ltd. and other related

parties and sells finished goods to STX Shipbuilding Co., Ltd. and other related parties and has balances due from and to those related parties in

relation to the above transactions as of December 31, 2008 and 2007. The Company also had provided guarantees for STX (Dalian) Engine co., Ltd.

and STX Norway AS as of December 31, 2008.

As discussed in note 9 to the non-consolidated financial statements, the Company elected to early adopt the revaluation model in accordance with

the revised SKAS No.5 Property, Plant and Equipment, which is effective from the fiscal year beginning on or after December 31, 2008. As a result of

the revaluation, net assets of W83,573 million were increased.

As discussed in notes 36 and 37 to the non-consolidated financial statements, the Company spun off its power plant business unit and STX Industrial

Plant Co., Ltd. was established on April 1, 2008. The Company entered into an agreement to merge STX Industrial Plant Co., Ltd. into STX Heavy

Industries Co., Ltd. pursuant to a resolution of the board of directors’ meeting held on November 24, 2008. STX Industrial Plant Co., Ltd. had been

merged by STX Heavy Industries Co., Ltd. on January 1, 2009. The company recognized income from its power plant business unit before the spin-off

as income from discontinued operations in the income statements.

Seoul, Korea

March 17, 2009

This report is effective as of March 17, 2009, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying non-consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.

30STX Engine

Independent Auditors' Report

Non-Consolidated Balance Sheets December 31, 2008 and 2007


In millions of Won

2008 2007

Assets

Current assets:

Cash and cash equivalents (note 18) W 51,215 78,539

Short-term financial instruments 3,225 264

Short-term investments (note 5) 6,274 2,821

Accounts and notes receivable - trade, less allowance for doubtful accounts of W 718 million

in 2008 and W 631 million in 2007 (notes 8 and 18) 353,801 287,237

Accounts and notes receivable - other (note 8) 87 620

Advance payments (note 8) 118,343 109,073

Prepaid value added tax 9,773 5,501

Forward foreign exchange contract assets (note 23) 4,684 1,362

Firm commitment assets (note 23) 76,161 -

Current deferred tax assets (note 27) 9,044 348

Inventories (notes 4 and 9) 218,508 87,864

Other current assets (note 6) 22,623 4,309

Total current assets 873,738 577,938

Non-current investments (note 7) 484,735 237,887

Property, plant and equipment, at cost (notes 9 and 12):

Land 165,302 57,867

Buildings 81,806 57,772

Structures 13,118 12,523

Machinery and equipment 72,814 71,114

Vehicles 2,828 1,872

Tools 59,723 52,349

Construction-in-progress 42,166 22,940

437,757 276,437Less government subsidies (140) (578)

Less accumulated depreciation (80,954) (72,877)

Net property, plant and equipment 356,663 202,982

Intangible assets (notes 10 and 11) 13,719 7,677

Less government subsidies (1,623) (884)

Net intangible assets 12,096 6,793

Non-current forward foreign exchange contract assets (note 23) 1,702 373

Firm commitment assets (note 23) 54,374 -

Non-current deferred tax assets (note 27) - 5,405

Other non-current assets (note 13) 58,387 6,311

Total assets W 1,841,695 1,037,689

Non-Consolidated Balance Sheets December 31, 2008 and 2007

32STX Engine

In millions of Won, except for share data

2008 2007

Liabilities and Stockholders' Equity

Liabilities:

Short-term borrowings W 24,659 -

Accounts and notes payable - trade (notes 8 and 18) 217,951 134,286

Current portion of debenture (note 15) 10,000 -

Accounts and notes payable - other (note 8) 108,496 61,359

Advances from customers (note 8) 576,596 463,876

Forward foreign exchange contract liabilities (note 23) 107,768 3,731

Other current liabilities (note 14) 46,649 37,233

Total current liabilities 1,092,119 700,485

Provision for retirement and severance benefits (note 16) 25,117 24,311

Non-current forward foreign exchange contract liabilities (note 23) 101,606 5,298

Non-current deferred tax liabilities (note 27) 30,081 -

Other long-term liabilities (note 17) 38,755 7,386

Total non-current liabilities 195,559 36,995

Total liabilities 1,287,678 737,480

Stockholders' equity:

Common stock of W 2,500 par value:

Authorized - 55,000,000 shares

Issued and outstanding - 28,676,833 shares (note 19) 71,692 71,692

Preferred stock of W 2,500 par value:

Authorized - 5,000,000 shares

Issued and outstanding - 1,398 shares (note 19) 3 3

Capital surplus 109,119 108,810

Capital adjustments (note 20) (9) (9)

Accumulated other comprehensive income 182,084 6,352

Retained earnings (note 21) 191,128 113,361

Total stockholders' equity 554,017 300,209

Total liabilities and stockholders’ equity W 1,841,695 1,037,689

See accompanying notes to non-consolidated financial statements.

Non-Consolidated Statements of Income For the years ended December 31, 2008 and 2007


In millions of Won, except for earnings per share

2008 2007

Continuing operations sales (notes 8, 26, 35 and 37) Gross Sales W 1,508,001 1,274,985

Sales from discontinued operation (15,491) (120,743)

Sales from continuing operations 1,492,510 1,154,242

Cost of sales (notes 8 and 25) 1,232,884 1,022,051

Gross profit 259,626 132,191

Selling, general and administrative expenses (notes 24, 33 and 34) 53,520 46,165

Operating income 206,106 86,026

Other income (expense):

Interest income 6,573 5,837

Interest expense (842) (198)

Foreign currency transaction and translation gain, net 4,810 4,066

Loss on transaction of forward foreign exchange contracts, net (note 23) (66,930) (2,106)

Loss on valuation of forward foreign exchange contracts, net (note 23) (198,062) (8,390)

Gain on valuation of firm commitment assets 155,551 -

Gain on sale of investments in affiliated companies - 5,665

Gain on valuation of investment securities using equity method (note 7) 46,196 21,957

Loss on valuation of investment securities using equity method (note 7) (16,563) (16,829)

Donations (note 34) (3,332) (2,590)

Other, net 335 4,508

(72,264) 11,920

Income before income taxes 133,842 97,946

Income taxes (note 27) 37,926 29,408

Income from continuing operations 95,916 68,538

Discontinued operation

Income from discontinued operation (note 37) less income tax of W 315 million in 2008

and W 4,679 million in 2007W 831 12,334

Net income W 96,747 80,872

Earnings per share of common stock (note 28)

Basic earnings per share from continuing operations W 3,345 2,390

Basic earning per share W 3,374 2,820


34STX Engine

For the years ended December 31, 2008 and 2007Date of appropriation for 2008 : March 27, 2009Date of appropriation for 2007 : March 21, 2008

Non-Consolidated Statements of Appropriation of Retained Earnings

In millions of Won

2008 2007

Unappropriated retained earnings:Balance at beginning of year W 98,916 33,772

Cumulative effect of accounting changes - (3,894)

Change in unrealized loss on valuation of investments in retained earnings of affiliate (8,226) -

Net income 96,747 80,872

Balance at end of year before appropriation 187,437 110,750

Appropriations of retained earnings:Legal reserve 870 1,080

Cash dividends (note 31) 8,603 10,754

9,473 11,834

Unappropriated retained earnings to be carried over to subsequent year W 177,964 98,916

See accompanying notes to non-consolidated financial statements


For the years ended December 31, 2008 and 2007Date of appropriation for 2008 : March 27, 2009Date of appropriation for 2007 : March 21, 2008

Non-Consolidated Statement of Changes in Equity For the year ended December 31, 2008 and 2007

In millions of Won

Capitalstock

Capital surplus

Capital adjustment

Accumulated other

comprehensiveIncome

Retained earnings

TotalStockholder’s

equity

Balance at January 1, 2007 W 71,695 96,909 (9) (5,088) 45,702 209,209Cumulative effect of change in accounting policy - 745 - 3,688 (3,893) 540

Balance at January 1, 2007, restated 71,695 97,654 (9) (1,400) 41,809 209,749Dividends - - - - (9,320) (9,320)

Net income - - - - 80,872 80,872

Sale of investments in affiliated companies - 10,087 - - - 10,087

Gains on valuation of investments - - - 88 - 88

Change in unrealized gain on valuation of investments in equity of affiliates - 1,069 - 7,548 - 8,617

Change in unrealized loss on valuation of investments in equity of affiliates - - - 116 - 116

Balance at January 1, 2008 W 71,695 108,810 (9) 6,352 113,361 300,209

Dividends - - - - (10,754) (10,754)

Net income - - - - 96,747 96,747

Gains on valuation of investment - - - 331 - 331

Change in unrealized gain on valuation of investments in equity of affiliates - 309 - 91,510 - 91,819

Change in unrealized loss on valuation of investments in equity of affiliates - - - - (8,226) (8,226)

Gains on revaluation of land and structures - - - 83,891 - 83,891

Balance at December 31, 2008 W 71,695 109,119 (9) 182,084 191,128 554,017


Non-Consolidated Statements of Cash Flows For the years ended December 31, 2008 and 2007

36STX Engine

In millions of Won

2008 2007

Cash flows from operating activities:Net income W 96,747 80,872

Adjustments for:

Depreciation 14,900 11,900

Amortization 2,837 1,812

Provision for bad debts 209 -

Accrual for retirement and severance benefits 7,258 7,277

Foreign currency translation loss (gain), net 10,115 (2,138)

Loss on valuation of inventories 915 82

Provision for construction warranties 26,429 3,960

Loss on valuation of forward foreign exchange contracts, net 198,062 8,390

Gain on valuation of firm commitment (155,551) -

Gain on sale of investment in affiliated companies - (5,665)

Equity in net income of equity method accounted investees (29,633) (5,128)

Loss on sale of investments, net 2,363 -

Loss (gain) on disposal of property, plant and equipment, net (2,267) 259

Changes in assets and liabilities:

Accounts and notes receivable - trade (83,118) (109,494)

Accounts and notes receivable - other 517 (389)

Advanced payments (9,315) (50,798)

Prepaid value added tax (4,272) 7,114

Forward foreign exchange contract assets 1,590 6,568

Firm commitment assets 21,571 -

Deferred tax assets (3,499) 1,682

Other current assets (819) (44)

Inventories (139,288) (41,280)

Other assets (564) (1,067)

Accounts and notes payable - trade 83,814 88,608

Accounts and notes payable - other 45,027 24,642

Advances from customers 136,029 172,523

Other current liabilities 11,832 11,915

Forward foreign exchange contract liabilities (3,977) (1,379)

Deferred tax liabilities (14,686) (789)

Payment of retirement and severance benefits (5,765) (1,564)

Other, net 3,907 6,540

Net cash provided by operating activities 211,368 214,409

Non-Consolidated Statements of Cash Flows For the years ended December 31, 2008 and 2007


In millions of Won

2008 2007

Cash flows from investing activities:Proceeds from sale of short-term financial instruments W 30 516,355

Decrease in short-term loans receivable 95,339 3,363

Proceeds from sale of held-to-maturity securities - 20,082

Proceeds from sale of investments in affiliated companies - 72,078

Dividends received 5,300 691

Proceeds from sale of property, plant and equipment 1,195 95

Decrease in deposits provided 1,030 20

Proceeds from sale of other investments 1 53

Purchase of short-term financial instruments (3,000) (514,106)

Purchase of held-to-maturity securities - (10,000)

Increase in short-term loans receivable (114,667) (2,875)

Acquisition of available-for-sale securities (10,227) (10,543)

Acquisition of investments in affiliated companies (102,862) (145,831)

Acquisition of property, plant and equipment (71,107) (61,735)

Acquisition of intangibles (6,834) (1,062)

Increase in long-term loans receivable (56,896) (1,628)

Increase in deposits provided (1,138) (1,165)

Other, net 4,556 10,791

Net cash used in investing activities (259,280) (125,417)

Cash flows from financing activities:Proceeds from short-term borrowings 27,040 -

Proceeds from debentures 10,000 -

Repayment of short-term borrowings (2,198) -

Repayment of current portion of long-term debt - (3,460)

Dividends paid (10,754) (9,320)

Net cash provided by (used in) financing activities 24,088 (12,780)

Decrease in spin-off (3,500) -

Net increase (decrease) in cash and cash equivalents (note 31) (27,324) 76,212

Cash and cash equivalents at beginning of year 78,539 2,327

Cash and cash equivalents at end of year W 51,215 78,539


38STX Engine

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

1. Organization and Description of Business

STX Engine Co., Ltd. (the “Company”) was established on April 1, 2004 through the spin off of the former shipbuilding business unit, defense business

unit, and power plant business unit of STX Corporation. On May 10, 2004, the Company became publicly owned, with its common stock listed on

the Korea Exchange. The Company also merged STX Radarsis Co., Ltd., previously an affiliated company on May 23, 2005 and spun off its power plant

business unit and STX Industrial Plant Co., Ltd. was established on April 1, 2008. The Company is engaged in manufacturing and distributing diesel

engines and industrial machinery and its manufacturing facilities are located in Changwon, Kyungsangnamdo and Yongin, Kyunggido.

As of December 31, 2008, the major shareholders of the Company are STX Corporation (26.58%) and Korea Development Bank (6.36%).

2. Summary of Significant Accounting Policies and Basis of Presenting Financial Statements

(a) Basis of Presenting Financial Statements

The Company maintains its accounting records in Korean Won and prepares statutory non-consolidated financial statements in the Korean language

in conformity with 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 solely for use by only those who are informed about

Korean accounting principles and practices. The accompanying non-consolidated financial statements have been condensed, restructured and

translated into English from the Korean language non-consolidated financial statements.

Certain information included in the Korean language non-consolidated financial statements, but not required for a fair presentation of the

Company’s financial position, results of operations, cash flows or changes in equity is not presented in the accompanying non-consolidated financial

statements.

The Company prepares the non-consolidated financial statements in accordance with generally accepted accounting principles in the Republic

of Korea. Except for the adoption of changes to Statements of Korean Accounting Standards (“SKAS”) No.5 Property, Plant and Equipment, No.15

Investments in Associates, No.16 Income Taxes, and Korea Accounting Institute Opinion 06-2 (Deferred Income Taxes on Investments in Subsidiaries,

Associates and Interests in Joint Ventures), the Company applied the same accounting policies that were adopted in the previous year’s non-

consolidated financial statements.

Certain accounts of the prior year’s non-consolidated financial statements have been reclassified to conform to the current year’s presentation. These

reclassifications have not resulted in any change to reported net income or stockholders’ equity.

(b) Revenue Recognition

The Company’s revenue categories principally consist of goods sold, services and construction contracts.

Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade

discounts and volume rebates. Revenue is recognized when the significant risks and rewards of ownership have been transferred to the buyer,

recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, and there is no continuing

management involvement with the goods.

Revenue from services rendered is recognized in the statement of income based on the percentage of completion when all of the following

conditions are met: (1) the amount of revenue can be measured reliably; (2) it is probable that the economic benefits associated with the transaction

will flow into the entity; (3) the stage of completion of the transaction at the balance sheet date can be measured reliably; and (4) the costs incurred

for the transaction and the costs to complete the transaction can be measured reliably. When the percentage of completion method is applied, the

Company uses working hours or costs incurred for work performed to date to the estimated total contract hours or costs to measure the amount of

work performed.

As soon as the outcome of a construction contract can be estimated reliably, contract revenue and expenses are recognized in the statement of

income in proportion to the percentage of completion. Contract revenue includes the initial amount agreed in the contract plus any variations in

contract work, claims and incentive payments to the extent that it is probable that they will result in revenue and can be measured reliably.

The percentage of completion is assessed by reference to costs incurred for work performed to date to the estimated total contract costs or surveys


of work performed. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent of

contract costs incurred that are likely to be recoverable. An expected loss on a contract is recognized immediately in the statement of income.

Other revenue is recognized when the Company’s revenue-earning activities have been substantially completed, the amount of revenue can be

measured reliably, and it is probable that the economic benefits associated with the transaction will flow to the Company.

(c) Allowance for Doubtful Accounts

Allowance for doubtful accounts is estimated based on an analysis of individual accounts and past experience of collection and presented as a

deduction from trade receivables.

(d) Inventories

Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business,

less the estimated selling costs. The cost of inventories is determined by the specific identification method for finished goods, work-in-process and

raw materials in transit and by the weighted-average method for all other inventories. Amounts of inventory written down to net realizable value

due to losses occurring in the normal course of business are recognized as cost of goods sold and are deducted as an allowance from the carrying

value of inventories.

The Company recognizes interest costs and other financial charges on borrowings associated with inventories that require a long period in the

acquisition, construction or production as an expense in the period in which they are incurred.

(e) Investments in Securities (Excluding Investments in Associates, Subsidiaries and Joint Ventures)

Upon acquisition, the Company classifies debt and equity securities (excluding investments in subsidiaries, associates and joint ventures) into the

following categories: held-to-maturity, available-for-sale or trading securities.

Investments in debt securities where the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity. Securities

that are acquired principally for the purpose of selling in the short term are classified as trading securities. Investments not classified as either held-

to-maturity or trading securities are classified as available-for-sale securities.

In accordance with revised SKAS No. 8 Investments in Securities which went into effect on July 1, 2008 and which permits the reclassification of assets

held for sale to either the held-to-maturity or available-for-sales categories in rare circumstances, the Company reclassified trading securities as held

to maturity (or available for sales securities).

Investments in securities (excluding investments in subsidiaries, associates and joint ventures) are initially recognized at cost.

Trading securities are subsequently carried at fair value. Gains and losses arising from changes in the fair value of trading securities are included in

the income statement in the period in which they arise. Available-for-sale securities are subsequently carried at fair value. Gains and losses arising

from changes in the fair value of available-for-sale securities are recognized as accumulated other comprehensive income, net of tax, directly in equity.

Investments in available-for-sale securities that do not have readily determinable fair values are recognized at cost less impairment, if any. Held-to-

maturity investments are carried at amortized cost with interest income and expense recognized in the income statement using the effective interest

method.

The fair value of marketable securities is determined using quoted market prices as of the period end. Non-marketable debt securities are fair valued

by discounting cash flows using the prevailing market rates for debt with a similar credit risk and remaining maturity. Credit risk is determined using

the Company’s credit rating as announced by accredited credit rating agencies in Korea. The fair value of investments in money market funds is

determined by investment management companies.

Trading securities are presented as current assets. Available-for-sale securities, which mature within one year from the balance sheet date or where

the likelihood of disposal within one year from the balance sheet date is probable, are presented as current assets. Held-to-maturity securities, which

mature within one year from the balance sheet date, are presented as current assets. All other available-for-sale securities and held-to-maturity

securities are presented as long-term investments.

The Company reviews investments in securities whenever events or changes in circumstances indicate that the carrying amount of the investments

may not be recoverable. Impairment losses are recognized when the reasonably estimated recoverable amounts are less than the carrying amount


40STX Engine

and it is not obviously evidenced that impairment is unnecessary.

An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized and a

reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortization or depreciation) had

no impairment loss been recognized in the asset in prior years. For financial assets measured at amortized cost and available-for-sale assets that are

debt securities, the reversal is recognized in profit or loss. For available-for-sale financial assets that are equity securities, the reversal is recognized

directly in equity.

(f ) Investments in Associates and Subsidiaries

Associates are entities of the Company and its subsidiaries that have the ability to significantly influence the financial and operating policies. It is

presumed to have significant influence if the Company holds directly or indirectly 20 percent or more of the voting power unless it can be clearly

demonstrated that this is not the case. Subsidiaries are entities controlled by the Company.

Investments in associates and subsidiaries are accounted for using the equity method of accounting and are initially recognized at cost.

The Company’s investments in associates and subsidiaries include goodwill identified on the acquisition date (net of any accumulated impairment

loss). Goodwill is calculated as the excess of the acquisition cost of an investment in an associate or subsidiary over the Company’s share of the fair

value of the identifiable net assets acquired. Goodwill is amortized using the straight-line method over its estimated useful life. Amortization of

goodwill is recorded together with equity income (losses).

When events or circumstances indicate that the carrying value of goodwill may not be recoverable, the Company reviews goodwill for impairment

and records any impairment loss immediately in the statement of income.

The Company’s share of its post-acquisition profits or losses in investments in associates and subsidiaries is recognized in the income statement,

and its share of post-acquisition movements in equity is recognized in equity. The cumulative post-acquisition movements are adjusted against

the carrying amount of each investment. Changes in the carrying amount of an investment resulting from dividends by an associate or subsidiary

are recognized when the associate or subsidiary declares the dividend. When the Company’s share of losses in an associate or subsidiary equals

or exceeds its interest in the associate or subsidiary, including preferred stock or other long term loans and receivables issued by the associate

or subsidiary, the Company does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate or

subsidiary.

Unrealized gains on transactions between the Company and its associates or subsidiaries are eliminated to the extent of the Company’s interest in

each associate or subsidiary.

(g) Property, Plant and Equipment

Property, plant and equipment are stated at cost, except in the case of revaluations made in accordance with the Asset Revaluation Law, which

allowed for asset revaluation prior to the Law being revoked on December 31, 2000. Assets acquired through investment in kind or donation are

recorded at their fair value upon acquisition. For assets acquired in exchange for a non-monetary asset, the fair value of the asset given up is used to

measure the cost of the asset received unless the fair value of the asset received is more clearly evident.

Significant additions or improvements extending useful life of assets are capitalized. Normal maintenance and repairs are charged to expense as

incurred.

Depreciation is computed by using the straight-line method over the estimated useful lives of the assets as follows:

Useful lives (years)

Buildings 11 ~ 49 Structures 8 ~ 48

Machinery and equipment 4 ~ 20

Vehicles 5 ~ 9 Tools 5 ~ 20

The Company recognizes interest costs and other financial charges on borrowings associated with the production, acquisition or construction of

property, plant and equipment as an expense in the period in which they are incurred.


The Company reviews property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying

amount of an asset may not be recoverable. An impairment loss is recognized when the expected estimated undiscounted future net cash flows

from the use of the asset and its eventual disposal are less than its carrying amount.

The Company elected to early adopt the revaluation model in accordance with the revised SKAS No.5 Property, Plant and Equipment, which is

effective from the fiscal year beginning on or after December 31, 2008. The book value of land and structures are accounted at fair value as of the date

of the revaluation less accumulated depreciation and accumulated impairment loss. If an asset’s book value increases as a result of the revaluation,

the amount of the increase is recognized in other comprehensive income, of which, the amount of the increase that reverses a revaluation decrease

of the same asset previously recognized in profit and loss is recognized in profit and loss in the current period. On the other hand, if an asset’s book

value decreases as a result of the revaluation, that decrease is recognized as a loss for the current period, and the portion of the amount of decrease

included in the credit balance in the revaluation surplus recorded in comprehensive income is deducted from other comprehensive income.

According to the transitional provision to this Standard, the accounting change will be applied prospectively and the prior period non-consolidated

financial statements presented for comparative purposes have not been restated.

(h) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the identifiable net assets acquired. Goodwill is amortized on

a straight-line basis over its estimated useful life not to exceed 20 years. Where it is no longer probable that goodwill will be recovered from the

expected future economic benefits generated by the acquisition, it is expensed immediately.

(i) Intangible Assets

Intangible assets are stated at cost less accumulated amortization and impairment losses, if any. Impairment losses are determined as the amount

required to reduce the carrying amount of an intangible asset to its recoverable amount.

The criteria for determining whether an incurred cost qualifies as an intangible asset and the periods of amortization for each classification of

intangible asset are described below.

(i) Research and Development Costs

To assess whether an internally generated intangible asset meets the criteria for recognition, the Company classifies the expense generation

process into a research phase and a development phase. All costs incurred during the research phase are expensed as incurred. Costs incurred

during the development phase are recognized as assets only if the following criteria are met for recognition in Statement of Korea Accounting

Standards (“SKAS”) No. 3, Intangible Assets: (1) completion of the intangible asset is technically feasible so that it will be available for use or sale; (2)

the Company has the intention and ability to complete the intangible asset and use or sell it; (3) there is evidence that the intangible asset will

generate probable future economic benefit; (4) the Company has adequate technical, financial and other resources to complete the development

of the intangible asset and the intangible asset will be available; and (5) the expenditures attributable to the intangible asset during its development

can be reliably determined.

If the costs incurred fail to satisfy these criteria, they are recorded as expenses as incurred. Where development costs satisfy the criteria, they are

capitalized and amortized on a straight-line basis over 5 years. The expenditure capitalized includes the cost of materials, direct labor and an

appropriate proportion of overheads.

(ii) Other Intangible Assets

Other intangible assets, which consist of industrial property rights, franchise rights and software, are amortized using the straight-line method over

5-10 years, based on the nature of the asset.

(j) Government Grant Received for Capital Expenditure

Government grant received from third parties for capital expenditure are presented as a reduction of the acquisition cost of the acquired assets and,

accordingly, reduce depreciation expense related to the acquired assets over their useful lives.

Income from grants that do not require the Company to fulfill any subsequent obligations and is directly related to the Company’s operating activities

is recognized as operating income, net of related costs. Other income from grants is recognized as other income.

42STX Engine


(k) Retirement and Severance Benefits

Employees who have been with the Company for more than one year are entitled to lump-sum payments based on salary rates and length of service

at the time they leave the Company. The Company’s estimated liability under the plan, which would be payable if all employees left on the balance

sheet date, is accrued in the accompanying non-consolidated balance sheets. A portion of the liability is covered by an employees’ severance benefits

trust where the employees have a vested interest in the deposit with the insurance company (or the bank) in trust. The deposit for severance benefits

held in trust is, therefore, reflected in the accompanying non-consolidated balance sheets as a reduction of the liability for retirement and severance

benefits.

Through March 1999, under the National Pension Scheme of Korea, the Company transferred a certain portion of retirement allowances for employees

to the National Pension Fund. The amount transferred reduced the retirement and severance benefit amount to be paid to the employees when they

leave the Company and is accordingly reflected in the accompanying non-consolidated financial statements as a reduction of the retirement and

severance benefits liability. However, due to regulation effective April 1999, such transfers to the National Pension Fund are no longer required.

The Company introduced a pension plan, effective 2006. Under the Retirement Benefits Regulation, consideration of service requirements under the

plan begins from the date the plan is effective; the period of service prior to the effective date of the plan will continue to be covered by the existing

retirement benefits plan.

The amount of benefit payments depends on the performance of the plan assets and is not guaranteed. Contributions to the plan are expensed as

retirement and severance benefits when remitted to the plan.

(l) Foreign Currency Translation

Monetary assets and liabilities denominated in foreign currencies are translated into Korean Won at the foreign exchange rate on the balance sheet

date, with the resulting gains or losses recognized in the income statement. Non-monetary assets and liabilities denominated in foreign currencies,

which are stated at historical cost, are translated into Korean Won at the foreign exchange rate on the date of the transaction.

Foreign currency assets and liabilities of foreign-based operations and companies accounted for using the equity method are translated at the rate of

exchange at the balance sheet date. Foreign currency amounts in the statement of income are translated using an average rate and foreign currency

balances in the capital account are translated using the historical rate. Translation gains and losses arising from collective translation of the foreign

currency financial statements of foreign-based operations are recorded net as accumulated other comprehensive income. These gains and losses

are subsequently recognized as income in the year the foreign operations or the companies are liquidated or sold.

(m) Derivatives and Hedge Accounting

The Company holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures. Embedded derivatives are separated

from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are

not closely related, and a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative.

Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value.

Attributable transaction costs are recognized in profit or loss when incurred.

Where a derivative, which meets certain criteria, is used for hedging the exposure to changes in the fair value of a recognized asset, liability or firm

commitment, it is designated as a fair value hedge. Where a derivative, which meets certain criteria, is used for hedging the exposure to the variability

of the future cash flows of a forecasted transaction it is designated as a cash flow hedge.

The Company documents, at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk

management objective and strategy for undertaking various hedge transactions. The Company also documents its assessment, both at hedge

inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting the changes in

fair values or cash flows of hedged items.

Pursuant to the revised SKAS Interpretation 53-70 (Accounting for Derivative Instruments), the Company designated non-derivative financial

instruments as fair value hedging instruments for the year ended December 31, 2008. The Company has opted for early adoption of this standard,

which will be effective from fiscal year beginning on or after December 31, 2008.

Changes in the fair value of derivatives that are designated and qualify as fair value hedges (if a non-derivative financial instrument was designated


as fair value hedging instrument, the translation gain or loss) are recorded in the statement of income, together with any changes in the fair value of

the hedged asset or liability that are attributable to the hedged risk.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in equity. The

gain or loss relating to any ineffective portion is recognized immediately in the statement of income. Amounts accumulated in equity are recycled

to the income statement in the periods in which the hedged item will affect income or expense. When a hedging instrument expires or is sold, or

when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at the time remains in equity and is

recognized when the forecast transaction is ultimately recognized in the statement of income. When a forecast transaction is no longer expected to

occur, the cumulative gain or loss that was reported in equity is immediately transferred to the statement of income.

Changes in the fair value of derivative instruments that are not designated as fair value or cash flow hedges are recognized immediately in the

statement of income.

Changes in the fair value of separable embedded derivatives are recognized immediately in the statement of income.

(n) Provision for Estimated Construction Losses and Costs

The Company records a provision for estimated losses on construction contracts and estimated costs that may be incurred after completion of

construction works based upon a review of estimated construction costs to complete contracts in progress.

(o) Provision for Construction Warranty Costs

The Company provides a provision for estimated warranty costs relating to construction defects during the warranty period. Estimated costs of

warranty are charged to current operations upon completion of construction and are included in the balance sheet as reserve for warranty costs.

(p) Provisions, Contingent Assets and Contingent Liabilities

Provisions are recognized when all of the following are met: (1) an entity has a present obligation as a result of a past event, (2) it is probable that an

outflow of resources embodying economic benefits will be required to settle the obligation, and (3) a reliable estimate can be made of the amount

of the obligation. Where the effect of the time value of money is material, a provision is recorded at the present value of the expenditures expected

to be required to settle the obligation.

Where the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement is recognized as a separate

asset when, and only when, it is virtually certain that reimbursement will be received if the Company settles the obligation. The expense generated

by the provision is presented net of the amount of expected reimbursement.

(q) Income Taxes

Income tax on the income or loss for the year comprises current and deferred tax. Income tax is recognized in the statement of income except to the

extent that it relates to items recognized directly in equity, in which case it is recognized in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted.

Deferred tax is provided using the asset and liability method, providing for temporary differences between the carrying amounts of assets and

liabilities for financial reporting purposes and the amounts used for tax purposes. The amount of deferred tax provided is based on the expected

manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance

sheet date.

A deferred tax asset is recognized only to the extent that it is probable that future taxable income will be available against which the unused tax losses

and credits can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

Deferred tax assets and liabilities are classified as current or non-current based on the classification of the related asset or liability for financial

reporting or the expected reversal date of the temporary difference for those with no related asset or liability such as loss carryforwards and tax credit

carryforwards. The deferred tax amounts are presented as a net current asset or liability and a net non-current asset or liability.

Changes in deferred taxes due to a change in the tax rate except for those related to items initially recognized outside profit or loss (either in other

comprehensive income or directly in equity) are recognized as income in the current year.

44STX Engine


(r) Earnings Per Share

Earnings per share are calculated by dividing net income attributable to stockholders of the Company by the weighted-average number of shares

outstanding during the period.

(s) Use of Estimates

The preparation of non-consolidated financial statements in accordance with accounting principles generally accepted in the Republic of Korea

requires management to make estimates and assumptions that affect the amounts reported in the non-consolidated financial statements and

related notes to non-consolidated financial statements. Actual results could differ from those estimates.

3. Restricted Deposits

Restricted deposits as of December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008 2007

Long-term financial instruments:Checking account deposits W 11 11

4. Inventories

Inventories as of December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008 2007

Finished goods W 28,571 3,972Merchandise 15,753 10,193

Work-in-process 59,396 32,780

Raw materials 56,882 23,403

Supplies 274 752

Raw materials-in-transit 60,367 18,584

221,243 89,684Less allowance for valuation loss (2,735) (1,820)

W 218,508 87,864

5. Short-term Investments

Short-term investments as of December 31, 2008 and 2007 are summarized as follows:

(a) Available-for-sale securities

Available-for-sale securities as of December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008

Cost oramortized

cost Fair value Book valueUnrealizedgain (loss)

Debt securities:Citizens’ housing bonds W 1,370 1,371 1,371 1

Local development bonds 4 4 4 -

Equity securities:

Beneficiary certificates- Mirae Asset Securities Co., Ltd. 6,653 4,899 4,899 (1,754)

W 8,027 6,274 6,274 (1,753)


In millions of Won

2007

Cost oramortized

cost Fair value Book valueUnrealized

gain(loss)

Debt securities:Local development bonds W 35 34 34 (1)

Equity securities:

Beneficiary certificates 5,000 2,787 2,787 (2,213)

W 5,035 2,821 2,821 (2,214)

(b) Held-to-maturity securities

Held-to-maturity securities as of December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008

Face value Discount Book value

Debt securities:Triple S Specialty Co., Ltd. W 720 - -

In millions of Won

2007

Face value Discount Book value

Debt securities:Triple S Specialty Co., Ltd. W 720 - -

Grand Consortium-2 Specialty Securitization Co., Ltd. 198 - -

W 918 - -

6. Other Current Assets

Other current assets as of December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008 2007

Short-term loans W 21,154 3,503Accrued income 744 119

Prepaid expenses 725 687

W 22,623 4,309

46STX Engine


7. Non-current Investments

Investments as of December 31, 2008 and 2007 are summarized as follows:

(a) Available-for-sale securities

Available-for-sale securities as of December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008

Cost oramortized


loss

Equity securities (*):Electric Contractors’ Financial Cooperation W 52 52 52 -

Korea Marine Equipment Association 17 17 17 -

Machinery Insurance Cooperative 340 340 340 -

Korea Defense industry Association 685 685 685 -

Korea SW Financial Cooperative 788 788 788 -

1,882 1,882 1,882 -

Debt securities:

Citizens’ housing bonds 706 668 668 (38)

Local development bonds 67 63 63 (4)

773 731 731 (42)

W 2,655 2,613 2,613 (42)

In millions of Won

2007

Cost oramortized


loss

Equity securities (*):Electric Contractors’ Financial Cooperation W 52 52 52 -

Korea Marine Equipment Association 17 17 17 -

Machinery Insurance Cooperative 340 340 340 -

Korea Construction Financial Cooperative 271 271 271 -

Korea Defense industry Association 685 685 685 -

Korea SW Financial Cooperative 788 788 788 -

Yoosung Power Co., Ltd. 245 245 245 -

2,398 2,398 2,398 -

Debt securities:

Citizens’ housing bonds 1,849 1,737 1,737 (112)

Local development bonds 71 62 62 (9)

1,920 1,799 1,799 (121)

W 4,318 4,197 4,197 (121)

(*) Equity securities are recorded at cost since their fair value is not available or readily determinable.


(b) Equity Method Accounted Investments

(i) Investments in companies accounted for using the equity method as of December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008

Affiliate

Equity

ownership

Balance at

January

1, 2008

Net

income

(loss)

Accumulated other

comprehensive

Income Other

Balance at

December 31,

2008

STX Enpaco Co., Ltd. 51.04% W 66,261 33,097 42,469 (3,828) 137,999STX Norway AS 33.30% 83,863 (15,476) 17,615 (6,695) 79,307

STX Pan Ocean Co., Ltd. (*1,*2) 1.55% 30,883 8,483 6,427 (1,471) 44,322

STX Industrial Plant Co., Ltd.(*3) 100.00% - 2,930 - 16,537 19,467

Sunwoo CS Co., Ltd. 29.00% - (588) - 9,996 9,408

STX (Dalian) Engine Co., Ltd. 100.00% 39,517 717 27,448 40,882 108,564

STX (Dalian) Metal Co., Ltd. 100.00% 13,166 968 13,911 35,243 63,288

STX Bangjisan Development(Dalian) Co., Ltd.

30.00% - (437) 4,754 14,198 18,515

KTE Electronics (Dalian) Co., Ltd. 34.00% - (61) 302 1,011 1,252

W 233,690 29,633 112,926 105,873 482,122

(*1) The Company accounted for its investment in STX Pan Ocean Co., Ltd. using the equity method of accounting despite its 1.55% ownership interest

as it has ability to significantly influence financial and operating policy decision. The number of holding shares of the Company had been changed

31,985,000 common shares into 3,198,500 common shares, as STX Pan Ocean Co., Ltd. undertake a share consolidation of every 10 common

shares.(*2) The Company had provided 1,523,681 shares as guarantee to Hana Daetoo Securities Co., Ltd. for the short-term borrowings.(*3) STX Industrial Plant Co., Ltd. had been merged by STX Heavy Industries Co., Ltd. on January 1, 2009. The Company received 2,402,754 shares (5.7%)

of STX Heavy Industries Co., Ltd. as the charge for the merger.

In millions of Won

2007

Affiliate

Equity

ownership

Balance at

January

1, 2007

Net

income

(loss)

Accumulated other

comprehensive

Income Other

Balance at

December 31,

2007

STX Enpaco Co., Ltd. 51.04% W 106,239 15,399 181 (55,558) 66,261STX Norway AS 33.30% - (15,849) 5,556 94,156 83,863

STX Pan Ocean Co., Ltd. (*) 1.55% 19,027 7,098 (216) 4,974 30,883

STX (Dalian) Engine Co., Ltd. 100.00% - (873) 1,791 38,599 39,517

STX (Dalian) Metal Co., Ltd. 100.00% - (107) 198 13,075 13,166

W 125,266 5,668 7,510 95,246 233,690

(*) The Company accounts for its investment in STX Pan Ocean Co., Ltd. under the equity method due to its significant management control, despite

having only a 1.55% equity interest ownership.

(ii) Details of the difference between the beginning balance and the Company’s share of the fair value of investees’ identifiable net assets as of

December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008

Balance at

January1, 2008 Increase

Amortizedamount

Balance at

December31, 2008

STX Norway AS W 3,248 1,532 525 4,255STX Pan Ocean Co., Ltd. 3,182 - 490 2,692

Sunwoo CS Co., Ltd. - 4,951 570 4,381

W 6,430 6,483 1,585 11,328

48STX Engine


In millions of Won

2007

Balance at

January1, 2007 Increase

Amortizedamount

Balance at

December31, 2007

STX Enpaco Co., Ltd. W (540) - (540) -STX Norway AS - 3,331 83 3,248

STX Pan Ocean Co., Ltd. 3,672 - 490 3,182

W 3,132 3,331 33 6,430

(iii) Details of eliminated unrealized gains from inter-company transactions as of December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008

Currentassets

Non-currentassets

Property &equipment Total

STX Enpaco Co., Ltd. W (2,949) (10) (3,688) (6,647)STX Industrial Plant Co., Ltd. (431) - (2,280) (2,711)

W (3,380) (10) (5,968) (9,358)

In millions of Won

2007

Currentassets

Non-currentassets

Property &equipment Total

STX Enpaco Co., Ltd. W (9,566) (10) (4,046) (13,622)

(iv) Financial information of equity-accounted investments, which represents 100% of the entities’ balances, as of December 31, 2008 is

summarized as follows:

In millions of Won

Affiliate Total assets Total liabilities Sales Net income

STX Enpaco Co., Ltd. W 693,052 409,676 1,021,415 51,689STX Norway AS (*1) 6,795,691 6,287,445 1,774,981 (75,818)

STX Pan Ocean Co., Ltd. (*2) 4,313,904 1,634,589 8,267,279 563,676

STX Industrial Plant Co., Ltd. 101,518 79,340 73,985 5,641

Sunwoo CS Co., Ltd. 17,882 5,316 - (50)

STX (Dalian) Engine Co., Ltd. 299,908 191,344 - 717

STX (Dalian) Metal Co., Ltd. 116,637 53,349 - 968STX Bangjisan Development (Dalian) Co., Ltd.

93,853 32,138 - (1,458)

KTE Electronics (Dalian) Co., Ltd. 3,683 1 - (180)

W 12,436,128 8,693,198 11,137,660 545,185

(*1) The Company adjusted goodwill prior to applying the equity method. As a result of the adjustment of goodwill, net assets of W 8,669 million were

increased.(*2) The Company reversed capitalization of borrowing cost and revaluation for fixed assets prior to applying the equity method. As a result of these

adjustments, net assets of W 22,378 million were decreased.


8. Transactions and Balances with Related Companies

(a) Details of parent and subsidiary relationships as of December 31, 2008 are as follows:

Parent Control relationship

STX Corporation Immediate parent

Controlled subsidiary (*) Ownership (%)

STX Enpaco Co., Ltd. 51.04%

STX (Dalian) Engine Co., Ltd. 100%

STX (Dalian) Metal Co., Ltd. 100%STX Industrial Plant Co., Ltd. 100%

(*) A controlled subsidiary represents majority-owned entity by either the Company or a controlled subsidiary and other entities where the Company

or its controlled subsidiary owns more than 30% of total outstanding common stock and is the largest shareholder.

(b) Significant transactions which occurred in the normal course of business with related companies for the years ended December 31, 2008

and 2007 are summarized as follows:

In millions of Won

Relationship Name Transaction 2008 2007

Parent STX Corporation Sales W 6,629 6,039Purchases 32,207 19,346

Others 7,908 8,489

Subsidiary STX Enpaco Co., Ltd. Sales 143 755

Purchases 503,897 384,872

Others 2,469 34

STX Industrial Plant Co., Ltd Sales 19,516 -

Others STX Shipbuilding Co., Ltd. Sales 182,969 210,102

Others 3,403 -

STX Heavy Industry Co., Ltd. Sales 5,491 1,201

Purchases 149,644 259,192

Others 93 112

STX Energy Co., Ltd. Sales 3,663 22,986

Force TEC Co., Ltd. Purchases 3,382 8

Others 8,070 7,170

POSI Co., Ltd. Purchases 12,970 4,957

Others 13,703 9,424

STX Construction Co., Ltd. Sales 187 64

Purchases 1,830 -

Others 44,348 38,405

STX Construction (Dalian) Co., Ltd. Sales 337 -

STX (Dalian) Shipbuilding Co., Ltd. Sales 10,608 -

STX (Dalian) Shipbuilding Marine Technology Co., Ltd. Sales 2,630 -

STX (Dalian) Heavy Industry Co., Ltd. Sales 1,120 -

STX (Dalian) Marine Heavy Industry Co., Ltd. Sales 896 -

STX Resort Corporatiion Others 7,576

Saerom Sungwon Industrial Co., Ltd. Sales 94 -

Purchases 3 -

KOCREF CR-REIT11 Purchases 1 -STX Pan Ocean (China) Co., Ltd. Sales 1 -

50STX Engine


(c) Significant account balances which occurred in the normal course of business with related companies as of December 31, 2008 and 2007

are summarized as follows:

In millions of Won

2008

Receivable Payables

Related company

Accounts and notes receivable

- tradeOther

receivables

Accountsand notes

payable - tradeNon-trade

payablesAdvance for

customers

STX Corporation W 1,453 - 9,685 3,731 12,792STX Enpaco Co., Ltd. - - 96,639 - -

STX Industrial Plant Co., Ltd. 253 - - - 45,767

STX Norway AS - 68,416 - - -

STX Shipbuilding Co., Ltd. 24,344 - - - 45,869

STX Heavy Industry Co., Ltd. 1,341 65,396 57,950 - 9,624

Force TEC Co., Ltd. - - 1,557 1,581 -

POSI Co., Ltd. - - 2,985 1,939 -

STX Construction Co., Ltd. 3 1 - 14,794 -

STX Construction (Dalian) Co., Ltd. 305 - - - -

STX (Dalian) Shipbuilding Co., Ltd. 6,425 - - - 7,124

STX (Dalian) Shipbuilding Marine Technology Co., Ltd. 12 - - - -

STX (Dalian) Heavy Industry Co., Ltd. 798 - - - -

STX (Dalian) Marine Heavy Industry Co., Ltd. 503 - - - -

STX Pan Ocean (China) co., Ltd. 1 - - - -

Heung Kook Mutual Savings Bank - 3,000 - - -

W 35,438 136,813 168,816 22,045 121,176

In millions of Won

2007

Receivable Payables

Related company

Accounts and notes receivable

- tradeOther

receivables

Accountsand notes

payable - tradeNon-trade

payablesAdvance for

customers

STX Corporation W 4,359 6 5,636 1,258 8,426STX Enpaco Co., Ltd. - - 52,799 696 -

Management of the Company - 20 - - -

STX Shipbuilding Co., Ltd. 4,239 - - - 55,628

STX Heavy Industry Co., Ltd. 634 63,742 47,075 - 5,282

STX Energy Co., Ltd. 4,214 - - - 1,440

Force TEC Co., Ltd. - - 26 6 -

POSI Co., Ltd. - - 1,724 1,285 -

STX Construction Co., Ltd. - - 476 1,687 -

Heung Kook Mutual Savings Bank - 9,000 - - -

W 13,446 72,768 107,736 4,932 70,776

(d) Key management personnel compensations for the following classifications for the year ended December 31, 2008 are summarized as

follows:

In millions of Won

Classifications 2008

Employee benefits W 5,045Provision for retirement and severance benefits 221

W 5,266


(e) The Company had provided guarantees for related companies as of December 31, 2008 as follows:

Related company Type of guarantee Guaranteed amount Guaranteed party

STX (Dalian) Engine Co., Ltd. Refund on customer’s advances CNY 628,222,600 CustomersSTX Norway AS Repayment of borrowings W 110,000,000,000 Woori Bank

9. Property, Plant and Equipment

(a) Changes in property, plant and equipment for the years ended December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008

Book value as of Jan.1 Acquisitions Disposals Depreciation Other Spin-off Revaluation

Book Value as of Dec.31

Land W 57,867 - - - 9,591 6,132 103,976 165,302Buildings 46,279 263 - (1,742) 23,772 - - 68,572

Structures 7,940 24 - (796) 2,782 - 3,168 13,118

Machinery andequipment 46,433 210 (1,038) (5,406) 3,212 - - 43,411

Vehicles 866 166 (7) (401) 907 29 - 1,502

Tools 21,236 7,258 (163) (6,569) 1,101 131 - 22,732

Construction-in-progress 22,939 63,186 - - (43,959) - - 42,166

203,560 71,107 (1,208) (14,914) (2,594) 6,292 107,144 356,803

Government subsidies (578) - - 14 424 - - (140)

W 202,982 71,107 (1,208) (14,900) (2,170) 6,292 107,144 356,663

In 2008, capital expenditures for construction-in-progress amount to W 63,186 million. The construction-in-progress was transferred to property, plant

and equipment, and intangible assets in the amounts of W 41,365 million and W 2,594 million, respectively.

Land and structures were stated at revalued as of December 31, 2008, respectively. The fair value of the assets was based on the results of an appraisal

by an independent appraiser.

Revaluated land and structures would have been recognized under the cost model at W 61,325 million and W 9,950 million, respectively. AS the

Company adopted the revaluation model in current year for the first time, other comprehensive income of W 83,891 million and revaluation loss of

W 408 million were recognized.

In millions of Won

2007

Book value as of Jan.1 Acquisitions Disposals Depreciation Other

Book Value as of Dec.31

Land W 52,151 5,638 - - 78 57,867Buildings 34,561 4,356 - (1,390) 8,752 46,279

Structures 6,997 1,697 (40) (714) - 7,940Machinery and equipment

28,267 7,193 (291) (4,482) 15,746 46,433

Vehicles 622 479 (11) (224) - 866

Tools 15,067 11,287 (13) (5,105) - 21,236

Construction-in-progress 16,602 31,087 - - (24,750) 22,939

154,267 61,737 (355) (11,915) (174) 203,560Government subsidies (593) - - 15 - (578)

W 153,674 61,737 (355) (11,900) (174) 202,982

In 2007, capital expenditures for construction-in-progress amounted to W 31,087 million. Construction-in-progress has been transferred to property,

plant and equipment, and industrial property rights in the amounts of W 24,576 million, W 174 million, respectively.

52STX Engine


(b) Officially Declared Value of Land

The officially declared value of land at December 31, 2008, as announced by the Minister of Construction and Transportation, are as follows:

In millions of Won

Book value Declared value

Land W 165,302 71,359

The officially declared value, which is used for government purpose, is not intended to represent fair value.

(c) Insurance

As of December 31, 2008, inventories, buildings, structures, machinery and equipment and tools were insured against fire damage up to W 131,685

million. In addition, the Company carries comprehensive automobile insurance and workers’ accident compensation insurance.

10. Goodwill

Changes in goodwill for the years ended December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008 2007

Beginning balance W 2,703 3,119Amortization (416) (416)

Net balance at end of the year W 2,287 2,703

11. Intangible Assets

(a) Changes in intangible assets except goodwill for the years ended December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008 2007

Development

costs

Industrial

property rights Others

Development

costs

Industrial

property rights Others

Beginning balance W 2,746 16 2,212 3,861 17 1,666Additions 2,300 1 7,128 - 5 1,063

Decrease by spin-off - - (99) - - -

Amortization (927) (5) (1,489) (874) (6) (517)

Offset by government subsidies (451) - - (241) - -

3,668 12 7,752 2,746 16 2,212Government subsidies (1,623) - - (884) - -

Net balance at end of year W 2,045 12 7,752 1,862 16 2,212

(b) Research and development costs incurred and expensed for the years ended December 31, 2008 and 2007 are W 101,100 million and W

68,300 million, respectively.

12. Pledged Assets

(a) The following assets were pledged as collateral for the Company’s short-term borrowings and long-term debt as of December 31, 2008:

In millions of Won

Book value Collateralized amount Creditor

Land W 165,302 Korea Development BankBuildings 68,571

Structures 13,118

Machinery and equipment 43,270 89,000

Equity Method Accounted Investments - STX Pan Ocean Co., Ltd. 21,114 21,114

Hana Daetoo Securities Co., Ltd and others

W 311,375 110,114


(b) Guarantees provided on behalf of third parties as of December 31, 2008 are summarized as follows:

In millions of Won

Borrower Type of guarantee Guaranteed creditor Guaranteed amounts

Jinse Ship Building Co., Ltd. Payment guarantee (lease expense) Korea Development Bank Capital Co., Ltd. W 14,289

(c) Guarantees provided by third parties on behalf of the Company as of December 31, 2008 are summarized as follows:

Guaranteed amount

Guarantor Type of guaranteeWon

(millions)Foreign currency

(thousands)

Seoul Guarantee Insurance Performance guarantee W 209,035 -Korea Defense Industry Association Performance guarantee 69,742 -

Machinery Insurance Cooperative Performance guarantee 2,444 -

Korea SW Financial Cooperative Defect guarantee 11,422 -

Kookmin Bank Advances from customersrefund guarantee - USD 3,708

National Agricultural Cooperative Federation Advances from customersrefund guarantee - USD 4,458

Korea Development Bank Advances from customers - EUR 1,817

refund guarantee - JPY 64,279

- USD 31,586

Woori Bank Advances from customersrefund guarantee - USD 53,973

Korea Exchange Bank Advances from customersrefund guarantee - USD 42,844

The Export-Import Bank of Korea Advances from customers - EUR 464refund guarantee - USD 29,871

13. Other Non-current Assets

Other non-current assets as of December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008 2007

Long-term financial instruments W 11 11Long-term loans 53,224 2,187

Deposits provided 1,363 1,605

Long-term accounts receivable, net - 100

Long-term advance payments 482 904

Long-term accrued income 1,174 171

Other 2,133 1,333

W 58,387 6,311

14. Other Current Liabilities

Other current liabilities as of December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008 2007

Withholdings W 177 2,979Accrued expenses 224 -

Income taxes payable 39,750 25,340

Dividends payable 4 4

Other 6,494 8,910

W 46,649 37,233

54STX Engine


15. Debentures

Debentures issued as of December 31, 2008 are summarized as follows:

In millions of Won

Maturity Interest rate Amount Underwritten by

Debentures 2009.11.28 8.06% W 10,000 Korea Development Bank

16. Retirement and Severance Benefits

Details of changes in the retirement and severance benefits for the years ended December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008 2007

Estimated retirement and severance benefits at beginning of year W 24,885 19,969Accrual for retirement and severance benefits 7,258 7,277

Payments (5,765) (1,564)

Decrease by the spin-off (29) -

Transfer to non-trade payable (683) (797)

Estimated retirement and severance benefits at end of year 25,666 24,885

Transfer to National Pension Fund (234) (278)

Deposit for severance benefit insurance (315) (296)

Net balance at end of year W 25,117 24,311

The Company maintains an employees’ severance benefit trust arrangement with Woori Bank. Under this arrangement, the Company has made

a deposit in the amount equal to 1.23 % and 1.19% of the reserve balances of retirement and severance benefits as of December 31, 2008 and

2007, respectively. This deposit is to be used to guarantee the required payments to the retirees and is accounted for as a reduction in the reserve

balance.

17. Other Long-term Liabilities

Other long-term liabilities of December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008 2007

Long-term accounts payable - other W 348 211Provision for construction losses 2,202 609


Other 10,443 1,204

W 38,755 7,386


18. Assets and Liabilities Denominated in Foreign Currency

Assets and liabilities denominated in foreign currency as of December 31, 2008 and 2007 are summarized as follows:

2008

Foreign currency(thousands)

Won equivalent(millions)

AssetsCash and cash equivalents USD 2,303 W 2,896

EUR 45 80

Accounts and notes receivable - trade USD 47,639 59,906

EUR 29,010 51,529

JPY 368 5

Short-term and Long-term loans USD 3,400 4,275

NOK 356,000 64,140

Total W 182,831

Liabilities

Accounts and notes payable - trade USD 1,893 W 2,380

EUR 8,770 15,577

SGD 959 840

SEK 517 84

JPY 142,428 1,985

GBP 199 362

CHF 228 271

DKK 2,298 548

NOK 708 128

Short-term borrowings USD 1,019 1,281

EUR 1,344 2,387

Accounts and notes payable - other USD 42 53

EUR 41,504 73,720

SGD 2 1

JPY 333 5

GBP 40 74

CHF 9 11

Total W 99,707

56STX Engine


2007

Foreign currency(thousands)

Won equivalent(millions)

AssetsCash and cash equivalents USD 5,771 W 5,414

EUR 5,000 6,906

Accounts and notes receivable - trade USD 29,976 28,124

EUR 36,869 50,925

JPY 78,105 651

Total W 92,020

Liabilities

Accounts and notes payable - trade USD 7,504 W 7,040

EUR 791 1,092

SGD 159 103

SEK 59 9

Accounts and notes payable - other USD 690 647

EUR 25,920 35,803

SGD 11 7

JPY 11,800 98

GBP 8 14

DKK 200 37

CNY 15 2

Total W 44,852

The Company recognized foreign currency translation gains of W 5,371 million and W 2,443 thousand, and foreign currency translation losses of W

15,487 thousand and W 151 thousands, on assets and liabilities denominated in foreign currency for the year ended December 31, 2008 and 2007,

respectively.

19. Capital Stock and Capital surplus

Authorized shares of common stock (W2,500 par value) are 55,000,000, of which 28,676,833 shares have been issued and outstanding as of December

31, 2008. Authorized shares of preferred stock (W2,500 par value) are 5,000,000, of which 1,398 shares have been issued and outstanding as of

December 31, 2008.

The Company recognized gains on disposal of investments in affiliates of W 12,210 million, net of income tax of W 3,517 million, as capital surplus as

of December 31, 2008.

20. Capital Adjustments

Details of capital adjustments as of December 31, 2008 were as follows:

In millions of Won

2008 2007

Treasury stock W (9) (9)

21. Retained Earnings

(a) Legal reserve

The Korean Commercial Code requires the Company to appropriate a legal reserve in an amount equal to at least 10% of cash dividends for each

accounting period until the reserve equals 50% of stated capital. The legal reserve may be used to reduce a deficit or may be transferred to common

stock in connection with a free issue of shares.

(b) Reserve for improvement of financial structure

Until December 26, 2007 the Regulations on Securities Issuance and Disclosure require the Company to appropriate into a reserve an amount equal

to at least 50% of the net gain on sale of property, plant and equipment and 10% of net income for each year until the Company’s shareholder’s equity

equals 30% of total assets. The reserve may be used to reduce a deficit or transferred to common stock in connection with a free issue of shares.


Effective December 27, 2007, the above requirement has been removed and the Company is no longer required to appropriate a reserve for

improvement of financial structure and, consequently, the existing balance as of December 31, 2008 is now regarded as a voluntary reserve.

22. Commitments and Contingencies

(a) Collateralized notes and checks for the various contractual obligations as of December 31, 2008 are summarized as follows:

In millions of Won

Classification Provided by Number Amount

Notes Hanjin Heavy Industries Co., Ltd., and others 31 W 41,657Korea Defense Industry Association and others 9 Blank

Checks Daewoo International Corporation and others 6 7,254

(b) Amounts of accounts and notes receivable-trade related export, which was disposed of to financial institutions, are US$ 5,306 as of December

31, 2008.

(c) Agreements for the lines of credit up as of December 31, 2008 are summarized as follows:

Amount

BankWon

(millions)Foreign currency

(thousands)

Issuing of letter of credit Korea Development Bank W - USD 60,000Korea Exchange Bank - USD 30,000

Woori Bank - USD 26,500

Settlement of notes Shinhan Bank 50,000 -

Woori Bank 40,000 -

Guarantees of foreign currency Kookmin Bank - USD 50,000

National Agricultural Cooperative Federation - USD 20,000

Korea Development Bank - USD 80,000

Korea Exchange Bank - USD 80,000

Woori Bank - USD 100,000

Overdrafts Korea Development Bank 8,000 -

Woori Bank 10,000 -

Borrowings Shinhan Bank 30,000 -

Woori Bank 20,000 -

National Agricultural Cooperative Federation 30,000 -

Borrowings related to overseas trade Korea Exchange Bank 10,000 -

Discount of accounts receivable Korea Exchange Bank 20,000 -

Hana Bank 10,000 -Woori Bank 40,000 -

(d) As of December 31, 2008, the company is providing NOK 254,000 thousand loans for STX Norway AS. The Company can convert of these

loans and accrued interest related into stocks of STX Norway AS of par value NOK 270.

58STX Engine


(e) The Company’s pending litigations for the year ended December 31, 2008 were as follows:

In millions of Won

Object of lawsuit Plaintiff Defendant Amount Prospects

Stockholders’ rights to acquire shares of common stock Chehyun SI and others The Company W 960 Not estimable

Cancellation of value added tax The Company Superintendent of Chang-won District Tax Office 155 Not estimable

Disputed billings to government on contracts completed The Company Korea Government 973 Not estimable

Validity of debt The Company Defense AcquisitionProgram Administration 649

In appeal but not estimable

(f ) The Company has entered into technical assistance agreements with MAN-Diesel Co., Ltd., MTU Co., Ltd., SEMT, Pielstick, NSD, Nigata, Hanshin,

Nippon Shokubal, Mitsubishi, GDLS and DDC under which the Company would be provided with technology and services.

(g) The Company is responsible for providing warranties on the diesel engine sales for one year. The Company has a contract with Seoul

Guarantee Insurance company for the performance of the Company’s warranty obligation. The reserve for warranties as of December 31, 2008

and 2007 are W 25,762 million and W 5,362 million, respectively.

23. Derivative Instruments and Hedge Accounting

(a) Details of foreign currency forwards outstanding as of December 31, 2008 were as follows:

Amount (thousands)

Contract Bank Accounting Method Currency Buying Selling

Forward foreign exchange contracts Korea Development Bank and others

Fair value hedge USD - 595,000

Trading EUR 30,934 -

Trading USD - 120,000Trading EUR - 23,986

(b) Gains and losses on valuation of forward foreign exchange contract for the years ended December 31, 2008 are summarized as follows:

In millions of Won

Contract Accounting Method Gain (loss)

Forward foreign exchange contracts Fair value hedge W (121,375)Trading 6,386 Other income and Other expenseTrading (83,073)

(c) The Company entered into Forward foreign exchange contract to reduce the risk of change of foreign exchange rate with Korea Development

Bank and is applying fair value hedge. As a result, the amounts of firm commitment assets as of December 31, 2008 are summarized as

follows:

In millions of Won

Firm commitment assets

Gain on valuation W 155,551Deduction of sales (21,571)

Deduction of advances from customers (3,445)

Balance at end of year W 130,535


(d) Assets and Liabilities in relation to valuation of derivatives as of December 31, 2008 are summarized as follows:

In millions of Won

Amount

Forward foreign exchange contract assets (including current assets) W 6,386Firm commitment assets (including current assets) 130,535 Fair value hedge accountingForward foreign exchange contract liabilities (including current liabilities) (209,374)

24. Selling, General and Administrative Expenses

Details of selling, general and administrative expenses for the years ended December 31, 2008 and 2007 are summarized as follows:

In millions of Won2008 2007

Salaries W 15,644 15,935Provision for retirement and severance benefits 1,314 1,250

Other employee benefits 3,108 3,202

Travel 1,239 1,318

Communications 80 100

Utilities 22 23

Taxes and public dues 135 617

Depreciation 35 49

Amortization 416 416

Provision for bad debt 209 -

Repairs and maintenance 57 14

Insurance 310 474

Entertainment 651 795

Advertising 3,394 3,184

Freight 5,034 4,510

Commissions and fees 17,442 6,065

After-sales service - 1,985

Development 2,476 3,494

Automobile maintenance 246 186

Training 1,388 1,323

Other 320 1,225

W 53,520 46,165

25. Cost of Sales

Details of cost of sales for the years ended December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008 2007

Beginning inventories W 14,165 2,570Cost of products manufactured and Merchandise purchased during the year 1,249,629 1,130,525

Closing inventories (44,324) (14,165)

Losses on valuation of inventories 915 82

Provision for construction loss 1,630 553


1,246,814 1,122,972Cost of sales from discontinued operations 13,930 100,921

Cost of sales from continuing operations W 1,232,884 1,022,051

60STX Engine


26. Business Contracts

Changes in business contracts for the year ended December 31, 2008 are summarized as follows:

In millions of Won

DescriptionBalance at January

1, 2008 New contracts CompletedDecrease due to

spin-off

Balance atDecember

31,2008

Production of engines and others W 3,089,800 2,059,629 1,375,181 224,200 3,550,048

27. Income Taxes

(a) The Company was subject to income taxes on taxable income at the following normal tax rates.:

Taxable income Tax rate

Prior to 2008 Thereafter Prior to 2008 2008 2009 Thereafter

Up to W100 million Up to W200 million 14.3% 12.1% 12.1% 11%Over W100 million Over W200 million 27.5% 27.5% 24.2% 22%

In December 2008, the Korean government reduced the corporate income tax rate (including resident tax) and increased the tax base from W 100

million to W 200 million beginning in 2008. Effective January 1, 2008, the income tax rate for those having their taxable income less than W 200 million

was reduced from 14.3 % to 12.1%.

(b) The components of income tax expense for the years ended December 31, 2008 and 2007 were as follows

2008 2007

Current income tax expense W 54,786 32,427Deferred income tax expense 26,790 6,136

Additional income taxes for prior periods 1,641 767

Income tax related to items recognized in equity (44,976) (5,243)

Income tax expense W 38,241 34,087

(c) Deferred tax assets and liabilities are measured using the tax rate to be applied for the year in which temporary differences are expected

to be realized, and the change in deferred tax assets (liabilities) due to the change in the income tax rate amounting to W 2,650 million was

recognized directly to equity and W 319 million was recognized in current income tax expense.

(d) The income tax expense calculated by applying statutory tax rates to the Company’s income before income taxes for the year differs

from the actual tax expense in the non-consolidated statement of income for the years ended December 31, 2008 and 2007 for the following

reasons:

In millions of Won

2008 2007

Income before income taxes W 134,988 114,959Expense for income taxes at normal tax rates 37,091 31,600

Adjustments:

Tax effects of permanent differences, primarily entertainment 4,126 (1,408)

Investment tax credit (2,056) (1,855)

Adjustment of prior year tax return 2,722 5,044

Others (3,642) 706

Income tax expense W 38,241 34,087Effective tax rate 28.33% 29.65%

(e) Deferred tax assets have been recognized as the Company has determined it is probable that future profits will be available against which

the Company can utilize the related benefit.


(f ) Deferred tax assets as of December 31, 2008 that the Company did not recognize are summarized as follows:

In millions of Won

Temporarydifferences Tax effect

Investments in equity of affiliated company W (16,968) (3,733)

(g) Deferred tax liabilities as of December 31, 2008 that the Company did not recognize are summarized as follows:

In millions of Won

Temporarydifferences Tax effect

Goodwill W (2,287) (503)Provision for deferred income tax related to disposal of land (24,055) (5,292)

W (26,342) (5,795)

(h) Deferred tax assets and liabilities that were directly charged or credited to accumulated other comprehensive income as of December 31,

2008 are as follows:

In millions of Won

Temporarydifferences

Deferred taxassets (liabilities)

Gain on valuation of available-for-sale securities W (948) (209)Unrealized gain on valuation of investment in equity of affiliate (112,925) (21,415)

Capital Surplus 1,406 309

Gain on revaluation of fixed assets (107,553) (23,662)

W (220,020) (44,977)

62STX Engine


(i) In accordance with SKAS No. 16 Income Taxes, deferred tax amounts should be presented as a net current asset or liability and a net non-

current asset or liability. In addition, the Company is required to disclose gross deferred tax assets and liabilities. As of December 31, 2008,

details of gross deferred tax assets and liabilities are as follows:

In millions of Won

Temporary

differences at

December 31,

2008

Deferred tax assets (liabilities)

Current Non-current

Assets:Retirement and severance benefits W 23,438 - 5,156

Depreciation 4,309 - 948

Loss on valuation of inventory 2,735 662 -

Impairment losses on held-to-maturity securities 831 - 183

Losses on valuation of financial derivatives 209,374 26,080 22,353

Foreign currency translation loss 15,487 3,747 -

Provision for construction loss 2,202 - 484

Provision for construction warranties 25,762 - 5,668

Losses on revaluation of land 222 - 49

Losses on revaluation of structures 186 - 41

Gain on sale of investments in affiliated companies 86 - 19

Bad debts 33 8 -

Government subsidies 1,225 - 269

Loss on valuation of available-for-securities 1,796 424 9

287,686 30,921 35,179

Liabilities:

Gains on revaluation of land (104,198) - (22,924)

Gains on revaluation of structures (3,355) - (738)

Investment in equity of affiliated company (153,689) - (28,935)

Gains on valuation of financial derivatives (6,386) (1,133) (374)

Gains on valuation of firm commitment assets (133,979) (19,264) (11,962)

Foreign currency translation gain (5,371) (1,300) -

Others (2,234) (180) (327)

(409,212) (21,877) (65,260)

Net deferred tax asset (liability) W (121,526) 9,044 (30,081)

28. Earnings Per Share

Earnings per share for the years ended December 31, 2008 and 2007 are calculated as follows:


Basic earnings per share from continuing operations

2008 2007

Net income W 95,916 68,538Less: dividends on preferred stock 1 1

Income applicable to common stock W 95,917 68,539

Weighted-average number of shares of common stock (thousands) 28,677 28,677Earnings per share in Won W 3,345 2,390



Basic earnings per share

2008 2007

Net income W 96,747 80,872Less: dividends on preferred stock 1 1

Income applicable to common stock W 96,748 80,873

Weighted-average number of shares of common stock (thousands) 28,677 28,677Earnings per share in Won W 3,374 2,820

29. Cumulative Effect of Accounting Changes

In March 28, 2008, the Company changed its method of accounting for investments to conform with the new requirements of SKAS No.15, Investment

in Associates. The financial statements as of and for the years ended December 31, 2007, 2006 and 2005 have been retroactively restated to reflect

the change.

Details of changes for the years ended December 31, 2007, 2006 and 2005 are as follows:

In millions of Won

2005 2006 2007

Account Prior Restated Prior Restated Prior Restated

Capital surplus:Unrealized gain on valuation of investment in equity of affiliate W - 882 - 745 - 11,901

Accumulated other comprehensive income:

Unrealized gain on valuation of investment in equity of affiliate 179 262 497 497 15,513 8,045

Unrealized loss on valuation of investment in equity of affiliate (3,653) - (3,803) (116) - -

Unappropriated retained earnings 5,393 227 44,032 40,139 115,183 110,751Net income 3,466 3,450 42,584 42,568 81,412 80,872

30. Comprehensive Income

Comprehensive income for the years ended December 31, 2008 and 2007 was as follows:

In millions of Won

2008 2007

Net income W 96,747 80,872Effect of accounting changes - 540

Change in unrealized loss on valuation of investments in retained earnings of affiliate 309 11,156

Unrealized gain on valuation of investment in equity of affiliate (8,226) -

Gain (loss) on valuation of available-for-sale securities 331 88

Unrealized gain on valuation of investment in equity of affiliate 91,510 7,548

Unrealized gain (loss) on valuation of investment in equity of affiliate - 116

Gains on revaluation of Land and Structures 83,891 -

Comprehensive income W 264,562 100,320

31. Cash Dividends

The details of dividends paid by the Company for the years ended December 31, 2008 and 2007 are as follows:

(a) Dividends

In millions of Won

2008

Classification Number of shares Par value (in won) Dividend rate Dividend amount

Common stock 28,676,833 W 2,500 12.0% W 8,602Preferred stock 391 2,500 14.4% 1

Total 28,677,224 W 8,603

64STX Engine


In millions of Won

2007

Classification Number of shares Par value (in won) Dividend rate Dividend amount

Common stock 28,676,833 W 2,500 15.0% W 10,753Preferred stock 391 2,500 15.0% 1

Total 28,677,224 W 10,754

(b) Dividend payout ratios

In millions of Won

2008 2007

Dividends on common stock and preferred stock W 8,603 10,754Net income 96,747 80,872

Dividend payout ratios 8.89% 13.30%

(c) Dividend yield ratio

i) Common stock

2008 2007

Dividend per share W 300 375Stock price as of December 31 15,950 64,500

Dividend yield ratio 1.88% 0.58%

ii) Preferred stock

2008 2007

Dividend per share W 360 375Stock price as of December 31 - -

Dividend yield ratio - -

32. Non-cash Investing and Financing Activities

Significant non-cash investing and financing activities for the years ended December 31, 2008 and 2007 are summarized as follows:

In millions of Won

2008 2007

Construction-in-progress transferred to property, plant and equipment, at cost W 43,959 24,750

33. Added Value

The components of manufacturing costs and selling, general and administrative expenses which are necessary in calculating added value at

December 31, 2008 and 2007 are as follows:

In millions of Won

2008 2007

Salaries W 56,325 52,687Retirement allowance 7,258 7,277

Other employee benefits 12,379 10,250

Rental expense 236 326

Depreciation 14,900 11,900Taxes and public dues 1,312 2,484

34. Employee Welfare and Contribution to Society

(a) For employee welfare, the Company maintains a refectory, an infirmary, athletic facilities, a scholarship fund, and workmen’s accident

compensation, unemployment and medical insurances. The amount of welfare spending for the years ended December 31, 2008 and 2007 are

W 12,379 million and W 10,250 million, respectively.

(b) The Company donated W 3,332 million to STX Welfare Foundation and others for the years ended December 31, 2008.


35. Segment Information

(a) The Company has three reportable operating segments - production of diesel engines for shipbuilding (the Shipbuilding Business segment),

production of diesel engines for military equipment (the Defense Business segment), and production of electronic and information products

(the Electronics & Information business segment). The following table provides information for each operating segment as of and for the years

ended December 31, 2008 and 2007:

In millions of Won

2008

Shipbuilding DefenseElectronics & information

Sales W 1,200,330 184,590 107,590Operating income 190,405 2,184 13,517

Fixed assets 298,695 44,251 25,813Depreciation, etc. 14,939 1,767 1,031

In millions of Won

2007

Shipbuilding DefenseElectronics & information

Sales W 938,563 160,610 55,069Operating income 78,966 328 6,732

Fixed assets 174,289 26,425 9,061Depreciation, etc. 11,392 1,727 592

(b) The Company conducts its businesses globally and is managed geographically. The following table provides information for each

geographical segment as of and for the years ended December 31, 2008 and 2007:

In millions of Won

2008 2007

Domestic Overseas Domestic Overseas

Sales W 343,540 1,148,970 227,900 926,343

36. Spin-off and Merger of Business Unit

(a) The Company spun off its power plant business unit and STX Industrial Plant Co., Ltd. was established on April 1, 2008. Financial information

of the spun-off business unit for the years ended March 31, 2008 and December 31, 2007 are summarized as follows:

In millions of Won

March 31, 2008 December 31, 2007

Assets W 35,841 29,989Liabilities 21,583 23,552

Sales 15,491 120,743Operating income 809 17,013

(b) The Company entered into an agreement to be merged STX Industrial Plant Co., Ltd. by STX Heavy Industries Co., Ltd. pursuant to a resolution

of the board of directors’ meeting held on November 24, 2008. STX Industrial Plant Co., Ltd. had been merged by STX Heavy Industries Co., Ltd.

on January 1, 2009.

37. Discontinued Operations

STX Industrial Plant Co., Ltd., which the Company spun off its power plant business unit and established on April 1, 2008, was merged by STX Heavy

Industries Co., Ltd. on January 1, 2009. As a result, the company recognized income from its power plant business unit before the spin-off as income

from discontinued operations in the income statements.

66STX Engine


The results of the discontinued operation were calculated as follows:

In millions of Won

2008 2007

Sales W 15,491 120,743Cost of sales 13,930 100,921

Gross profit 1,561 19,822

Selling, general and administrative expenses 752 2,809

Operating income 809 17,013

Other income 337 -

Income from power plant business unit 1,146 17,013

Income taxes 315 4,679

Income from discontinued operation W 831 12,334

The comparative income statement has been restated to show the discontinued operation separately from continuing operations.

38. Subsequent Event

The Company had provided guarantees to Standard Chartered Bank in relation to bond issue of STX Norway AS, as affiliate, on January 19, 2009. STX

Norway AS had issued bond to acquire residual equity of STX Europe ASA and repay loans.


To the President of

STX Engine Co., Ltd.:

We have reviewed the accompanying Report on the Operations of Internal Accounting Control System (“IACS”) of STX Engine Co., Ltd. (the “Company”)

as of December 31, 2008. The Company’s management is responsible for designing and maintaining effective IACS and for its assessment of the

effectiveness of IACS. Our responsibility is to review management’s assessment and issue a report based on our review. In the accompanying report

of management’s assessment of IACS, the Company’s management stated: “Based on the assessment on the operations of the IACS, the Company’s

IACS has been effectively designed and is operating as of December 31, 2008, in all material respects, in accordance with the IACS Framework issued

by the Internal Accounting Control System Operation Committee.”

We conducted our review in accordance with IACS Review Standards, issued by the Korean Institute of Certified Public Accountants. Those Standards

require that we plan and perform the review to obtain assurance of a level less than that of an audit as to whether Report on the Operations of

Internal Accounting Control System is free of material misstatement. Our review consists principally of obtaining an understanding of the Company’s

IACS, inquiries of company personnel about the details of the report, and tracing to related documents we considered necessary in the circumstances.

We have not performed an audit and, accordingly, we do not express an audit opinion.

A company’s IACS is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial

statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, however, IACS may

not prevent or detect misstatements. Also, projections of any evaluation of effectiveness 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 Report on the Operations of Internal Accounting Control System as of December

31, 2008 is not prepared in all material respects, in accordance with IACS Framework issued by the Internal Accounting Control System Operation

Committee.

This report applies to the Company’s IACS in existence as of December 31, 2008. We did not review the Company’s IACS subsequent to December

31, 2008. This report has been prepared for Korean regulatory purposes, pursuant to the External Audit Law, and may not be appropriate for other

purposes or for other users.

March 17, 2009

This report is annexed in relation to the audit of the non-consolidated financial statements as of December 31, 2008 and the review of internal accounting control system pursuant to Article 2-3 of the Act on External Audit for Stock Companies of the Republic of Korea.

Independent Accountants’ Review Report on Internal Accounting Control System

Board of Directors

Duk-Soo Kang _ Chairman ❶

Dong-Hak Chung _ President ❷

Sung-Kyu Sohn _ Director ❸

Jin-Myung Lee _ Director ❹

Kwang-Bok Choi _ Auditor ❺

In-Tae Hwang _ Director ❻

Dong-Han Jung _ Director ❼

Hae-Ryong Hwang _ Director ❽

❶ ❻ ❼ ❽❸ ❹❷ ❺

AFFILIATES

STX Corporation Co., Ltd. ｜ www.stx.co.kr

STX Corp., the holding company for the STX Group, owns voting stock in the subsidiaries in order to control management and operations. The company also

is engaged in its own profit-making business activities, which include importing machinery, steel and other industrial materials and fuel needed in shipbuilding and

engine manufacturing; managing ships; as well as leasing and selling used vessels. STX Corp. also leads the Group's advance into new business areas such as overseas

resource development projects. It invest as a holding company mainly in the major subsidiaries of STX Pan Ocean, STX Offshore & Shipbuilding, STX Engine and STX

Energy, thereby playing a leading role in maximizing intra-Group synergy.

STX PanOcean Co., Ltd. ｜ www.stxpanocean.com

STX Pan Ocean is a global shipping line, operating a fleet of over 500 bulk carriers, tankers, containerships, car carriers and LNG carriers. The company provides

the very best marine shipping services and is particularly well known for its bulker services. STX Pan Ocean became Korea's first marine shipper to be listed on the

Singapore Stock Exchange in 2005 and was listed on the Korean Stock Exchange in 2007, reinforcing its global status. An extensive global network of branches and

subsidiaries spans all the major ports, including New York, London, Singapore, Hong Kong, and Shanghai, to bolster overall competitiveness. STX Pan Ocean leads the

Group's involvement in shipping and logistics and continues to expand the fleet and diversify the business portfolio to secure future growth engines. The ultimate goal is

to become one of the world's very best marine shipping lines.

STX Enpaco Co., Ltd. ｜ www.stxenpaco.co.kr

STX Enpaco was established to supply core parts and advanced materials used in the manufacture of large diesel engines. Technology self-sufficiency has

given the company unrivalled competitiveness in core parts and materials for diesel engines as well as in turbochargers for marine engines, parts and materials for

industrial machinery and materials for shipbuilding. The company's marine diesel turbocharger was designated a “World's Best Product” by the Ministry of Commerce,

Industry and Economy in 2005, with the same honor bestowed on a crankshaft in 2006 and the 2ST cylinder liner in 2007. The submerged cargo pump received the “Next-

generation World's Best Product” designation in 2008. The company's share of global markets continues to rise on the back of ongoing technology development and

quality improvement activities, and the company aims to become the world's top maker of core parts and materials for industry.

STX Offshore & Shipbuilding｜ www.stxship.com

With accumulated experiences and expertise, STX Offshore & Shipbuilding has enjoyed global competitiveness in the design and construction of product

tankers, containerships and gas carriers. Since 2007, the company has continued to receive new orders for LNG carriers, ultra large containerships, VLCCs and VLOCs, currently

specializing in building high value-added ships. STX Offshore & Shipbuilding also developed world’s first shipbuilding methods of SLS (Skid Launching System) and ROSE

(Rendezvous On the Sea for Erection) with in-house technology. Such innovations have elevated its stature as a global leader in productivity as well as in technology. As a

flagship company in the shipbuilding and machinery sector, STX Offshore & Shipbuilding is today forming the groundwork for a long-lived company by securing future

growth engines, leapfrogging into a top global shipbuilder by 2010.

STX Heavy Industries Co., Ltd. ｜ www.stxhi.co.kr

In 2004 STX Heavy Industries started out as a specialist in large marine diesel engines and materials for shipbuilding, and today the business portfolio also

includes industrial plants. Annual sales topped W1 trillion in 2008, just four years after the company's establishment within the STX Group. The US$100 Million Export Tower

was received in 2007, followed by the US$300 Million Export Tower a year later. The engine factory was expanded in 2008 to boost annual capacity to 4 million bhp. An order

for a cement plant was received from Jordan as the company makes its first steps into industrial plant construction, a future growth driver. Meanwhile, STX Heavy Industries

acquired STX Industrial Plant Co. through a merger and Cheil Engineering Co. through a purchase in 2008, thereby diversifying the plant construction operation and raising

the degree of specialization in this sector. As a result, the company is now capable of performing turnkey plant construction projects as an EPC contractor.

STX Energy Co., Ltd. ｜ www.stxenergy.co.kr

STX Energy operates Korea's largest co-generation power plant, providing a stable and affordable supply of steam and electricity to more than 260

companies working in the Gumi and Banweol Industrial Complexes. In 2008, the steam supply to resident companies surpassed 6.1 million tons, while another 1 million

MWh of electricity was sold to Korea Electric Power Corp. Meanwhile, the company embarked on a number of new business ventures overseas, joining Shell in an oil

exploration project, purchasing equity in a Chinese anthracite mine, buying a stake in the Uzbekistani Surgil gas field development project, and taking part in an

Indonesian thermal power plant project. A 2008 merger with STX Oil & Services put STX Energy in the businesses of domestic energy distribution and storage. The

company now operates 39 filling stations and 13 storage tanks nationwide. STX Energy also has advanced into the new and renewable energy sector, producing solar cells

as well as operating wind and solar power generation systems to help promote clean energy. STX Solar, an STX Energy subsidiary, started to build a solar cell plant in Gumi,

Korea in 2008, with commercial startup slated for June 2009.

STX Construction Co., Ltd. ｜ www.stxconst.co.kr

STX Construction is using specialized competencies in building high-tech plants to diversify into housing construction, environmental facilities and privately-

funded infrastructure projects, ports and hinterland urban development. The company made its first advance overseas by participating in the construction of the Dalian

Shipbuilding Complex and a US$180 million housing complex in Abu Dhabi. The luxury apartment brand STX KAN was adopted in late 2007 as the company stepped up

involvement in the housing sector, focusing particularly on apartment complexes. STX Construction has also expanded into resort construction with the Moon-gyung STX

Group Resort project, featuring luxurious five-star accommodations. Besides the Dalian and Abu Dhabi projects, the company won enough orders in the Middle East, Asia

and Russia to be ranked tenth among Korean builders for overseas construction activities in 2008. Plans call for continued advancement into new areas by increasing

involvement in build-transfer-lease (BTL) and infrastructure projects, and by going after orders for large projects outside Korea. The goal is to be ranked tenth in the Korean

construction industry by 2012.

STX Europe ASA｜ www.stxeurope.com

STX Europe is a global shipbuilding operation of world-class scale that focuses mainly on vessels that require advanced technology. Innovative and future-

oriented vessels are provided at optimal prices to meet the needs of global customers for cruise ships, ferries, merchant ships, offshore energy plants and specialized ships.

The result is full customer satisfaction. The technology to build icebreakers for the polar regions, applied engineering for state-of-the-art ships, superior shipyard production

capabilities and modularized shipbuilding technologies have provided STX Europe with the highest added value in the shipbuilding industry. STX Europe operates a total

of eighteen shipyards, including six in Norway; three in Finland; two each in France, Germany, and Romania; and one each in Brazil, Vietnam and the Ukraine. The company

holds more than 30 percent of the world market share for cruise ships and ferries in terms of gross tonnage.

The 1st Phase of construction at STX Dalian Shipyard is already complete, and the first ship built there was delivered in April 2009. During the 2nd Phase,

factories for offshore structures, engines and parts are being built that will enable the production of all the basic materials and core parts, engines and completed ships

and offshore energy plants on the same site, in a fully integrated operation. STX Dalian Shipyard will build those ship types for which it is the most competitive such as

tankers, bulkers and car carriers. The complex will also specialize in offshore plants and support equipment, providing a powerful new growth engine for the STX Group.

STX Dalian Shipyard

Name

> Local Subsidiaries

CityCountry

STX (Dalian) Shipbuilding Co., Ltd.STX (Dalian) Heavy Industries Co., Ltd.STX (Dalian) Marine Engineering Co., Ltd.STX (Dalian) Engine Co., Ltd.STX (Dalian) Precision Engineering Co., Ltd.STX( Dalian) Metal Co., Ltd.STX (Dalian) Plant Co., Ltd.STX (Dalian) Business Center Co., Ltd.STX (Dalian) Shipbuilding Engineering Co., Ltd.STX Construction (Dalian) Co.,Ltd.STX Real Property Development (Dalian) Co., Ltd.POSI (Dalian) Logistics Co., Ltd.STX Fushun Heavy Industries Co., Ltd.Qingdao STX Machinery Co., Ltd.STX Norway ASSTX (Shanghai) Corporation Ltd.STX Japan CorporationSTX Mongolia LLC.STX-VINA Heavy Industry Co., Ltd.STX Middle East FZE.STX PanOcean Singapore Pte. Ltd.STX PanOcean (China) Co., Ltd.STX PanOcean (HongKong) Co., Ltd.STX PanOcean (U.K) Co., Ltd.STX PanOcean (America), Inc.

Dalian

Dalian

Dalian

Dalian

Dalian

Dalian

Dalian

Dalian

Dalian

Dalian

Dalian

Dalian

Fushun

Qingdao

Oslo

Shanghai

Tokyo

Ulaanbaatar

Van Phong

Dubai

Singapore

Shanghai

Hong Kong

London

New York

China

China

China

China

China

China

China

China

China

China

China

China

China

China

Norway

China

Japan

Mongolia

Vietnam

UAE

Singapore

China

China

UK

US

Name CityCountry

STX PanOcean LNG Pte. Ltd.STX Brasil Trading Ltda.DS Cement LLPSp/f STX Faroes Ltd.STX Ireland LimitedSTX Construction RUSSTX Aprils, Inc.

Singapore

Rio de Janeiro

Chilly

Faroes Island

Ireland

Moscow

Boston

Singapore

Brazil

Kazakhstan

Denmark

Ireland

Russia

US

Name

> Local Sub-subsidiaries

CityCountry

STX Europe ASASTX Architectural Design Co., Ltd.Tianjin STX-Sinotrans Logistics Co., Ltd.Qingdao STX-Keyun Logistics Co., Ltd.Qingdao STX International Logistics Co., Ltd.Sea Win Shipping Co., Ltd.Lianyungang Global Ocean Shipping Co., Ltd.Gulf Pacific Shipping Ltd.STX Global Logix Co., Ltd.STX Citinet, LLC.STX Gulf Shipping FZCOSTX Logistics Singapore Pte. Ltd.DTK Oceanic Limited

Oslo

Dalian

Tianjin

Qingdao

Qingdao

Qingdao

Lianyungang

Hong Kong

Tokyo

Ulaanbaatar

Dubai

Singapore

Lagos

Norway

China

China

China

China

China

China

China

Japan

Mongolia

UAE

Singapore

Nigeria

OSLO

HOLEBY

ANTWERP

KATRANA

MOSCOW

CHILLY

BAKU

LAGOS

DUBAI

MUMBAI

NEW DELHI

ULAANBAATAR

DALIAN

KOREA

KAOHSIUNG

TOKYO

VLADIVOSTOK

JAKARTA

MELBOURNE

SINGAPORE

LONDON

ATHENS

HO CHI MINH

VAN PHONG

HANOIHONG KONG

SHENZHENXIAMEN

SHANGHAININGBO

LIANYUNGANG

QINGDAO

WUXI

TIANJINBEIJING

FUSHUN

Global Network

Name

> Overseas Offices

CityCountry

STX Corporation Mumbai OfficeSTX Corporation Hanoi OfficeSTX Corporation London OfficeSTX Corporation Athens OfficeSTX Corporation Jakarta Office STX PanOcean Ningbo OfficeSTX PanOcean Xiamen Office STX PanOcean Kaohsiung Office STX PanOcean Jakarta Office STX PanOcean Hochiminh OfficeSTX PanOcean New Delhi Office STX PanOcean New Orleans OfficeSTX PanOcean Portland Office STX PanOcean Santiago Office STX PanOcean Melbourne Office STX PanOcean Antwerp Office STX Energy Azerbaijan OfficeSTX Construction Hanoi OfficeBeijing Branch of STX Shanghai Corporation Ningbo Branch of STX Shanghai Corporation

Mumbai

Hanoi

London

Athens

Jakarta

Ningbo

Xiamen

Kaohsiung

Jakarta

Ho Chi Minh

New Delhi

New Orleans

Portland

Santiago

Melbourne

Antwerp

Baku

Hanoi

Beijing

Ningbo

India

Vietnam

UK

Greece

Indonesia

China

China

Taiwan

Indonesia

Vietnam

India

US

US

Chile

Australia

Belgium

Azerbaijan

Vietnam

China

China

Name CityCountry

Wuxi Branch of STX Shanghai Corporation Dalian Branch of STX PanOcean (China) Co., Ltd.Tianjin Branch of STX PanOcean (China) Co., Ltd.Qingdao Branch of STX PanOcean (China) Co., Ltd.Shenzhen Office of STX PanOcean (HongKong) Co., Ltd.

Wuxi

Dalian

Tianjin

Qingdao

Shenzhen

China

China

China

China

China

PORTLAND

NEW ORLEANS

NEW YORK

BOSTON

RIO DE JANEIRO

SANTIAGO

Name

> Overseas Branches

CityCountry

STX Heavy Industries Co. Ltd. JordanSTX Enpaco Denmark Branch

Katrana

HolebyJordan

Denmark

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