We would like to express our sincere regret for causing a significant confusion to you and in the market through our disclosure of capital injection into Doosan Infracore International (DII) on August 28, 2008.


Dear Esteemed Shareholders and Analysts,
We would like to express our sincere regret for causing a significant confusion to you and in the market through our disclosure of capital injection into Doosan Infracore International (DII) on August 28, 2008. To remedy this, we explained to our esteemed shareholders and analysts the facts and circumstances of this capital injection at 16:00, August 29. In this letter, we would like to once again summarize and share with you our explanation of the major issues that were raised in the market.

We hope that you will find this letter responsive to any questions you may have had, and we will try our best to meet your expectations and to regain your trust.

1. Explanation of the Financial Covenants

- In the loan agreement between DII and the lenders, DII’s debt to EBITDA ratio is required to be maintained at seven or lower. If this covenant is not met, the consequence is not a repayment of the loan, and we are only obligated to make whole the deficient EBITDA through cash injection (capital increase or shareholder loan). In other words, if EBITDA from our operation is insufficient, we promised to the lenders that the parent company will inject additional cash into DII. For example, if the prescribed EBITDA is US$ 400 million, and the actual EBITDA is US$ 350 million, only the difference of US$ 50 million needs to be injected. There is no obligation to repay the debt by injecting US$ 350 million which is seven times US$ 50 million.

- We believe that there was some misunderstanding about the meaning of this covenant. It seems that the fundamental concern of the market was that if the covenant is breached, DII will have to repay the loan in the amount of seven times the deficient EBITDA which would inevitably require a large scale capital injection. Further, if the economy does not improve, some people in the market may have been concerned that capital injection to cure the breach will have to be made again and again in the future to no avail. However, as we explained, this is not the true consequence of the breach of this covenant, and in fact, such outcome simply cannot happen.

2. Background and Timing of US$ 1 Billion Capital Injection

- At the time we were structuring the financing for our acquisition of DII, we might have depended on the LBO loan at a somewhat more than desirable level. This was actually a part of our overall strategy to minimize the investment in DII from the parent level so as to maximize our investment capability for the potential acquisition of Daewoo Shipbuilding & Marine Engineering (DSME). However, from the perspective of DII, the debt to EBITDA ratio ended up being somewhat excessive 6.7.

(US$ 5.1 billion consists of US$ 2.9 billion in loan and US$ 2.2 billion in capital (US$ 700 million from Doosan Infracore, US$ 650 million from Doosan Engine, US$ 50 million from Doosan, US$ 800 million from financial investors))

- Therefore, there was a need to reduce the debt level at the earliest opportunity for the benefit of DII, and when Doosan Group decided not to pursue the acquisition of DSME, it was only natural for us to use the fund to reduce the debt level of DII and help DII increase its expansion capacity.

- This large-scale US$ 1 billion capital injection was not forced upon us by the financial covenant. This was a voluntary management decision to improve the financial condition. This capital increase will provide DII’s management with an environment where they are less burdened by the financing and where they can focus on operating DII. Based on this opportunity, DII’s management plans to actively pursue investment and product development for synergy creation and investment in developing new markets, both of which are DII’s top priority items.

- There were some who questioned why DII’s debt was reduced instead of Doosan Infracore’s debt. Doosan Infracore’s current debt is about KRW 1 trillion, and except for the US$ 700 million in long term, low interest loan borrowed for the initial investment in DII, there is not much debt to be repaid. Therefore, it was more reasonable and appropriate to reduce DII’s debt which stands at US$ 2.9 billion. It also makes sense from value perspective to reduce DII’s debt because the interest rate on DII’s debt, as an LBO loan, is 75 bp higher than the interest rate on Doosan Infracore’s debt.

- Through the reduction in DII’s debt level, its financing cost will be reduced from US$ 200 million in 2008 to US$ 130 million in 2009, and ICR will reach the healthy level of 2.9. This will lead to increase in Doosan Infracore’s profit through its shareholding in DII and will ultimately benefit both companies.

- US$ 1 billion will be shared between Doosan Infracore (US$ 519 million) and Doosan Engine (US$ 481 million) in accordance with their initial capital investment ratio, and the fund will be raised from surplus capital and sale of unused assets, without requiring additional borrowing. This plan will be carried out based on the funding plan which was originally prepared for the purpose of pursuing the acquisition of DSME (our apologies for not revealing more details for disclosure issues). Further, the entire US$ 1 billion will not be injected all at once, but rather, this amount will be paid in several tranches until the first half of 2009, as the fund becomes available, in accordance with the board resolution.

- There was also the question of why this capital injection is taking place now. This was an expression of our clear intent to improve the financial structure in the face of continuing downturn in world economy, and the moment was simply appropriate given our decision not to try to acquire DSME.

3. DII’s Results for 2008 and Estimates for 2009

- If the excavator market cycle for the past 20 to 30 years is examined, the downturn trend tended to continue for at most about two years, followed by a rapid recovery. Based on this, we expect that the market will start recovering around 2010, and construction equipment market research firms (Yengst, Manfredi, etc.) also expect that the market will continue its downward swing through 2009, but will show an annual growth of 8% to 13% starting in 2010.

- DII is expected to achieve US$ 2.939 billion in sales in 2008 (-0.4% compared to the previous year) and EBITDA of US$ 310 million. Considering that Bobcat’s profit rate declined by about 3 to 5 percentage points compared to its normal level in previous market downturns, DII’s management is convinced that this estimated EBITDA is on the conservative side.

- Although we expect that the market will be slow in 2009, we actually expect that DII’s EBITDA will increase by US$ 60 million from 2008 to US$ 370 million because DII’s synergy creation and cost reduction through internal restructuring will outpace DII’s reduced profit.

＊EBITDA increase from 2008 to 2009: US$ 60 million ?Reduced market and increased raw material cost: -$51 million ?Factory optimization, reduction of low profit assets and SG&A/ manufacturing overhead cost: +US$ 57 million ?Synergy from cross-selling, global sourcing, mini excavator global leadership and Attachment growth: +US$ 54 million

- It is expected that EBITDA of US$ 370 million in 2009 is a sufficiently achievable target. Even in the worst case scenario, the possibility that EBITDA will fall below this year’s estimate of US$ 310 million realistically does not exist. Even if we assume that the financial covenant cannot be satisfied, any additional cash injection will be small, and there will not be any vicious cycle of endless cash injection.

(Unit: US$ Millions) ’08 ‘09 ‘10 ‘11 ‘12 ------------------------------------------------------------------------------------------------- Sales 2,939 3,076 3,649 4,269 4,978 EBITDA 310 370 520 636 835 ------------------------------------------------------------------------------------------------- Debt 2,106 1,967 1,763 1,451 891 Interest Expense 204 126 118 106 87 ------------------------------------------------------------------------------------------------- Debt/EBITDA 6.5* 5.3 3.4 2.3 1.1 Debt Ratio 93% 88% 78% 64% 45% ICR** 1.5 2.9 4.4 6.0 9.6 ------------------------------------------------------------------------------------------------- * Under the loan agreement, EBITDA for 2008 will be US$ 323 million, including one time expense of US$ 13 million ** Interest Coverage Ratio

- In the long term, DII plans to achieve the sales of US$ 4.978 million and EBITDA of US$ 835 million by 2012. Of these numbers, the sales of US$ 1.392 million and EBITDA of US$ 290 million are estimated to come from the synergy effect. Also, DII’s financial condition will reach a very sound debt ratio of 45% and debt-to-EBITDA ratio of 1.1, allowing DII to obtain a credit rating of A or better from Moody’s and other international rating agencies. After 2012, we are even planning an IPO of DII based on these sound and health financial figures.

4. Regarding the market confusion and harm to shareholder trust

- We sincerely regret that the market’s trust in us was harmed through this capital increase process and the process of providing information about DII.

- We believe that the root of the problem lies in the fact that we significantly downward-adjusted DII’s operational results. This downward adjustment was unfortunately inevitable because the credit crisis in the U.S. caused a faster-than-expected market downturn in the U.S. and Europe, which are DII’s major markets.

- However, the estimate figures that we provided to you here are all achievable conservative figures, and through them, we hope to recover the trust of the market.

- The reason that we might be providing not enough information about DII and providing them late is that DII consists of business divisions spread out over 50 entities located across 27 countries, and we are not yet fully prepared to systematically collect the information from all these entities. We will try to have the system in place and provide you with more information as quickly as practically possible.

- Lastly, we should have clearly communicated this capital increase to the market, but in hindsight, there may have been some lack of clarity. We regret that we did not respond appropriately, and we will make our best effort to prevent a similar happening in the future. We hope that our esteemed shareholders and analysts will continue to have trust and belief in Doosan Infracore, and we will do our best to maximize shareholder value. Thank you.

August 30, 2008

Doosan Infracore Co., Ltd. Yong Sung Kim President and CEO