UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

or

o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

KABUSHIKI KAISHA KOMATSU SEISAKUSHO

(Exact name of Registrant as specified in its charter)

JAPAN

2-3-6 Akasaka, Minato-ku, Tokyo 107-8414, Japan
(Address of principal executive offices)

Yasushi Sakano or Masaki Takeda
Telephone: +81-3-5561-2628
Facsimile: +81-3-3586-0374
Address: 2-3-6 Akasaka, Minato-ku, Tokyo 107-8414, Japan

Securities registered or to be registered pursuant to Section 12(b) of the Act.

		Name of each exchange
Title of each class		on which registered
None		N/A

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

Common Stock*

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

968,039,976 shares (excluding 30,704,084 shares of Treasury Stock)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes þ No o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP þ International Financial Reporting Standards as issued by the International Accounting Standards Board o Other o

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

 

 

In this document, KOMATSU LTD. is hereinafter referred to as the “Company,” and together with its consolidated subsidiaries as “Komatsu.”

Cautionary Statement with respect to forward-looking statements:

This annual report contains forward-looking statements that reflect management’s views and assumptions in the light of information currently available with respect to certain future events, including expected financial position, operating results and business strategies. These statements can be identified by the use of terms such as “will,” “believes,” “should,” “projects,” “plans,” “expects” and similar terms and expressions that identify future events or expectations. Actual results may differ materially from those projected, and the events and results of such forward-looking assumptions cannot be assured. Any forward-looking statements speak only as of the date of this annual report, and the Company assumes no duty to update such statements.

Factors that may cause actual results to differ materially from those predicted by such forward-looking statements include, but are not limited to, unanticipated changes in demand for Komatsu’s principal products, owing to changes in the economic conditions in Komatsu’s principal markets; changes in exchange rates or the impact of increased competition; unanticipated costs or delays encountered in achieving Komatsu’s objectives with respect to globalized product sourcing and new information technology tools; uncertainties as to the results of Komatsu’s research and development efforts and its ability to access and protect certain intellectual property rights; the impact of regulatory changes and accounting principles and practices; and the introduction, success and timing of business initiatives and strategies.

Important information regarding risks and uncertainties is also set forth elsewhere in this annual report, including in “D. Risk Factors” included in “Item 3. Key Information,” “Item 4. Information on the Company,” “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

Table of Contents

PART I
Item 1. Identity of Directors, Senior Management and Advisers			1
Item 2. Offer Statistics and Expected Timetable			1
Item 3. Key Information			1
A. Selected Financial Data			1
B. Capitalization and Indebtedness			4
C. Reasons for the Offer and Use of Proceeds			4
D. Risk Factors			4
Item 4. Information on the Company			8
A. History and Development of the Company			8
B. Business Overview			12
C. Organizational Structure			29
D. Property, Plants and Equipment			31
Item 4A. Unresolved Staff Comments			34
Item 5. Operating and Financial Review and Prospects			34
A. Operating Results			34
B. Liquidity and Capital Resources			76
C. Research and Development, Patents and Licenses, etc.			81
D. Trend Information			83
E. Off-Balance Sheet Arrangements			85
F. Tabular Disclosure of Contractual Obligations			87
G. Safe Harbor			88
Item 6. Directors, Senior Management and Employees			89
A. Directors and Senior Management			89
B. Compensation			99
C. Board Practices			102
D. Employees			103
E. Share ownership			105
Item 7. Major Shareholders and Related Party Transactions			107
A. Major Shareholders			107
B. Related Party Transactions			108
C. Interests of Experts and Counsel			108
Item 8. Financial Information			108
A. Consolidated Statements and Other Financial Information			108
B. Significant Changes			109
Item 9. The Offer and Listing			109
A. Offer and Listing Details			109

B. Plan of Distribution			111
C. Markets			111
D. Selling Shareholders			111
E. Dilution			111
F. Expenses of the Issue			111
Item 10. Additional Information			111
A. Share Capital			111
B. Memorandum and Articles of Association			111
C. Material Contracts			123
D. Exchange Controls			123
E. Taxation			125
F. Dividends and Paying Agents			132
G. Statement by Experts			132
H. Documents on Display			132
I. Subsidiary Information			132
Item 11. Quantitative and Qualitative Disclosures About Market Risk			132
Item 12. Description of Securities Other than Equity Securities			137
A. Debt Securities			137
B. Warrants and Rights			137
C. Other Securities			137
D. American Depositary Shares			137
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies			139
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds			139
Item 15. Controls and Procedures			139
Item 16. [Reserved]			141
A. Audit Committee Financial Experts			141
B. Code of Ethics			141
C. Principal Accountant Fees and Services			141
D. Exemptions from the Listing Standards for Audit Committees			143
E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers			143
F. Change in Registrant’s Certifying Accountant			143
G. Corporate Governance			143
PART III
Item 17. Financial Statements			144
Item 18. Financial Statements			144
Item 19. Exhibits			144
Exhibit 1.1
Exhibit 1.2
Exhibit 2
Exhibit 11
Exhibit 12 a
Exhibit 12 b
Exhibit 13 a
Exhibit 13 b

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected Financial Data

The following data for each of the fiscal years ended March 31, 2006 through March 31, 2010 have been derived from the Company’s audited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). It should be read in conjunction with the Company’s audited consolidated balance sheets as of March 31, 2009 and 2010, the related consolidated statements of income, shareholders’ equity and cash flows for the three fiscal years ended March 31, 2010 and the notes thereto that appear elsewhere in this annual report.

Selected Financial Data

		(Millions of yen, except per share amounts)
		2010				2009				2008				2007				2006
Income Statement Data:
Net sales 1)			1,431,564				2,021,743				2,243,023				1,893,343				1,612,140
Operating income 1)			67,035				151,948				332,850				244,741				163,428
Income from continuing operations before income taxes and equity in earnings of affiliated companies 1)			64,979				128,782				322,210				236,491				155,779
Income taxes 1)			25,364				42,293				115,794				79,745				43,970
Income from continuing operations attributable to Komatsu Ltd. less applicable income taxes1)			33,559				78,797				203,826				153,264				109,141
Income from discontinued operations attributable to Komatsu Ltd. less applicable income taxes 1)			—				—				4,967				11,374				5,149
Net income attributable to Komatsu Ltd.			33,559				78,797				208,793				164,638				114,290

		(Millions of yen, except per share amounts)
		2010				2009				2008				2007				2006
Per Share Data:
Income from continuing operations attributable to Komatsu Ltd. less applicable income taxes
- Basic			34.67				79.95				204.88				154.25				109.94
- Diluted			34.65				79.89				204.61				153.97				109.75
Net income attributable to Komatsu Ltd.
- Basic			34.67				79.95				209.87				165.70				115.13
- Diluted			34.65				79.89				209.59				165.40				114.93
Cash dividends
Yen			26.00				44.00				38.00				23.00				14.00
U.S. cents 2)			27.96				44.44				38.00
Depreciation and amortization			91,319				98,354				75,664				72,709				72,640
Capital Investment 1) 3)			96,191				162,512				145,730				129,680				113,934
Research and development expenses 1)			46,449				53,736				49,673				46,306				44,560
		(Millions of yen)
Balance Sheet Data:
Total assets			1,959,055				1,969,059				2,105,146				1,843,982				1,652,125
Komatsu Ltd. shareholders’ equity			833,975				814,941				887,126				776,717				622,997
Capital stock			67,870				67,870				67,870				67,870				67,870
Number of shares issued at year-end			998,744,060				998,744,060				998,744,060				998,744,060				998,744,060
Number of shares outstanding at year-end			968,039,976				967,822,292				995,103,847				993,786,759				993,645,492

Notes:

The following table provides the noon buying rates for Japanese yen in The City of New York as reported by the Federal Reserve Bank of New York and the Federal Reserve Board expressed in Japanese yen per U.S. dollar for the periods indicated. The average Japanese yen exchange rates represent average noon buying rates on the last business day of each month for the respective period. On June 18, 2010, the noon buying rate in The City of New York as reported by the Federal Reserve Board for Japanese yen was ¥90.79 = U.S.$1.00.

Yen Exchange Rates per U.S. dollar:

(Yen)

		Average				High				Low				Period-End
Year ended March 31
2006			113.67				104.64				119.66				117.48
2007			116.55				112.26				121.02				117.56
2008			113.61				96.88				124.09				99.85
2009			100.85				87.80				110.48				99.15
2010			92.49				86.12				100.71				93.40

		High				Low				Period-End
2009
December			86.62				93.08				93.08
2010
January			89.41				93.31				90.38
February			88.84				91.94				88.84
March			88.43				93.40				93.40
April			92.03				94.51				94.24
May			89.89				94.68				90.81

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Given the business environment in which Komatsu operates, Komatsu is exposed to a variety of risks. Komatsu has identified the following risks as its primary risks based on information currently available to it. The statements set forth in this section should be considered carefully in conjunction with Item 5. “Operating and Financial Review and Prospects” and the “Consolidated Financial Statements” that appear elsewhere in this annual report on Form 20-F. The risks discussed below are risks that may, individually or in the aggregate, make Komatsu’s actual results differ materially from its expected or past results. It should be noted, however, that it is impossible to predict or identify all risks that may be applicable to Komatsu. The below list of risks should not be considered to be a complete list of risks that could materially affect Komatsu’s results of operations and/or financial condition. Komatsu’s results of operations and/or financial condition may also be affected in the future by other risks that are currently unknown or that are not currently considered significant or material.

(1) Economic and market conditions

As Komatsu is engaged in business on a global scale, the economic and market conditions and competitive environment in which Komatsu operates differ from region to region. In addition, demand for Komatsu’s products, as well as the business environment in which Komatsu operates, may change substantially as a result of changes in the economic and market conditions of each such region.

In economically-advanced regions in which Komatsu operates, Komatsu’s business is generally affected by cyclical changes in the economies of such regions. Therefore, factors which are beyond Komatsu’s control, such as levels of housing starts, industrial production, public investments in infrastructure development and private-sector capital outlays, may affect demand for Komatsu’s products.

In recent years, Komatsu has derived a greater percentage of its business from newly-developing markets, such as China, India, Russia, the Middle East and Africa. In line with such increase in business, Komatsu has been making capital investments in such markets. Particularly in China, Komatsu has been making aggressive investments to expand the production capacity of its subsidiaries and reinforce its sales and service operations. If a temporary confusion or stagnation were to occur in the Chinese economy, Komatsu’s business results would be adversely affected. In addition, in the other newly-developing markets, Komatsu constantly pays careful attention to the changes in demand for its products. However, their economies depend upon a number of unstable factors, such as commodity prices and considerable reliance on exports to economically-advanced countries, and thus, changes in these factors could adversely affect Komatsu’s business results.

Furthermore, when economic and/or market conditions change more drastically than forecasted by Komatsu, Komatsu may also experience, among others, fewer orders of its products, an increase in cancellation of orders by customers and a delay in the collection of receivables.

These changes in the economic and market conditions and the business environment in which Komatsu operates may lead to a decline in sales, and inefficient inventory levels and/or production capacities, thereby causing Komatsu to record lower profitability and incur additional expenses and losses. As a result, Komatsu’s results of operations may be adversely affected.

(2) Foreign currency exchange rate fluctuations

Komatsu conducts its business operations on a global scale, and a substantial portion of its overseas sales is affected by foreign currency exchange rate fluctuations. In general, an appreciation of the Japanese yen against another currency would adversely affect Komatsu’s results of operations, while a depreciation of the Japanese yen against another currency would have a favorable impact thereon. In addition, foreign currency exchange rate fluctuations may also affect the comparative prices between products sold by Komatsu and products sold by its foreign competitors in the same market, as well as the cost of materials used in the production of such products. Komatsu strives to alleviate the effect of such foreign currency exchange rate fluctuations by, for example, locating its production bases globally and positioning such bases closer to the respective markets in which the products manufactured by such bases are sold. Komatsu also engages in hedging activities to minimize the effects of short-term foreign currency exchange rate fluctuations. Despite Komatsu’s efforts, if the foreign currency exchange rates fluctuate beyond Komatsu’s projected fluctuation range, Komatsu’s results of operations may be adversely affected.

(3) Fluctuations in financial markets

While Komatsu is currently working on improving the efficiency of its assets to reduce its interest-bearing debt, its aggregate short- and long-term interest-bearing debt was approximately ¥590 billion as of March 31, 2010. Although Komatsu has strived to reduce the effect of interest rate fluctuations by promoting the procurement of funds at fixed interest rates, an increase in interest rates may increase Komatsu’s interest expenses with respect to its interest-bearing debt subject to floating interest rates, thereby adversely affecting Komatsu’s results of operations. In addition, fluctuations in the financial markets, such as fluctuations in the fair value of marketable securities and interest rates, may also increase the unfunded obligation portion of Komatsu’s pension plans or pension liabilities, which may result in an increase in pension expenses. Such an increase in interest expenses and pension expenses may adversely affect Komatsu’s results of operations and financial condition.

(4) Laws and regulations of different countries

Komatsu is subject to various governmental regulations and approval procedures in the countries in which it operates. If the government of a given country were to enact new laws and regulations, such as laws and regulations relating to import/export duties, quotas, currency restrictions and taxation, Komatsu may be required to bear increased expenses in order to comply with such regulations. With respect to transfer pricing between Komatsu and its affiliated companies, Komatsu is careful to comply with applicable taxation laws of Japan and the concerned foreign governments. Nevertheless, it is possible that Komatsu may be viewed by the concerned tax authorities as having used inappropriate pricing. If intergovernmental negotiations were to fail, Komatsu may be charged with double or additional taxation. Such developments could have an unfavorable impact on Komatsu’s business results.

(5) Environmental laws and regulations

Komatsu’s products and business operations are required to comply with increasingly stringent environmental laws and regulations in the numerous countries in which Komatsu operates. Komatsu expends a significant share of its management resources, such as research and development expenses, to comply with regulations concerning air and wastewater emission levels of its manufacturing facilities and products. If the existing standards were amended, Komatsu may be required to bear increased costs and to make further capital investments to comply with such new standards. Incurrence of such additional environmental compliance costs may adversely affect Komatsu’s results of operations.

(6) Product and quality liability

While Komatsu endeavors to sustain and improve the quality and reliability of its operations and products based on stringent standards established internally, Komatsu may face product and quality liability claims or become exposed to other liabilities if unexpected defects in its products result in recalls or accidents. If the costs for addressing such claims or other liabilities are not covered by Komatsu’s existing insurance policies or other protective means, such claims may adversely affect its financial condition.

(7) Alliances and collaborative relationships

Komatsu has entered into various alliances and collaborative relationships with distributors, suppliers and other companies in its industry to reinforce its international competitiveness. Through such arrangements, Komatsu is working to improve its product development, production, sales and service capabilities. While Komatsu expects its alliances and collaborative relationships to be successful, Komatsu’s failure to attain expected results or the termination of such alliances or collaborative relationships may adversely affect Komatsu’s results of operations.

(8) Procurement, production and other matters

Komatsu’s procurement of parts and materials for its products is exposed to fluctuations in commodity prices, mainly in the price of steel materials. Price increases in commodities may increase the cost of materials and therefore the production cost of Komatsu’s products. In addition, a shortage of product parts and materials, bankruptcies of suppliers or production discontinuation by suppliers of products used by Komatsu may make it difficult for Komatsu to engage in the timely procurement of parts and materials and manufacture of its products, thereby lowering Komatsu’s production efficiency. In an effort to reduce any adverse effect to its business as a result of an increase in the cost of materials, Komatsu strives to reduce other costs and pass on any increase in the cost of materials to its customers through price adjustments of its products. Komatsu strives to minimize the effects of possible procurement or manufacturing issues by securing new suppliers or promoting closer collaboration among its related business divisions. However, if the increase in commodity prices were to exceed Komatsu’s expectations or a prolonged shortage of materials and parts were to occur, Komatsu’s results of operations may be adversely affected.

(9) Information security, intellectual property and other matters

Komatsu may obtain confidential information concerning its customers and individuals in the normal course of its business. Komatsu also holds confidential business and technological information. Komatsu safeguards such confidential information with the utmost care. To safeguard such confidential information from unauthorized access, tampering, destruction, leakage, losses and other damages, Komatsu employs appropriate safety measures, including implementing technological safety measures and strengthening its information management capabilities. If a leak of confidential information concerning customers and individuals were to occur, Komatsu may become liable for damages, or its reputation or its customers’ confidence in Komatsu may be adversely affected. In addition, if Komatsu’s confidential business and technological information were leaked or misused by a third party, or Komatsu’s intellectual properties were infringed upon by a third party, or Komatsu were held liable for infringing on a third party’s intellectual property rights, Komatsu’s business results may be adversely affected.

(10) Natural calamities, wars, terrorism, accidents and other matters

Komatsu conducts its business operations on a global scale and operates and maintains development, production, sales and other business facilities in many countries. If natural disasters, such as earthquakes and floods, epidemics, wars, terrorist acts, accidents, such as fires and explosions, unforeseeable criticism or interference by third parties or computer virus infections in regions in which Komatsu operates were to occur and cause extensive damage to one or more of its facilities that then could not become fully operational within a short period of time, delays or disruption in the procurement of materials and parts or the production and sales of Komatsu’s products and services may result. Such delays or disruptions may adversely affect Komatsu’s results of operations.

Item 4. Information on the Company

A. History and Development of the Company

The Company was incorporated in May 1921 as a joint stock corporation (kabushiki kaisha) in accordance with Japanese law under the name Kabushiki Kaisha Komatsu Seisakusho (“Komatsu Ltd.” in English). Its registered office is located at 2-3-6 Akasaka, Minato-ku, Tokyo 107-8414, Japan, and its telephone number is +81-3-5561-2628 (Finance & Treasury Department).

Shortly after its formation in 1921, the Company commenced the production and marketing of sheet-forming presses. In 1931, the Company produced Japan’s first crawler-type farm tractor and in the 1940s the Company began its production of bulldozers in Japan. The Company broadened its product line-up by beginning production of motor graders and dump trucks in the 1950s and wheel loaders and hydraulic excavators in the 1960s.

The history and development of Komatsu’s global operations can be divided into three phases: (1) exports from Japan, (2) offshore production and (3) management of its global production and distribution network.

Since its first export to Argentina in 1955, Komatsu has gradually increased exports of its products. Komatsu established its first liaison office in India in 1964 and established sales companies in Europe, the United States and Asia between 1967 and 1971.

During the 1970s and 1980s, Komatsu started establishing its production facilities offshore and enhanced its offshore production by locating manufacturing plants close to their respective markets. In 1975, Komatsu commenced offshore production with the production of bulldozers in Brazil by Komatsu do Brasil Ltda., its first manufacturing plant outside Japan. Subsequently, Komatsu increased its global presence by establishing manufacturing plants in Indonesia, the United Kingdom and the United States during the 1980s. For example, during the 1980s, Komatsu established a joint venture company in the United States with Dresser Industries Inc. named Komatsu Dresser Company (now known as Komatsu America Corp., “KAC”).

During the 1990s, Komatsu strengthened its overseas manufacturing capabilities and made efforts to optimize its production and distribution network on a global basis through various methods, including forming alliances and entering into joint ventures. For instance, Komatsu established Komatsu Cummins Engine Co., Ltd. and Industrial Power Alliance Ltd. in Japan and Cummins Komatsu Engine Company in the United States, with Cummins Engine Company (now known as Cummins Inc.). In addition, Komatsu entered into three joint ventures in China, and a joint venture with Mannesmann Demag of Germany to establish Demag Komatsu GmbH (now known as Komatsu Mining Germany GmbH).

The following are some of the significant transactions in the development of Komatsu’s business in recent years.

In September 2006, the Company entered into an agreement with SUMCO CORPORATION (“SUMCO”) pursuant to which the Company agreed to accept SUMCO’s tender offer for KEM. In October 2006, the Company sold 51.0% of its equity ownership in its consolidated subsidiary, KEM, to SUMCO. Prior to this disposition, the Company held a 61.9% equity interest in KEM.

In October 2006 and December 2006, the Company completed two transactions to acquire an aggregate 29.3% equity interest in NIPPEI TOYAMA CORPORATION (“NIPPEI TOYAMA”), one of the leading manufacturers in the field of transfer machines used in the processing of automobile engines, various grinding machines, wire saws used in the semiconductor and solar application industries, and laser cutting machines.

In January 2007, the Company signed a definitive agreement to sell the OPE business of Komatsu Zenoah Co. to a Japanese subsidiary of Husqvarna AB of Sweden. After Komatsu Zenoah Co. split its OPE business and established Zenoah Co., Komatsu Zenoah Co. was merged into Komatsu Utility Co., Ltd. in April 2007, as a result of which Komatsu Utility Co., Ltd. became Zenoah Co.’s parent company. In the same month, Komatsu Utility Co., Ltd. sold all of its shares of Zenoah Co. to HUSQVARNA JAPAN LTD. (now known as Husqvarna Zenoah Co., Ltd.), thereby completing the sale of the OPE business.

In January 2008, to generate more synergy, the Company launched a takeover bid to obtain all issued shares of NIPPEI TOYAMA, which resulted in the Company owning 93.7% of the equity interest.

In August 2008, the Company and NIPPEI TOYAMA implemented a share exchange and NIPPEI TOYAMA became a wholly owned subsidiary of the Company. In October 2008, NIPPEI TOYAMA changed its name and is now known as Komatsu NTC Ltd.

In April 2009, Komatsu Tokyo Ltd. (“Komatsu Tokyo”), a wholly owned subsidiary of the Company, merged with 11 other consolidated subsidiaries of the Company, consisting of 10 sales subsidiaries and Komatsu All Parts Support Ltd., through an absorption-type merger. In the same month, the Company transferred its sales and service business for construction equipment (excluding underground construction equipment) in Japan to Komatsu Tokyo through an absorption-type company split. Upon the completion of these transactions, Komatsu Tokyo changed its name and is now known as Komatsu Construction Equipment Sales and Service Japan Ltd.

In April 2010, Komatsu Industries Corporation (“Komatsu Industries”), a wholly owned subsidiary of the Company, took over the product development and sales and service operations of the large-sized press business, previously conducted by the Company’s Industrial Machinery Division, by way of an absorption-type corporate split.

PRINCIPAL CAPITAL INVESTMENT

Komatsu invests capital each year in the development and production of new products and the improvement of the operating efficiency of its production infrastructure, primarily focusing on the Construction, Mining and Utility Equipment operating segment. Komatsu’s capital investment for the fiscal years ended March 31, 2010, 2009 and 2008 were ¥96,191 million, ¥162,512 million and ¥145,730 million, respectively. Capital investment for the fiscal year ended March 31, 2010 by operating segment was as follows.

Capital Investment by Operating Segment

						Percentage Change as
		Millions of Yen				compared to the
		Fiscal Year ended				Fiscal Year ended
		March 31, 2010				March 31, 2009
Construction, Mining and Utility Equipment		¥	92,979				-39.2	%
Industrial Machinery and Others			3,212				-66.9	%
Total		¥	96,191				-40.8	%

Notes:

Demand for Komatsu products decreased in the fiscal year ended March 31, 2010 due primarily to the global financial crisis. Although Komatsu decreased its capital investments in the construction, mining and utility equipment business for the fiscal year ended March 31, 2010, Komatsu continued to make capital investments, including investments to reorganize its production operations in Japan and the United States so as to put in place a more flexible production infrastructure that enables Komatsu to adjust quickly to market demands. Komatsu also made capital investments in the industrial machinery and others business for the fiscal year ended March 31, 2010 to improve its productivity and efficiency by making improvements to its production infrastructure, such as closing down the Komatsu Plant (where some of the facility and equipment had become obsolete) and transferring the production of products manufactured at such plant to the Kanazawa Plant (where the facility and equipment are more up-to-date).

While Komatsu did not complete any new main facilities during the fiscal year ended March 31, 2010, the following table sets forth in further detail new constructions, expansions and overhauls of Komatsu’s main facilities that were in progress during the fiscal year ended March 31, 2010:

Operating segment		Main facilities
Construction, Mining and Utility Equipment		Construction of Komatsu Manufacturing Rus, LLC’s new plant •    Products: Medium-sized hydraulic excavators and forklift trucks •    Location: Yaroslavl, Russia
		Relocation and expansion of Komatsu (Changzhou) Construction Machinery Corp.’s plant
		•    Products: Hydraulic excavators, wheel loaders, dump trucks, etc.
		•    Location: Changzhou, Jiangsu, China
		Expansion of Komatsu Castex Ltd.’s manufacturing facilities for key components (i.e., iron castings)
		•    Products: Cylinder blocks, etc.
		•    Location: Himi City, Toyama, Japan

Komatsu’s capital investments for the fiscal year ended March 31, 2010 were primarily financed by funds on hand and bank borrowings.

For information on Komatsu’s expected principal capital investments for the fiscal year ended March 31, 2011, see Item 4.D. Property, Plants and Equipment.

B. Business Overview

GENERAL

Komatsu is a global company that engages in the manufacturing, development, marketing and sale of a diversified range of industrial-use products and services. With “Quality and Reliability” as the cornerstone of its management policy, Komatsu is committed to providing safe and innovative products and services that satisfy its customers’ needs and expectations.

The manufacturing operations of Komatsu are conducted primarily at plants located in Japan, the United States, Brazil, the United Kingdom, Germany, Sweden, Italy, Indonesia, China, Thailand and India. Komatsu’s products are primarily sold under the “Komatsu” brand name and almost all of its sales and service activities are conducted through its sales subsidiaries and independent distributors who primarily sell products to retail dealers in their respective geographic area.

PRODUCTS AND SERVICES

The following table sets forth Komatsu’s net sales by operating segments for the fiscal years ended March 31, 2010, 2009 and 2008, which is reproduced from the Company’s audited consolidated financial statements.

Net Sales by Operating Segments

		(Millions of Yen)
		Fiscal Year								Fiscal Year								Fiscal Year
		Ended March 31,								Ended March 31,								Ended March 31,
		2010								2009								2008
Construction, Mining and Utility Equipment		¥	1,268,575				88.6	%		¥	1,744,733				86.3	%		¥	2,048,711				91.3	%
Industrial Machinery and Others			162,989				11.4	%			277,010				13.7	%			194,312				8.7	%
Total		¥	1,431,564				100.0	%		¥	2,021,743				100.0	%		¥	2,243,023				100.0	%

Note:

Starting with the fiscal year ended March 31, 2009, Komatsu reclassified the forklift truck business of Komatsu Utility Co., Ltd. and the businesses of Komatsu Logistics Corp. (both of which were formerly in the Industrial Machinery, Vehicles and Others operating segment) so that such businesses are part of Komatsu’s construction and mining equipment business, and accordingly, changed its operating segments by renaming the Construction and Mining Equipment operating segment as the Construction, Mining and Utility Equipment operating segment and the Industrial Machinery, Vehicles and Others operating segment as the Industrial Machinery and Others operating segment. As a result of this reclassification, the financial data for the fiscal year ended March 31, 2008 in the above table have been retrospectively reclassified using the new operating segments.

(1) Construction, Mining and Utility Equipment

The Construction, Mining and Utility Equipment operating segment has been Komatsu’s mainstay operating segment during the last several decades. Net sales from this operating segment accounted for 88.6% of Komatsu’s total net sales for the fiscal year ended March 31, 2010.

Komatsu offers various types of construction, mining and utility equipment, ranging from super-large machines capable of mining applications to general construction equipment and mini construction equipment for urban use. Komatsu’s range of products in this operating segment also includes a wide variety of attachments to be used with its products. Komatsu’s principal products in this operating segment fall into the following categories:

Category		Principal Products
Excavating Equipment		Hydraulic excavators, mini excavators and backhoe loaders
Loading Equipment		Wheel loaders, mini wheel loaders and skid steer loaders
Grading and Roadbed Preparation Equipment		Bulldozers, motor graders and vibratory rollers
Hauling Equipment		Off-highway dump trucks, articulated dump trucks and crawler carriers
Forestry Equipment		Harvesters, forwarders and feller-bunchers
Tunneling Machines		Shield machines, tunnel-boring machines and small-diameter pipe jacking machines
Recycling Equipment		Mobile debris crushers, mobile soil recyclers and mobile tub grinders
Industrial Vehicles		Forklift trucks
Other Equipment		Railroad maintenance equipment
Engines and Components		Diesel engines, diesel generator sets and hydraulic equipment
Casting Products		Steel castings and iron castings
Logistics		Packing and transport

To remain competitive in this operating segment, Komatsu introduced the “DANTOTSU Strategy” in 2003 and has been working to increase the number of DANTOTSU products. DANTOTSU means “unique and unrivaled” in Japanese. Komatsu only designates a product as DANTOTSU if such product is considered unique and unrivaled as compared to those produced by Komatsu’s competitors, due to the fact that such product is equipped with one or more features that its competitors cannot match for some time. Since the introduction of DANTOTSU products, Komatsu has been working to replace many of its product models with DANTOTSU products. The current line-up of DANTOTSU products include WA500 and WA600 wheel loaders and the D51-22 bulldozer to name a few. Komatsu plans to continue making model changes to replace some of its existing construction, mining and utility equipment product models with DANTOTSU products.

In addition to manufacturing and developing new products, Komatsu has been focused on downstream businesses, such as the used equipment business and the rental equipment business. Komatsu Used Equipment Corp. has been facilitating the sale of used equipment by holding annual auctions in several locations in Japan since the mid-1990s.

The principal products developed and introduced to the market in the Construction, Mining and Utility Equipment operating segment during the fiscal year ended March 31, 2010 are listed below:

Company		Product		Model
Komatsu Ltd.		Hydraulic Excavators		PC78UU-8, PC130F-7, PC200LC-8E0Hybrid, PC600-8E0, PC600LC-8E0, PC600-8R, PC600LC-8R, PC650-8E0, PC650LC-8E0, PC700LC-8E0, PC700LC-8R, PC8000-6
		Bulldozers		D375A-6R
		Motor Graders		GD555-5, GD655-5, GD675-5
Komatsu Utility Co., Ltd.		Hydraulic Excavators,		PC05-1A, PC58UUT-5
		Forklifts Trucks		FD20-17, FD25-17, FD30-17, FD35A-17, FB15-12, FD18-12, FD20A-12, FB15MU-12, FB18MU-12, FB20MU-12

(2) Industrial Machinery and Others

Net sales from the Industrial Machinery and Others operating segment accounted for 11.4% of Komatsu’s total net sales for the fiscal year ended March 31, 2010. The products available in this operating segment are used by a wide range of businesses and include industrial machinery, such as forging and sheet metal machinery and other services. Komatsu’s principal products in this operating segment fall into the following categories:

Category		Principal Products
Metal Forging and Stamping Presses		Large-sized presses, servo presses, small- and medium-sized presses and forging presses
Sheet Metal Machines		Laser cutting machines, fine-plasma cutting machines, press brakes and shears
Machine Tools		Transfer machines, machining centers, crankshaft millers, grinding machines and wire saws
Defense Systems		Ammunition and armored personnel carriers
Temperature-control equipment		Thermoelectric modules and temperature-control equipment for semiconductor manufacturing
Others		Commercial-use prefabricated structures

The principal products developed and introduced to the market in the Industrial Machinery and Others operating segment during the fiscal year ended March 31, 2010 include the high speed palletizing system for large-size presses, plasma cutting machines, the crankshaft milling machine, new milling machines for a vehicle engine’s crankshaft (GPM190F-5 and 200F-5), the large size wire-sawing machine (PV800) that can be used to saw materials used in solar batteries and chip ID markers.

PRINCIPAL MARKETS

Komatsu operates and competes in the following six principal markets: (1) Japan, (2) the Americas, (3) Europe and Commonwealth of Independent States (“CIS”), (4) China, (5) Asia (excluding Japan and China) and Oceania and (6) the Middle East and Africa.

In this annual report, information regarding net sales by geographic segment is presented in the following two ways: (1) by sales destination (based on the country where the purchaser is located) and (2) by sales origin (based on the country where the seller is located). The following table sets forth Komatsu’s net sales recognized by sales destination for the fiscal years ended March 31, 2010, 2009 and 2008. Net sales data by sales origin are set forth in Item 5.A. Operating and Financial Review and Prospectus as well as Note 23 to the Company’s audited consolidated financial statements, included elsewhere in this report.

		(Millions of Yen)
		Fiscal Year								Fiscal Year								Fiscal Year
		Ended March 31,								Ended March 31,								Ended March 31,
		2010								2009								2008
Japan		¥	323,813				22.6	%		¥	452,172				22.4	%		¥	505,185				22.5	%
Americas			323,984				22.7	%			503,450				24.9	%			541,160				24.1	%
Europe and CIS			127,377				8.9	%			284,029				14.0	%			427,679				19.1	%
China			270,870				18.9	%			236,226				11.7	%			189,902				8.5	%
Asia (excluding Japan and China) and Oceania			299,864				20.9	%			335,574				16.6	%			348,462				15.5	%
Middle East and Africa			85,656				6.0	%			210,292				10.4	%			230,635				10.3	%
Total		¥	1,431,564				100.0	%		¥	2,021,743				100.0	%		¥	2,243,023				100.0	%

SALES AND DISTRIBUTION

Komatsu’s international and domestic sales and distribution for its Construction, Mining and Utility Equipment operating segment are conducted primarily through a network of subsidiaries, affiliates and independent distributors, and to a lesser extent by its partners of jointly-owned companies.

Komatsu’s construction, mining and utility equipment sales and distribution operations in Japan focus principally on retail sales to customers, partly on an installment basis. In addition, Komatsu has enhanced its equipment rental services business in Japan by using rental companies to act as its agents, especially for its construction and utility equipment, in response to strong demand from customers. Distributors and dealers form the core of Komatsu’s service network in Japan, providing total customer-support services.

Komatsu’s overseas construction, mining and utility equipment sales and service network consists of approximately 420 distributors. Komatsu supplies its products to distributors around the world through unaffiliated trading companies and the Company’s subsidiaries and affiliated companies. Komatsu’s liaison offices provide both sales support and technical support to independent distributors. The Company’s major sales subsidiaries and affiliates are located in the United States, Brazil, Chile, Belgium, Germany, France, Italy, Sweden, Russia, China, Singapore, Indonesia, India, Australia, the United Arab Emirates and South Africa. These subsidiaries and affiliates provide technical assistance to Komatsu’s distributors and carry spare parts so that such parts can be delivered on a timely basis to its customers and distributors. These subsidiaries and affiliates as well as Komatsu’s distributors provide the services that customers may require with respect to their construction, mining and utility equipment outside of Japan.

Komatsu’s sales of products in the Industrial Machinery and Others operating segment include direct sales to customers and sales through distributors, dealers and trading companies. For example, large presses are mainly sold directly to customers while small- and medium-sized presses are primarily sold through distributors and dealers.

SOURCES OF SUPPLY

As it is neither economical nor efficient for Komatsu to manufacture all of its necessary components and parts, Komatsu produces some of its major equipment components internally and purchases other components and parts, such as electrical components, tires, hoses and batteries, from specialized suppliers. Specialized suppliers are Komatsu’s business partners that supply components and parts that are particularly important to maintaining the quality of Komatsu’s products or business partners who specialize in supplying particular components and parts. Komatsu also procures some of its parts, such as metal forgings, machine components, sheet metal parts and various accessories, from other business partners. Therefore, the fluctuations in prices of materials for such components, such as steel materials, may affect Komatsu’s results of operations. In addition, a shortage of product parts and materials, bankruptcies of suppliers or production discontinuation by suppliers of products used by Komatsu may make it difficult for Komatsu to engage in the timely procurement of parts and materials and manufacture of its products. Komatsu believes, however, that it has adequate and reliable sources of supply for its material components, parts and raw materials, and that it has appropriate alternative sources available for such supplies consistent with its prudent business practices.

SEASONALITY

In general, Komatsu’s businesses have historically experienced some seasonal fluctuations in sales. While there are variations by market and product, Komatsu’s consolidated sales volume is customarily the highest during the fourth quarter. However, this seasonality has generally not been material to Komatsu’s results of operations.

PATENTS AND LICENSES

Komatsu holds numerous Japanese and foreign patents, design patents and utility model registrations relating to its products. It also has a number of applications pending for Japanese and foreign patents. Under Japanese law, a utility model registration is a right granted with respect to inventions of less originality than those which qualify for patents. Komatsu also manufactures a variety of products under licensing agreements with various other companies.

While Komatsu considers all of its patents and licenses to be important for the operation of its business, it does not consider any of its patents or licenses or any related group of them to be so important that its expiration or termination would materially affect Komatsu’s business as a whole, nor does it believe that any category of its activities is materially dependent upon patents or licenses, or patent or license protection. Komatsu also owns and maintains a substantial number of trademarks and trade names that are registered or otherwise protected under the laws of various jurisdictions.

COMPETITIVE ENVIRONMENT

Construction, Mining and Utility Equipment

As a manufacturer of a full line-up of construction and mining equipment, Komatsu provides a broad range of products from super-large equipment for mining use to general construction equipment and mini construction equipment for urban use.

While there is intense competition in all of the product categories in this operating segment, Komatsu continues to be one of the market leaders in respect of construction and mining equipment in every geographic region in which it operates. In many countries in the Asian market, Komatsu is the market leader in respect of construction and mining equipment.

Komatsu’s competitors in the construction and mining equipment business consist of global competitors, regional competitors and locally specialized competitors. Major global competitors include Caterpillar Inc. (“Caterpillar”), Hitachi Construction Machinery Co., Ltd. (“Hitachi Construction”), Volvo Construction Equipment NV (“Volvo”) and CNH Global N.V. The competitive environment differs according to regions and product models.

Although demand for construction equipment in North America continues to experience a sharp downturn, it is still the largest market for construction equipment in the world and Caterpillar is the market leader in North America based on sales. Deere & Company, which has formed an alliance with Hitachi Construction, also holds a strong market position in construction equipment in North America based on sales. With respect to mining equipment, Komatsu’s main competitor in North America is Caterpillar, a mining equipment manufacturer with a full line-up of products.

In Europe, in addition to global manufacturers with a full line-up of construction equipment, such as Caterpillar and Volvo, there are many regional or locally specialized competitors who have firm footings in the local construction equipment markets. Komatsu competes with different competitors in each country or region in Europe and it is expected that the construction equipment markets in Europe will continue to be very competitive.

In Asia, Komatsu’s competitors in the construction equipment market include Caterpillar, Hitachi Construction and Korean manufacturers, such as Hyundai Heavy Industries Co., Ltd. and Doosan Infracore Co., Ltd. In China, where demand has turned around in the first half of the fiscal year ended March 31, 2010 and started to record growth. Komatsu competes with a number of locally specialized construction equipment manufacturers in addition to the above-mentioned competitors. With respect to mining equipment, Komatsu’s main competitor in Asia and China is Caterpillar, a mining equipment manufacturer with a full line-up of products.

As for industrial vehicles, Komatsu competes with global competitors that offer a full line-up of forklift trucks, such as Toyota Motor Corporation, as well as locally specialized manufacturers. The major markets for forklift trucks have traditionally been Europe, the United States and Japan. Recently, China has overtaken Europe and has developed into the largest market for forklift trucks. While European and U.S. manufacturers of forklift trucks sell not only forklift trucks but also warehousing equipment, Komatsu and other Japanese manufacturers (excluding Toyota Motor Corporation) of forklift trucks primarily focus on forklift trucks. In China, Komatsu competes with a number of locally specialized manufacturers in addition to European and U.S. manufacturers.

Komatsu believes that the following strengths provide Komatsu with a competitive advantage in the global construction, mining and utility equipment market:

DANTOTSU products

DANTOTSU products are products that have truly outstanding features or qualities in terms of, among others, fuel efficiency, information and communication technology (“ICT”) and environmental features, such as lower carbon dioxide (CO₂) emissions and fuel consumption, which Komatsu believes its competitors will not be able to match for some time.

KOMTRAX (Komatsu Machine Tracking System)

KOMTRAX is a system that Komatsu pioneered the development of and introduced to the market in 2001. Using KOMTRAX, customers can manage the operation of their construction equipment by utilizing information technology applications, such as global positioning system (“GPS”) and mobile telecommunication technologies. Using the information collected through KOMTRAX, such as location and operation time, customers who operate equipment equipped with KOMTRAX are able to operate the equipment more efficiently and cost effectively because they are able to decrease fuel use and maintenance expenses. In addition, more recently, this system has enabled distributors and dealers to improve their parts and service operations.

AHS (Autonomous Haulage System)

AHS is a system that controls the operation of super-large autonomous dump trucks that are used in large-scale mines. Komatsu first introduced AHS in copper mines in northern Chile, where it is currently in full use. Komatsu started to provide AHS for use in iron ore mines in western Australia at the end of 2008 as its second installation. Komatsu is the only company that can provide this type of system in the mining equipment industry.

Hybrid

In June 2008, Komatsu launched the world’s first hybrid hydraulic excavator that consumes less fuel and emits less CO₂ . Komatsu believes that it has a competitive advantage in the market with respect to this type of equipment not only because it was one of the first to develop and market this type of equipment but also because it is equipped with advanced technologies that reduce CO₂ emissions and fuel consumption, which is a feature that customers have been focused on in recent years.

Industrial Machinery and Others

In the Industrial Machinery and Others operating segment, Komatsu’s principal products include (1) metal forging and stamping presses, (2) sheet metal machines and (3) machine tools. As discussed below, the market for these products is highly competitive.

(1) Metal Forging and Stamping Presses

Komatsu manufactures and sells stamping presses that are used to press doors and roofs of automobiles and various other parts into shapes. Komatsu’s stamping presses can be divided into large-sized presses, and medium- and small-sized presses.

With respect to large-sized presses, which are mainly sold to automobile manufacturers, Komatsu considers Ishikawajima-Harima Heavy Industries Co., Ltd., Hitachi Zosen Fukui Corporation and AIDA Engineering, Ltd. (“AIDA”) of Japan and Schuler AG of Germany to be its major competitors. In Japan, Japanese manufacturers, including Komatsu, have an advantage over non-Japanese manufacturers. Likewise, in Germany, German manufacturers enjoy dominant positions and have a competitive advantage over non-German manufacturers. In other markets, regional and locally specialized competitors in addition to the above-mentioned major manufacturers compete with each other, making the market highly competitive. For the fiscal year ended March 31, 2010, demand for large-sized presses decreased due primarily to the continuous restraint in capital investments exercised by automobile manufacturers on a global basis, in line with the drastic deterioration of the global economy. Nevertheless, Komatsu strengthened its marketing activities of large-sized presses in the emerging markets. For example, Komatsu focused on sales promotion activities in China and India as it expanded the product line-up of its AC Servo motor-driven large-sized presses, enhanced its technological edge, reinforced its global service operations and strengthened its collaboration with mold builders.

With respect to small- and medium-sized presses, Asia (including Japan) and North America are Komatsu’s largest markets. Major competitors of Komatsu for these products include AIDA and Amada Co., Ltd. (“Amada”) of Japan, The Minster Machine Company of the United States and Chin Fong Machine Industrial Co., Ltd. of Taiwan. During the fiscal year ended March 31, 2010, Komatsu continued to increase the product line-up of its AC Servo motor-driven presses, which contributed to the increase in sales of small- and medium-sized presses. Despite the downturn in the global economy and the difficult market conditions, which continued to exist partly because companies in the automobile industry and the electronics industry continued to exercise restraint in their capital investments, Komatsu started the production of small- and medium-sized presses in China in the fiscal year ended March 31, 2010 with the goal of increasing sales of such presses in China.

(2) Sheet Metal Machines

Komatsu’s sheet metal machines business is primarily focused on machines that cut and bend steel sheets, and Japan is the major market for such machines. Komatsu’s competitors consist of other Japanese manufacturers, such as Amada, Mitsubishi Electric Corporation, Yamazaki Mazak Corporation and Koike Sanso Kogyo Co., Ltd. Amada enjoys a large market share in this business due to its large product line-up.

One of the principal product of Komatsu’s sheet metal machine business is its plasma cutting machines. With technology that is original to Komatsu, Komatsu’s plasma cutting machines boast high productivity and outstanding cost performance in terms of both operating and initial costs while maintaining a cutting quality that is equivalent to that of laser cutting machines. Such features are highly valued in this market and has enabled Komatsu to improve its profitability in this business.

In addition, Komatsu’s 3D laser cutting machines that can be used to cut three dimensional objects are highly valued in the sheet metal machine market.

(3) Machine Tools

The principal products of Komatsu’s machine tool business are machine tools that are used to cut and fabricate engine parts (transfer machines, crankshaft millers and grinding machines), general- purpose machining centers and wire saws. Major competitors in the market for machine tools used to cut and fabricate engine parts include JTEKT Corporation and ENSHU Limited of Japan and Gebrüder Heller Maschinenfabrik GmbH of Germany. Major competitors in the machining center include Japanese manufacturers such as Mori Seiki Co., Ltd. and Okuma Corporation.

Komatsu believes that it continues to maintain a competitive edge in the global market for machine tools used to cut and fabricate engine parts based on its technological edge and broad product line-up.

Although capital investments by automobile manufacturers decreased sharply during the fiscal year ended March 31, 2010 as compared to the fiscal year ended March 31, 2009, Komatsu was able to maintain its high position in the global market for machine tools used to cut and fabricate engine parts due to the steps it took to reinforce its sales in China, North America and Europe, expand its product line-up and establish a sales arrangement whereby customers can purchase through Komatsu all of the machinery (including some machinery not manufactured by Komatsu) necessary to manufacture an engine.

In addition, the market for wire saws that are used to slice silicon ingots, which are used to manufacture solar cells, has expanded rapidly in recent years due to the increase in demand for solar power generator devices. Major competitors in the wire saw market include Swiss manufacturers HCT Shaping Systems SA and Meyer Burger Technology AG. Komatsu’s wire saws have been highly valued in the wire saw market because it uses advanced technologies, such as technologies that regulate the wire appropriately to enable it to cut silicon ingots.

REGULATIONS

Komatsu is subject to a wide range of laws and regulations in the countries and regions where it operates, including safety regulations, restrictions on emissions, noise and vibration from its products, various environmental controls regulating the manufacturing processes, such as the management of toxic chemicals and hazardous wastes, green procurement and recycling. Komatsu’s operations and products are designed to comply with all applicable laws and regulations currently in effect in the relevant jurisdictions. Komatsu expects to remain in substantial compliance with existing applicable laws and regulations and does not expect that the costs of compliance with foreseeable laws and regulations will have a material effect upon its financial position and results of operations. Some of the important laws and regulations that affect Komatsu’s businesses are summarized below.

Regulations regarding engine emissions

The Ministry of Land, Infrastructure and Transport of Japan (“MLIT”) introduced the approval system for low-emission type construction equipment used in construction in 1997, setting the maximum emission levels by model and power range. Under this system, manufacturers are required to file an application with MLIT for the approval of their low-emission type construction equipment which meets the standards set forth by MLIT. While the maximum emission levels set by MLIT are not legally binding, they must be complied with in Japan in practice since only construction equipment that has obtained the required approvals is allowed to be used in construction projects under the direct control of MLIT. In 2003, MLIT lowered such maximum emission levels established in 1997 and the revised limits are known in Japan as the Tier II standards. In 2006, a new law took effect in Japan to control exhaust emissions from off-road specific vehicles in the power range over 19kW, including those used at construction sites. In connection with the implementation of this new law, maximum emission levels were lowered further. Such new limits are known as the Tier III standards, compliance with which has been mandatory in Japan since 2006. MLIT and related ministries are expected to introduce new maximum emission levels, which are expected to become effective in two stages in Japan, first in 2011 and second in 2014. These new limits that are currently being considered by MLIT and related ministries are similar to the maximum emission level limits that are scheduled to be phased-in in the U.S. (Tier IV standards) and Europe (Stage 3B) starting in 2011.

In the United States, the U.S. Environmental Protection Agency (“EPA”) establishes emission standards for construction equipment and introduced the Tier I standards for equipment of 130kW or greater in 1996. Since then, the EPA has lowered emission standards and the Tier III standards, which are currently in effect, have been phased-in since 2006. The even more stringent Tier IV standards are scheduled to be phased-in starting 2011.

In Europe, the Engine Emissions Directive 97/68/EC regarding measures against emission of gaseous and particulate pollutants from internal combustion engines to be installed in off-road mobile machinery went into effect in 1999 and the second stage of the directive was implemented from 2002 to 2004. The first part of the third stage of this directive (Stage 3A) was implemented in 2006 to 2008. The next stage (Stage 3B) is scheduled to be phased-in starting 2011, similar to Japan and the United States.

Komatsu and its products are in compliance with all regulatory standards that have already taken effect and Komatsu continues to make progress in its preparations to comply with the Tier IV (Stage 3B) standards that are to be phased-in in Japan, the United States and Europe starting in 2011.

Regulations regarding noise and vibration

In Japan, MLIT established the approval system for low-noise emission and low-vibration type construction equipment in 1983. Under this system, manufacturers are required to file an application with MLIT for the approval of their low-noise and low-vibration type construction equipment which meets the standards set forth by MLIT. Initially, this approval system for noise emission and vibration was only used for noise emission. The current measurement method and limits on noise emission levels for the type approval system have been in effect since October 1997. While the maximum standards for noise emission established by MLIT are not legally binding, these maximum standards must be complied with in Japan in practice since only construction equipment that has obtained the required approvals is allowed to be used in construction projects under the direct control of MLIT. The type approval system has been in use for low-vibration type construction equipment since October 1996. Similar to the type approval system for noise emission, the maximum standards for vibration set by MLIT are not legally binding. However, unlike the type approval system for noise emission, construction equipment, such as vibratory hammers and hydraulic excavators, that have not obtained such approvals are allowed to be used in construction projects under the direct control of MLIT.

In Europe, Directive 95/27/EC of the European Parliament and of the Council of June 1995 amending Council Directive 86/662/EEC on the limitation of noise emitted by hydraulic excavators, rope-operated excavators, dozers, loaders and excavator-loaders has been in effect since January 1997. This directive defined the maximum sound-power levels of airborne noise emitted by these earth-moving machines under dynamic operating conditions and required manufacturers to obtain an EC type-examination certificate. The second stage of this directive, which requires further noise reduction, has been in effect since January 2006. Separately, in January 2002, Directive 2000/14/EC of the European Parliament and of the Council relating to the noise emission in the environment by equipment for use outdoors went into effect. This regulation applies to a wide range of product types from gardening equipment to construction and waste-management equipment and requires such products to bear a CE-mark and indicate their guaranteed sound-power level before they could be sold in the European market. Under such directive, manufacturers are required to confirm that the noise emitted from their products would not exceed the guaranteed sound-power level. The second stage of this directive, which requires further noise reduction, has been in effect since January 2006.

Komatsu and its products are in compliance with all regulatory standards that have already taken effect and Komatsu continues to make progress in its preparations to comply with the latest noise and vibration standards that are to become effective in the future.

Regulations regarding hazardous substances

Responding to the increase in environmental conservation awareness around the world, Komatsu has been making efforts for several decades to reduce the use of asbestos, lead and other substances of environmental concern.

In response to the enactment of the European regulation addressing Registration, Evaluation, Authorisation and Restriction of Chemicals (“REACH”) in June 2007, Komatsu reviewed the list of substances approved for limited use and revised the designation of certain substances within its manufacturing plants to “reduced” or “banned” as appropriate. Through cooperation with suppliers, Komatsu has initiated a system to strengthen its control over substances of environmental concern used in its products, as manufacturers like Komatsu are required by REACH to provide information to consumers (i.e., customers that purchased the equipment new or used) about the name(s) and the amount(s) of substance(s) used in each machine/part.

Komatsu and its products are in compliance with all regulatory standards that have already taken effect and Komatsu continues to make progress in its preparations to comply with the latest regulations regarding hazardous substances that are to become effective in the future.

Regulations regarding Health and Safety requirement

Komatsu believes that it is essential that manufacturers of construction equipment consider the machine operator’s health and safety when developing and manufacturing construction equipment. Komatsu has been making efforts to improve the health and safety features of its construction equipment for quite some time.

In Europe, the Machinery Directive 89/392/EEC, which sets forth the essential requirements on machine safety, was published in 1989 and became effective in 1995. These requirements relate to the design and construction of machinery and are intended to promote the health and safety of the operator when machinery is used. Since then Komatsu has been in compliance with this Directive. The Directive was amended by several Directives and codified into Directive 98/37/EC in 1998. Based on Directive 98/37/EC, the new Machinery Directive 2006/42/EC was published in 2006 and became effective on December 29, 2009.

The new Machinery Directive updated Directive 98/37/EC in several respects. Such updates include requiring manufacturers to provide clearer instructions as to the operation of the equipment and to improve the visibility of the operator of the equipment. More specifically, the new Machinery Directive requires the operation and maintenance manuals of the equipment to be written in the 24 official languages of the member states of the European Union at the time the equipment is sold in the European market. The new Machinery Directive also requires the manufacturer to take appropriate steps so that an operator of an equipment in each of the member states of the European Union understands any information regarding the equipment that is written on the equipment. To avoid any misunderstandings as to the operation or handling of the equipment due to language differences, a manufacturer can either (1) use decals solely consisting of pictograms or (2) translate the text of any decals into every official language of the member states of the European Union. In addition, as the new Machinery Directive requires operators of large-size machines to have rear visibility, Komatsu has made rear view cameras or mirror systems a standard feature of large-size machines it sells in Europe. The new Machinery Directive also requires the manufacturer to disclose in each operation and maintenance manual issued in Europe the declared level of noise or vibration level and the uncertainty figures (which is the mean value and deviation of noise or vibration data collected on several machines of the same model).

Komatsu and its products are in compliance with all regulatory standards that have already taken effect and Komatsu continues to make progress in its preparations to comply with the latest regulations regarding health and safety standards that are to become effective in the future.

MANAGEMENT POLICY AND STRATEGIES

Below describes Komatsu’s basic management policy and its mid- to long-range management plans.

Basic Management Policy

The cornerstone of Komatsu’s management is commitment to Quality and Reliability for maximization of its corporate value. This commitment is not limited to delivering safe and innovative products and services which incorporate the viewpoints of customers. Komatsu is continuing its efforts to enhance the Quality and Reliability of all organizations, businesses, employees and management of the entire Komatsu Group. It is the top management task of Komatsu to continue improving the Quality and Reliability of all these, year after year.

New Mid- to Long-Range Management Plan and Issues Ahead

To improve its profitability, strengthen its financial position, enhance its market position in Greater Asia and so forth, Komatsu worked on the “Global Teamwork for 15” mid-range management plan for three years, from April 2007 to the end of March 2010. For the fiscal year ended March 31, 2008, Komatsu attained an operating margin of 14.8%, virtually achieving the goal of 15%, against the backdrop of good tailwind on the market in addition to its own efforts, such as the development of DANTOTSU products. Komatsu sustained a high ratio up through the first half of the following fiscal year.

In the wake of the financial crisis triggered in the United States in September 2008, world economies went into recession, reducing the volume of global demand for construction equipment to half the size of the peak period recorded in April through June, 2008. Komatsu also weathered a similarly drastic drop in demand in its other businesses. In response to this change in the business environment, Komatsu quickly promoted structural reforms, such as the reorganization of production on a global scale and consolidation of sales operation, and cut down its inventories and fixed costs. As a result, Komatsu has sculpted its corporate structure into a leaner and stronger entity.

Today, market demand for construction and mining equipment has upturned for recovery in China and other emerging countries in Asia and Latin America. Komatsu anticipates that economic growth in these emerging countries will drive global demand upward. Komatsu is going to turn its rudder sharply for growth again as it capitalizes on market recovery by taking advantage of its solid corporate strength built through previous structural reforms. To generate further growth through teamwork among all employees and with distributors and suppliers around the world, Komatsu looked ahead and started the new three-year management plan “Global Teamwork for Tomorrow” in April this year.

In the new management plan, Komatsu has positioned China, Asia, Oceania, Latin America, Africa and some other emerging economies as “Strategic Markets.” Together with this move, Komatsu is going to work on the following activities of importance in order to further refine its accumulated strengths of ICT applications: development of key components, manufacturing technologies, global sales and service networks, and flexible procurement and production. Komatsu will generate positive outcomes. Komatsu is also continuing its efforts to anchor The KOMATSU Way* by encouraging all employees of the Komatsu Group to acquire it through their Kaizen (improvement) activities, while emphasizing the importance of Brand Management designed to build on relationships with customers and promote mutual business growth with them. Komatsu is going to materialize these two efforts in the form of human resource development needed for global business expansion.

1) Promotion of ICT Applications

Komatsu has refined its ICT applications mainly in the domain of construction and mining equipment as represented by KOMRAX (Komatsu Machine Tracking System) for construction equipment and Autonomous Haulage System for use in large-scale mines. Komatsu is continuing its applications of leading-edge ICT to machine management, machine control and construction management to enhance its product competitiveness. Komatsu is also going to proactively promote ICT applications to industrial machinery and forklift trucks. Furthermore, Komatsu is going to advance its utilization of KOMTRAX-originated information to improve customers’ productivity and its sales and production planning.

2) Development of Environment-Friendly Products

To help Komatsu’s customers reduce CO₂ emissions from their equipment, Komatsu is going to advance its hybrid and HST (hydrostatic transmission) technologies for construction equipment and forklift trucks and its AC Servo technology for presses in the industrial machinery business. With respect to hybrid hydraulic excavators, in particular, Komatsu is going to lead other companies in worldwide marketing. In the domain of mining equipment, Komatsu is going to generate steady results in the Biodiesel Fuel Project Komatsu has recently started.

Starting in and after 2011, the new emission control regulations which require further reduction of NO_X (nitrogen oxides) and PM (particulate matters) will be effective in Japan, the United States and Europe. Komatsu is going to continue its efforts to develop new regulations-compliant products by integrating leading-edge technologies into its strategic advantage of in-house development and manufacturing capabilities for engines, hydraulic units and control systems and to ensure their smooth market introduction.

3) Expansion of Sales and Service Operations in Strategic Markets

In Strategic Markets with high growth potential and in the domain of mining equipment, Komatsu is going to make a difference from competitors by not only supplying products featuring excellent QCDS (quality, costs, delivery and safety) but also enhancing operating rates of customers’ equipment through quick and responsive delivery of parts and service. To this end, Komatsu is going to upgrade its sales and service capabilities by developing and strengthening distributors, expanding service support bases, reinforcing parts and Reman businesses and supporting customers through ICT applications. Also, in the domains of industrial machinery and forklift trucks, Komatsu is going to promote more synergy effects with the construction equipment operation and improve sales and service networks in response to an expanding weight on Strategic Markets centering on China.

4) Promotion of Continuous Kaizen (Improvement) by Strengthening Workplace Capability

While growth of emerging economies offers Komatsu a great chance to expand its business, Komatsu needs to expect new competition with companies of emerging economies in addition to conventional competition. To win this global mega competition, it is important for Komatsu to continuously refine its capability and cost competitiveness to meet the changes, as Komatsu advances its engagement in activities for growth which are defined in the new mid-range management plan. To this end, it is absolutely necessary for Komatsu to demonstrate workplace capability, i.e., the power to continue its Kaizen (improvement) activities. With this workplace capability and effective ICT utilization, Komatsu is going to further heighten its operational flexibility of global production, optimize logistics, and reduce its production costs substantially. Komatsu is also going to continue efforts to reform and streamline its administrative work. Through these Kaizen (improvement) activities, Komatsu is going to further enhance its workplace capability and promote human resource development.

Based on the belief that “Komatsu’s corporate value is the total sum given to it by society and all of its stakeholders,” Komatsu is further strengthening its corporate governance to ensure sound and transparent management, while improving management efficiency. Being committed to promoting thorough compliance, Komatsu will also ensure that all employees share The KOMATSU Way. In addition to improving its business performance, Komatsu will facilitate the development of both corporate strength and social responsibility in a well balanced manner.

* The KOMATSU Way:

When the founder of Komatsu established the Company in 1921, he defined the guiding principles of the Company to be “overseas expansion,” “quality first,” “technology innovation” and “human resource development.” Komatsu’s management believes that Komatsu’s strengths were forged by earlier generations of employees based on these principles and these principles are still ingrained in the minds of Komatsu employees today. Komatsu’s management defines “The KOMATSU Way” to consist of Komatsu’s strengths, the beliefs that support the strengths, and the basic attitudes and patterns of behavior. Komatsu’s management believes that Komatsu can further enhance its reliability and achieve growth if its employees continue to believe in and pursue The KOMATSU Way.

Below are the financial targets that management has established for the “Global Teamwork for Tomorrow” mid-range management plan.

Numerical Targets of the “Global Teamwork for Tomorrow”

Items		Targets for Fiscal Year Ending March 31, 2013
Operating margin		15% or above
ROE: Return on equity 1)		20%
Net debt-to-equity ratio 2)		0.4 or below
Excluding debt of retail finance companies		0.2 or below
Consolidated payout ratio		20 - 40% (stably)

Notes:

Guidelines for the Numeric Targets of the “Global Teamwork for Tomorrow”

Items

Fiscal Year Ending March 31, 2013

Guideline on sales

JPY2,000 billion ± JPY100 billion

Guidelines on exchange rate

USD1

EUR1

RMB1

JPY90

JPY125

JPY13.5

C. Organizational Structure

As of March 31, 2010, the Komatsu group includes the Company, 143 consolidated subsidiaries and 40 affiliates accounted for by the equity method. The Company is the parent of the Komatsu group. The following is a list of the principal consolidated subsidiaries as of March 31, 2010.

				Ownership Interest (proportion of voting
		Country of		power held)
Name		Incorporation		(%)
Komatsu Utility Co., Ltd.		Japan			100.0
Komatsu Castex Ltd.		Japan			100.0
Komatsu Construction Equipment Sales and Service Japan Ltd.		Japan			100.0
Komatsu Used Equipment Corp.		Japan			100.0
Komatsu Rental Japan Ltd.		Japan			79.0
Komatsu Forklift Japan Ltd.		Japan			100.0
Komatsu Logistics Corp.		Japan			100.0
Komatsu Industries Corporation		Japan			100.0
Komatsu Machinery Corporation		Japan			100.0
Komatsu NTC Ltd.		Japan			100.0
Komatsu Business Support Ltd.		Japan			100.0
Komatsu America Corp.		U.S.A.			100.0
Komatsu do Brasil Ltda.		Brazil			100.0
Komatsu Brasil International Ltda.		Brazil			100.0
Komatsu Holding South America Ltda.		Chile			100.0
Komatsu Cummins Chile Ltda.		Chile			81.8
Komatsu Financial Limited Partnership		U.S.A.			100.0
Komatsu Europe International N.V.		Belgium			100.0
Komatsu UK Ltd.		U.K.			100.0
Komatsu Hanomag GmbH		Germany			100.0
Komatsu Mining Germany GmbH		Germany			100.0
Komatsu Deutschland GmbH		Germany			100.0
Komatsu France S.A.S.		France			100.0
Komatsu Utility Europe S.p.A.		Italy			100.0
Komatsu Italia S.p.A.		Italy			100.0
Komatsu Forest AB		Sweden			100.0
Komatsu CIS LLC		Russia			100.0
Komatsu Financial Europe N.V.		Belgium			100.0
Komatsu Southern Africa (Pty) Ltd.		South Africa			80.0
Komatsu Asia & Pacific Pte Ltd.		Singapore			100.0
PT Komatsu Indonesia		Indonesia			94.9
Bangkok Komatsu Co., Ltd.		Thailand			74.8
Komatsu Australia Pty. Ltd.		Australia			60.0
Komatsu Australia Corporate Finance Pty. Ltd.		Australia			60.0
Komatsu (China) Ltd.		China			100.0
Komatsu (Changzhou) Construction Machinery Corp.		China			85.0
Komatsu Shantui Construction Machinery Co., Ltd.		China			60.0
Komatsu Financial Leasing China Ltd.		China			100.0

D. Property, Plants and Equipment

Komatsu’s manufacturing operations for the Construction, Mining and Utility Equipment operating segment are conducted in 45 plants, 12 of which are located in Japan. As of March 31, 2010, 24 principal plants (out of 45 plants) had an aggregate manufacturing floor space of 1,665 thousand square meters (17,923 thousand square feet). Komatsu uses additional floor space at such plants and elsewhere as laboratories, office space and employee housing and welfare facilities. Komatsu is capable of increasing production output at its manufacturing facilities by adjusting their manufacturing schedules.

Komatsu owns most of the manufacturing facilities and the land on which such facilities are located. A portion of the properties owned by Komatsu is subject to mortgages or other types of liens. As of March 31, 2010, the net book value of the property owned by Komatsu was ¥525,100 million, of which ¥4,660 million was subject to encumbrances.

The name and location of Komatsu’s principal plants, their approximate aggregate floor space, and the principal products manufactured therein as of March 31, 2010 are as follows:

		Floor Space
		Thousand				Thousand
Name and Location		sq. meter				sq. ft				Principal products
Japan:
Awazu Plant Komatsu, Ishikawa			247				2,659			Small- and medium-sized hydraulic excavators, small- and medium-sized wheel loaders, small- and medium-sized bulldozers, motor graders
Kanazawa Plant Kanazawa, Ishikawa			25				269			Super-large hydraulic excavators, presses
Osaka Plant Hirakata, Osaka			169				1,819			Medium- and large-sized hydraulic excavators, large-sized bulldozers, recycling equipment
Oyama Plant 1) Oyama, Tochigi			225				2,422			Diesel engines, hydraulic equipment, axle
Ibaraki Plant Hitachinaka, Ibaraki			51				549			Large-sized wheel loaders, dump trucks
Koriyama Plant Koriyama, Fukushima			30				323			Hydraulic equipment
Komatsu Utility Co., Ltd. Oyama, Tochigi			75				807			Forklift trucks, mini excavators, mini wheel loaders
Komatsu Castex Ltd. Himi, Toyama			91				980			Steel castings, iron castings, pattern for casting
Komatsu NTC Ltd. Nanto, Toyama			68				732			Transfer machines, machining centers, laser cutting machines, grinding machines

		Floor Space
		Thousand				Thousand
Name and Location		sq. meter				sq. ft				Principal products
The Americas
Komatsu America Corp. Tennessee, U.S.A.			31				334			Medium-sized hydraulic excavators, articulated dump trucks
South Carolina, U.S.A.			18				194			Wheel loaders, forklift trucks
Illinois, U.S.A.			62				667			Large-sized dump trucks
Hensley Industries, Inc. Texas, U.S.A.			29				312			Buckets, teeth, edges, adapters
Komatsu do Brasil Ltda. São Paulo, Brazil			68				732			Medium-sized hydraulic excavators, small- and medium-sized wheel loaders, medium-sized bulldozers, motor graders
Europe
Komatsu UK Ltd. Birtley, UK			60				646			Medium- and large-sized hydraulic excavators
Komatsu Hanomag GmbH Hannover, Germany			77				829			Wheeled hydraulic excavators, small- and medium-sized wheel loaders, mini wheel loaders
Komatsu Forest AB Umea, Sweden			14				151			Forestry equipment (wheel type)
Komatsu Mining Germany GmbH Düsseldorf, Germany			23				248			Super-large hydraulic excavators
Komatsu Utility Europe S.p.A. Este, Italy			48				517			Mini excavators, backhoe loaders, skid steer loaders
Asia (excluding Japan) and Oceania
PT Komatsu Indonesia Jakarta, Indonesia			139				1,496			Medium-sized hydraulic excavators, small- and medium-sized bulldozers, motor graders, dump trucks and hydraulic equipment
PT Komatsu Undercarriage Indonesia Bekasi, Indonesia			12				129			Undercarriage components and spare parts
Komatsu (Changzhou) Construction Machinery Corporation Jiangsu, China			16				172			Medium-sized hydraulic excavators, medium-sized wheel loaders, dump trucks
Komatsu Shantui Construction Machinery Co., Ltd. Shandong, China			63				678			Small- and medium-sized hydraulic excavators
Bangkok Komatsu Co., Ltd. Chonburi, Thailand			24				258			Medium-sized hydraulic excavators, wheel loaders and backhoe loaders

The head office of the Company is located in an office building in Tokyo, Japan which Komatsu owns. Komatsu considers that its manufacturing plants and other facilities are well maintained and believes that its plant capacity is adequate for its current operating requirements. To the best of management’s knowledge, management does not believe that there are any significant environmental issues that may materially affect Komatsu’s utilization of its assets.

Plans for Capital Investments

As of the filing date of this annual report, Komatsu plans to make capital investments of ¥86,977 million in the fiscal year ending March 31, 2011. The amount of capital investment expected to be made in the fiscal year ending March 31, 2011, the principal investment objectives and the sources of funding by operating segment are set forth in the below table.

		Approximate expected
		capital investment amount
		in the fiscal year ending
		March 31, 2011				Principal investment
Operating Segment		(Millions of Yen)				objectives		Sources of funding
Construction, Mining and Utility Equipment			84,784			To reorganize production and to develop and manufacture new products, etc.		Funds on hand, bank borrowings, etc.
Industrial Machinery and Others			2,193			To renew obsolete equipment and to streamline production, etc.		Funds on hand, bank borrowings, etc.
Total			86,977

With respect to the Construction, Mining and Utility Equipment operating segment, Komatsu plans to continue making investments to reorganize its production operations so as to put in place a more flexible production infrastructure that enables Komatsu to adjust quickly to market demands, and make investments in China and Asia where Komatsu anticipates further market growth. In addition, Komatsu plans to make investments to develop hybrid construction equipment and products that comply with the latest engine emission standards. With respect to the Industrial Machinery and Others operating segment, Komatsu plans to make investments to renew obsolete equipment and streamline its production operations.

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and Financial Review and Prospects

A. Operating Results

Overview

The following discussion and analysis provides information that Komatsu’s management believes to be relevant in understanding Komatsu’s consolidated financial condition and results of operations. For the convenience of the reader, Japanese yen amounts have been converted to U.S. dollar amounts at the rate of ¥93 to U.S.$1.00, the approximate buying rate of Japanese yen as of noon on March 31, 2010 in New York City as reported by the Federal Reserve Board.

Komatsu’s Business

Komatsu is a global organization engaged primarily in the manufacturing, development, marketing and sale of industrial-use equipment and products. Komatsu classifies its business segments into the following two operating segments: (1) Construction, Mining and Utility Equipment and (2) Industrial Machinery and Others.

For the fiscal year ended March 31, 2010, the Construction, Mining and Utility Equipment operating segment and the Industrial Machinery and Others operating segment accounted for approximately 88.6% and 11.4% of consolidated net sales, respectively. Of the consolidated net sales for the fiscal year ended March 31, 2010, 22.6% of net sales were derived from sales to customers located in Japan and 77.4% of net sales were derived from sales to customers located outside of Japan. For additional information regarding Komatsu’s products, competitive position, organizational structure, and property, plant and equipment, see Item 4. Information on the Company.

The average exchange rate between the Japanese yen and the U.S. dollar was ¥92.49 for the fiscal year ended March 31, 2010 and ¥100.85 for the fiscal year ended March 31, 2009. For additional discussion on the effect of foreign currency exchange rate fluctuations on Komatsu’s business, see “Risk Factors” in Item 3.D. Key Information and “Comparison of Fiscal Years ended March 31, 2010 and 2009” in Item 5.A. Operating Results.

General Overview

During the fiscal year ended March 31, 2010, some of the world’s economies showed signs of recovery, reflecting positive effects of the economic stimulus packages of their respective governments. In particular, the Chinese economy, with the support of its government’s massive economic stimulus measures, lead the other economies by turning around its economy in the first half of the fiscal year and recording growth. The positive effects of China’s economic growth have reached the surrounding Asian countries and countries that produce natural resources, helping such countries’ economic recovery. On the other hand, the pace of economic recovery of developed countries and regions, such as Japan, North America and Europe, was dull, which resulted in a challenging overall business environment.

In light of such economic environment, Komatsu continued to adjust its production levels around the world and was able to achieve an appropriate level of inventories in the first half of the fiscal year. Komatsu also reorganized its production infrastructure in both the Construction, Mining and Utility Equipment operating segment and the Industrial Machinery and Others operating segment. More specifically, with respect to the Construction, Mining and Utility Equipment operating segment, Komatsu (1) closed down the Mooka Plant and transferred the production of products manufactured at such plant to the Ibaraki Plant and other plants in Japan, (2) expanded the production capacity for electric motors and other key components for hybrid hydraulic excavators at its Shonan Plant and (3) closed down some of its manufacturing facilities in North America. With respect to the Industrial Machinery and Others operating segment, Komatsu (1) closed down the Komatsu Plant and transferred the production of products manufactured at such plant to the Kanazawa Plant and (2) integrated its product development and sales and service operations of the large-size press business previously conducted by the Company into Komatsu Industries to further streamline its press business, develop new markets and expand its business in China and other emerging economies. In addition, Komatsu also reorganized its distributor network to realign its sales infrastructure for construction equipment and forklift trucks in Japan.

At the same time, Komatsu worked to substantially decrease fixed costs, such as (1) R&D expenses, and (2) personnel expenses and facility related expenses (that is, depreciation expenses relating to fixed assets), which it was able to reduce through structural reforms such as the ones described above.

On the other hand, to improve sales and profits, Komatsu (1) reinforced its businesses that utilize ICT, such as the KOMTRAX, (2) strengthened its sales operations in China by implementing an ICT system that enables Komatsu and its distributors to exchange real-time information in order to minimize excess inventory, (3) strengthened its sales operations in the mining equipment business and (4) worked to strengthen its parts and service businesses.

Summary of Operating Results

Due primarily to the decrease in global demand for its products, which did not return to the levels reached prior to the financial meltdown, and the appreciation of the Japanese yen against other major currencies, Komatsu’s consolidated business results for the fiscal year ended March 31, 2010 decreased as compared to the fiscal year ended March 31, 2009.

Consolidated net sales for the fiscal year ended March 31, 2010 decreased by 29.2% from the fiscal year ended March 31, 2009 to ¥1,431,564 million (U.S.$15,393 million) due primarily to decreased sales in the Construction, Mining and Utility Equipment operating segment as well as the Industrial Machinery and Others operating segment. While the demand for construction, mining and utility equipment started to recover in some emerging economies that are rich in natural resources, such as Indonesia, India and Brazil, in addition to China, such recovery was not sufficient to fully offset the decrease in demand for construction, mining and utility equipment in developed countries and regions, such as Japan, North America and Europe. Demand for industrial machinery and other equipment decreased as customers to which Komatsu supplies such products continued to limit their capital investments in light of the global economic downturn. In addition, unfavorable changes in foreign exchange rates, such as the appreciation of the Japanese yen against the U.S. dollar, the Euro and other currencies, also contributed to the decrease in net sales.

Operating income for the fiscal year ended March 31, 2010 was ¥67,035 million (U.S.$721 million), which decreased by 55.9% as compared to the fiscal year ended March 31, 2009. This decrease in operating income was due primarily to negative factors such as (1) the decrease in demand for Komatsu products and (2) unfavorable changes in foreign exchange rates, which outweighed positive factors such as (1) the decrease in fixed costs, such as R&D expenses, and personnel expenses and facility related expenses (that is, depreciation expenses relating to fixed assets), which Komatsu was able to reduce through structural reforms, (2) the realization of product sales at higher prices and (3) the decrease in expenses relating to structural reforms of its production and sales operations.

Income from continuing operations before income taxes and equity in earnings of affiliated companies for the fiscal year ended March 31, 2010 decreased by 49.5% from the fiscal year ended March 31, 2009 to ¥64,979 million (U.S.$699 million).

Net income attributable to Komatsu Ltd. for the fiscal year ended March 31, 2010 decreased by 57.4% to ¥33,559 million (U.S.$361 million) from the fiscal year ended March 31, 2009.

Key Management Indices

Komatsu’s management uses the following six financial indicators to assess its financial condition and results of operations: (1) net sales, (2) segment profit, (3) operating income, (4) operating margin, (5) return on equity ratio (“ROE”) and (6) net debt-to-equity ratio (“Net DER”). Set forth below is the summary of operating results for the fiscal years ended March 31, 2010 and 2009.

Management considers segment profit, which is determined in a manner that is consistent with Japanese accounting principles, to be one of its key management indices because it enables management to evaluate financial data without taking into account the effect of nonrecurring events and other factors unrelated to business activities, such as impairment loss or interest income/expense. Based on such evaluation of financial data, management assesses performance and determines how to allocate resources.

		Results for Fiscal Year Ended March 31,								Percentage Change
Management Indices		2010				2009				2010 vs. 2009
Net Sales		¥	1,431,564 million			¥	2,021,743 million				-29.2	%
Segment Profit 1)		¥	80,719 million			¥	188,658 million				-57.2	%
Operating Income		¥	67,035 million			¥	151,948 million				-55.9	%
Operating Margin 2)			4.7	%			7.5	%		-2.8 points
ROE 3)			4.1	%			9.3	%		-5.2 points
Net DER 4)			0.60				0.62				-0.02

Net Sales

Consolidated net sales for the fiscal year ended March 31, 2010 decreased by 29.2%, or ¥590,179 million, to ¥1,431,564 million (U.S.$15,393 million) from ¥2,021,743 million for the fiscal year ended March 31, 2009. This decrease was due primarily to decreased sales in the Construction, Mining and Utility Equipment operating segment as well as the Industrial Machinery and Others operating segment. While demand for construction, mining and utility equipment started to recover in some emerging economies that are rich in natural resources, such as Indonesia, India and Brazil, in addition to China, such recovery was not sufficient to fully offset the decrease in demand for construction, mining and utility equipment in developed countries and regions, such as Japan, North America and Europe. Demand for industrial machinery and other equipment decreased as customers to which Komatsu supplies such products continued to limit their capital investments in light of the global economic downturn. In addition, unfavorable changes in foreign exchange rates, such as the appreciation of the Japanese yen against the U.S. dollar, the Euro and other currencies, also contributed to the decrease in net sales.

Segment Profit

Consolidated segment profit for the fiscal year ended March 31, 2010 decreased by 57.2% to ¥80,719 million (U.S.$868 million) as compared to the fiscal year ended March 31, 2009. This decrease in segment profit was due primarily to negative factors such as (1) the decrease in demand for Komatsu products and (2) unfavorable changes in foreign exchange rates, which outweighed positive factors such as (1) the decrease in fixed costs, such as R&D expenses, and personnel expenses and facility related expenses (that is, depreciation expenses relating to fixed assets), which Komatsu was able to reduce through structural reforms, (2) the realization of product sales at higher prices and (3) the decrease in the prices of materials used in the production of Komatsu products.

Operating Income, Operating Margin

Operating income for the fiscal year ended March 31, 2010 was ¥67,035 million (U.S.$721 million), down by 55.9% or ¥84,913 million from ¥151,948 million for the fiscal year ended March 31, 2009. This decrease in operating income was due primarily to negative factors such as (1) the decrease in demand for Komatsu products and (2) unfavorable changes in foreign exchange rates, which outweighed positive factors such as (1) the decrease in fixed costs, such as R&D expenses, and personnel expenses and facility related expenses (that is, depreciation expenses relating to fixed assets), which Komatsu was able to reduce through structural reforms, (2) the realization of product sales at higher prices and (3) the decrease in expenses relating to structural reforms of its production and sales operations.

Operating margin for the fiscal year ended March 31, 2010 decreased by 2.8 percentage points to 4.7% from 7.5% for the fiscal year ended March 31, 2009.

ROE

Net income attributable to Komatsu Ltd. in the fiscal year ended March 31, 2010 decreased by 57.4% to ¥33,559 million (U.S.$361 million) compared with the fiscal year ended March 31, 2009 due primarily to the decrease in operating income. As a result, ROE for the fiscal year ended March 31, 2010 decreased by 5.2 percentage points to 4.1% from 9.3% in the fiscal year ended March 31, 2009.

Net DER

Komatsu’s aggregate interest-bearing debt as of March 31, 2010 was ¥586,379 million (U.S.$6,305 million), which decreased by ¥13,476 million as compared to March 31, 2009. This decrease was due primarily to Komatsu’s efforts to reduce inventory to appropriate levels.

Net interest-bearing debt after deducting cash and deposits also decreased by ¥6,430 million to ¥502,818 million (U.S.$5,407 million) in the fiscal year ended March 31, 2010. As a result, Net DER for the fiscal year ended March 31, 2010 decreased to 0.60 from 0.62 for the fiscal year ended March 31, 2009.

Critical Accounting Policies

Komatsu prepares its consolidated financial statements in conformity with U.S. GAAP. Komatsu’s management regularly makes certain estimates and judgments that Komatsu believes are reasonable based upon available information. These estimates and judgments affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of income and expenses during the periods presented, and the disclosed information regarding contingent liabilities and debts. These estimates and judgments are based on Komatsu’s historical experience, terms of existing contracts, Komatsu’s observance of trends in the industry, information provided by its customers and information available from other outside sources, as appropriate.

By their nature, these estimates and judgments are subject to an inherent degree of uncertainty, and may differ from actual results. For a summary of Komatsu’s significant accounting policies, including the critical accounting policies discussed below, see Note 1 to the Consolidated Financial Statements. Komatsu’s management believes that the following accounting policies are critical in fully understanding and evaluating Komatsu’s reported financial results.

(1) Allowance for Doubtful Receivables

Komatsu estimates the collectability of its trade receivables taking into consideration numerous factors including the current financial position by each customer. Komatsu establishes an allowance for expected losses based on individual credit information, historical experience and assessment of overdue receivables. Komatsu continually analyzes data obtained from internal and external sources in order to become familiar with customers’ credit situations. Since Komatsu’s historical loss experiences have fallen within their original estimates and established provisions, Komatsu’s management believes its allowance for doubtful receivables to be adequate. If the composition of Komatsu’s trade receivable were to change or the financial position of each customer were to change due to an unexpected significant shift in the economic environment, it is possible that the accuracy of its estimates could be affected and thus its financial position and results of operations could be materially affected. For additional information, see Note 5 to the Consolidated Financial Statements.

(2) Deferred Income Tax Assets and Uncertain Tax Positions

Komatsu estimates income taxes and income tax payable in accordance with applicable tax laws in each of the jurisdictions in which it operates. Net operating loss carry forwards and temporary differences resulting from differing treatment of items for taxation and financial accounting and reporting purposes are recognized on Komatsu’s consolidated balance sheet by adjusting the effect for deferred income tax assets and liabilities. Komatsu is required to assess the likelihood that each of its group company’s deferred tax assets will be recovered from future taxable income estimated for each group company and the available tax planning strategies. Komatsu’s management estimates its future taxable income and considers the likelihood of recovery of deferred tax assets based on the management plan authorized by the board of directors, periodic operational reports of each group company, future market conditions and tax planning strategies, and, to the extent Komatsu’s management believes that any such recovery is not likely, each group company establishes a valuation allowance to reduce the amount of deferred tax assets reflected in the consolidated balance sheet. Changes to the amount and timing of future taxable income determined by Komatsu’s management could result in increases to the valuation allowance.

Benefits derived from uncertain tax positions are recognized when a particular tax position meets the more-likely-than-not recognition threshold based on the technical merits of such position. A benefit is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon a final settlement with the appropriate taxing authority. Komatsu assesses the likelihood of sustaining such tax positions at each reporting date, with any changes in estimate reflected in the financial statements for the period during which such changes occur, until such time as the positions are effectively settled.

While Komatsu’s management believes that all deferred tax assets after adjustments for valuation allowance will be realized and all material uncertain tax positions that are recognized will be successfully sustained, Komatsu may be required to adjust its deferred tax assets or valuation allowance or reserve for unrecognized tax benefits if its estimates differ from actual results due to poor operating results, lower future taxable income as compared to estimated taxable income or different interpretations of tax laws by the relevant tax authorities. These adjustments to the valuation allowance or recognized tax benefits could materially affect Komatsu’s financial position and results of operations. For additional information, see Note 16 to the Consolidated Financial Statements.

(3) Valuation of Long-Lived Assets and Goodwill

Komatsu’s long-lived assets are reviewed for potential impairment whenever events or changes in circumstance indicate that the carrying amount of an asset may not be recoverable, such as a decrease in future cash flows caused by a change in business environment. The recoverability of assets to be held and used is measured by comparing the carrying amount of a particular asset to the estimated future undiscounted cash flow expected to be generated by such asset. Such future undiscounted cash flow is estimated in accordance with Komatsu’s management plan. The management plan is established by taking into consideration, to the extent possible, management’s best estimates on the fluctuation of sales prices, changes in manufacturing costs and sales, general and administrative expenses based on expected sales volumes derived from market forecasts available through outside research institutions and through customers.

If the carrying amount of an asset exceeds its future undiscounted cash flow and such asset is considered unrecoverable and identified as an impaired asset, Komatsu recognizes an impairment loss based on the amount by which the carrying amount of the asset exceeds its fair value. Fair value is customarily measured based on the asset’s future discounted cash flow, and the rate used to discount such cash flow is the weighted average capital cost reflecting the fluctuation risk of future cash flow in the capital markets. As an alternative to such customary method, fair value may also be measured based on an independent appraisal. Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value less costs of sales.

Komatsu reviews its goodwill annually for impairment as of March 31. An impairment of goodwill is deemed to occur when the carrying amount of the reporting unit, including goodwill, exceeds its estimated fair value. Impairment losses on goodwill are recognized by conducting a two step test. The first of the two step test, which is used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the test is performed. The second step of the test, which is used to measure the amount of impairment loss, compares the implied fair value of the goodwill of the reporting unit with the carrying amount of that goodwill. Determination of the implied fair value of the goodwill requires management to estimate the fair value of other identifiable assets and liabilities of the reporting unit based on discounted cash flows, appraisals or other valuation methods. If the carrying amount of the goodwill of the reporting unit exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

In the event that Komatsu’s strategy or market conditions in which it operates changes, estimates of future cash flows to be generated by an asset and evaluations of fair value would be affected, and the assessment of the ability to recover the carrying amount of long-lived assets and goodwill may change. Accordingly, such changes in assessment could materially affect Komatsu’s financial position and results of operations.

(4) Fair Value of Financial Instruments

The fair values of derivative financial instruments, consisting principally of foreign currency contracts and interest swap agreements, are estimated by obtaining quotes from brokers based on observable market inputs.

While fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments, these estimates are subjective in nature. The estimated fair values may change due to uncertainties of the financial markets, and may therefore differ from actual results. The fair values of marketable investment securities are stated at market price.

In the case of a decrease in market price, in periodically assessing other-than-temporary impairment of marketable investment securities and investments in affiliates, Komatsu considers the period and amount of its decline, and the financial conditions and prospects of each subject company. While Komatsu believes that there are no major impairments of its investment securities or investments in affiliates at present, if the performance and business conditions of a subject company deteriorate due to a change in business circumstances, Komatsu may recognize an impairment of its investments.

(5) Pension Liabilities and Expenses

The amount of Komatsu’s pension obligations and net period pension costs are dependent on certain assumptions used to calculate such amounts. These assumptions are described in Note 13 to the Consolidated Financial Statements and include the discount rate, expected rate of return on plan assets and rates of increase in compensation. In accordance with U.S. GAAP, actual results that differ from these assumptions are accumulated and amortized over future service years of employees and therefore generally affect Komatsu’s recognized expenses and recorded obligations during such future periods.

The discount rate is determined based on the rates of return of high-quality fixed income investments currently available and expected to be available until the maturity of the pension benefits. The expected long-term rate of return on plan assets is determined by taking into consideration the current expectations for future returns and actual historical returns of each plan asset category.

While Komatsu believes that its assumptions are appropriate, in the event that actual results differ significantly from these assumptions or significant changes are made to these assumptions, Komatsu’s pension obligations and future expenses may be affected.

The following table illustrates the sensitivity of pension obligations and net periodic pension costs to changes in discount rates and expected long-term rate of return on pension plan assets, while holding all other assumptions constant, for Komatsu’s pension plans as of March 31, 2010.

		Pension obligations		Net periodic pension costs
Change in assumption		(Billions of Yen)		(Billions of Yen)
0.5% increase/ decrease in discount rate		-11.2 /+12.1		-1.1 /+1.1
0.5% increase/ decrease in expected long-term rate of return		—		-0.5 /+0.5

Recent Accounting Standards Not Yet Adopted

In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-16, “Accounting for Transfers of Financial Assets.” ASU 2009-16 eliminates the concept of a qualifying special-purpose entity (“QSPE”), establishes more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the financial-asset derecognition criteria and revises the initial measurement of a transferor’s interest in transferred financial assets. ASU 2009-16 is effective for the fiscal periods beginning on or after November 15, 2009 and is required to be adopted by Komatsu in the fiscal year beginning April 1, 2010. Komatsu is currently evaluating the effect that the adoption of ASU 2009-16 will have on its consolidated results of operations and financial condition but expects it will not have a material impact.

In December 2009, the FASB issued ASU 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” ASU 2009-17 prescribes a change in the approach to determine the primary beneficiary of a variable interest entity and also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. ASU 2009-17 is effective for the fiscal periods beginning on or after November 15, 2009 and is required to be adopted by Komatsu in the fiscal year beginning April 1, 2010. Komatsu is currently evaluating the effect that the adoption of ASU 2009-17 will have on its consolidated results of operations and financial condition but expects it will not have a material impact.

In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements.” ASU 2009-13 eliminates the residual method of revenue recognition and requires the use of management’s best estimate of selling price for individual elements of an arrangement if vendor specific objective evidence or third-party evidence is unavailable. ASU 2009-13 is effective for the fiscal periods beginning on or after June 15, 2010 and is required to be adopted by Komatsu in the fiscal year beginning April 1, 2011. Komatsu is currently evaluating the effect that the adoption of ASU 2009-13 will have on its consolidated results of operations and financial condition but expects it will not have a material impact.

In October 2009, the FASB issued ASU 2009-14, “Certain Revenue Arrangements That Include Software Elements.” ASU 2009-14 amends the scope of pre-existing software revenue guidance by removing tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality. ASU 2009-14 is effective for the fiscal periods beginning on or after June 15, 2010 and is required to be adopted by Komatsu in the fiscal year beginning April 1, 2011. Komatsu is currently evaluating the effect that the adoption of ASU 2009-14 will have on its consolidated results of operations and financial condition but expects it will not have a material impact.

Comparison of the Fiscal Years ended March 31, 2010 and 2009

The following tables set forth selected consolidated financial and operating data, including numerical data expressed as a percentage of total consolidated net sales for the periods indicated, and the changes in each consolidated financial line item between the indicated fiscal years.

Consolidated Statements of Income

		Millions of Yen																Percentage				Millions of
		Fiscal Years Ended March 31,																change				U.S. dollars
		2010								2009								2010 vs. 2009				2010
Net sales		¥	1,431,564				100.0	%		¥	2,021,743				100.0	%			-29.2	%		$	15,393
Cost of sales			1,101,559				76.9	%			1,510,408				74.7	%			-27.1	%			11,845
Selling, general and administrative expenses			249,286				17.4	%			322,677				16.0	%			-22.7	%			2,680
Impairment loss on long-lived assets			3,332				0.2	%			16,414				0.8	%			-79.7	%			36
Impairment loss on goodwill			—				—				2,003				0.1	%			-100.0	%			—

		Millions of Yen																Percentage				Millions of
		Fiscal Years Ended March 31,																change				U.S. dollars
		2010								2009								2010 vs. 2009				2010
Other operating expenses, net			(10,352	)			-0.7	%			(18,293	)			-0.9	%			-43.4	%			(111	)
Operating income			67,035				4.7	%			151,948				7.5	%			-55.9	%			721
Other income (expenses), net			(2,056	)							(23,166	)							-91.1	%			(22	)
Interest and dividend income			6,158								8,621								-28.6	%			66
Interest expense			(8,502	)							(14,576	)							-41.7	%			(91	)
Other, net			288								(17,211	)							-101.7	%			3
Income from continuing operations before income taxes and equity in earnings of affiliated companies			64,979				4.5	%			128,782				6.4	%			-49.5	%			699
Income taxes
Current			32,722								60,511												352
Deferred			(7,358	)							(18,218	)											(79	)
Total			25,364				1.8	%			42,293				2.1	%			-40.0	%			273
Income from continuing operations before equity in earnings of affiliated companies			39,615				2.8	%			86,489				4.3	%			-54.2	%			426
Equity in earnings of affiliated companies			1,588				0.1	%			396				0.0	%			301.0	%			17
Net income			41,203				2.9	%			86,885				4.3	%			-52.6	%			443
Less net income attributable to noncontrolling interests			(7,644	)			-0.5	%			(8,088	)			-0.4	%			-5.5	%			(82	)
Net income attributable to Komatsu Ltd.		¥	33,559				2.3	%		¥	78,797				3.9	%			-57.4	%		$	361
		Yen																U.S. cents
Per share data
Net income attributable to Komatsu Ltd.:
Basic			34.67								79.95												37.28
Diluted			34.65								79.89												37.26
Cash dividends per share		¥	26.00							¥	44.00											¢	27.96

		Millions of Yen																Percentage				Millions of
		Fiscal Years Ended March 31,																change				U.S. dollars
		2010								2009								2010 vs. 2009				2010
Segment profit			80,719				5.6	%			188,658				9.3	%			-57.2	%		$	868

Net Sales

Consolidated net sales for the fiscal year ended March 31, 2010 decreased by 29.2%, or ¥590,179 million, to ¥1,431,564 million (U.S.$15,393 million) from ¥2,021,743 million for the fiscal year ended March 31, 2009. This decrease was due primarily to decreased sales in the Construction, Mining and Utility Equipment operating segment as well as decreased sales in the Industrial Machinery and Others operating segment. Unfavorable changes in foreign exchange rates, such as the appreciation of the Japanese yen against the U.S. dollar, the Euro and other currencies, also contributed to the decrease in net sales.

For the fiscal year ended March 31, 2010, net sales to customers for the Construction, Mining and Utility Equipment operating segment decreased by 27.3%, or ¥476,158, to ¥1,268,575 million (U.S.$13,641 million) as compared to the fiscal year ended March 31, 2009. While demand for construction, mining and utility equipment recovered in China and showed signs of recovery in certain emerging economies that are rich in natural resources, such as Indonesia, India and Brazil, such trend was not generally observed in developed countries and regions, such as Japan, North America and Europe. Despite various governments’ efforts to stimulate their respective economies through stimulus packages, demand for construction, mining and utility equipment continued to decrease in developed countries as a result of the economic downturn. In light of such circumstances, Komatsu continued to suspend equipment sales to its dealers and distributors in developed countries to support their efforts to quickly adjust inventory levels, which further decreased Komatsu’s net sales. In addition, unfavorable changes in foreign exchange rates, such as the appreciation of the Japanese yen against the U.S. dollar, the Euro and other currencies, decreased net sales in the Construction, Mining and Utility Equipment operating segment by approximately ¥69.8 billion. While Komatsu was successful in realizing product sales at higher prices, this success did not offset the decrease in sales discussed above.

As the automobile and other industries to which Komatsu supplied industrial machinery and other products continued to limit their capital investments in light of the global economic downturn, as evidenced by the reduction in the number of new orders, net sales to customers in the Industrial Machinery and Others operating segment decreased by 41.2%, or ¥114,021 million, to ¥162,989 million (U.S.$1,753 million) as compared to the fiscal year ended March 31, 2009.

Cost of Sales

Cost of sales on a consolidated basis decreased by 27.1%, or ¥408,849 million, to ¥1,101,559 million (U.S.$11,845 million) for the fiscal year ended March 31, 2010 from ¥1,510,408 million for the fiscal year ended March 31, 2009, due primarily to decreased sales. Despite various efforts undertaken by Komatsu, such as the realization of sales of products at higher prices and the reduction of production costs (as a result of the decrease in the prices of materials used in the production of Komatsu products), cost of sales to sales ratio increased by 2.2 percentage points to 76.9% for the fiscal year ended March 31, 2010 from 74.7% for the fiscal year ended March 31, 2009. This increase was mainly due to (1) unfavorable changes in foreign exchange rates, such as the appreciation of the Japanese yen against the U.S. dollar, the Euro and other currencies and (2) certain costs not being fully absorbed due to reduced production volumes.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by 22.7% for the fiscal year ended March 31, 2010 to ¥249,286 million (U.S.$2,680 million) from ¥322,677 million for the fiscal year ended March 31, 2009, due primarily to (1) the decrease in selling expenses, such as expenses to transport products, as a result of decreased sales volume for the Construction, Mining and Utility Equipment operating segment, (2) the decrease in R&D expenses as Komatsu prioritized its R&D expenditures and postponed certain R&D activities and (3) the decrease in expenses associated with other activities aimed at reducing other fixed costs, such as personnel expenses and facility related expenses (that is, depreciation expenses relating to fixed assets), which Komatsu was able to reduce through structural reforms.

Impairment Loss on Long-Lived Assets

Consolidated impairment loss on long-lived assets for the fiscal year ended March 31, 2010 decreased by 79.7%, or ¥13,082 million, to ¥3,332 million (U.S.$36 million) as compared to ¥16,414 million for the fiscal year ended March 31, 2009. This decrease was due primarily to the fact that Komatsu did not record any impairment loss similar to the loss recorded in the fiscal year ended March 31, 2009 in connection with the closing of the Mooka plant and the Komatsu plant. For information about impairment loss on long-lived assets by segment, see Note 23 to the Consolidated Financial Statements.

Other Operating Expenses, net

For the fiscal year ended March 31, 2010, consolidated other operating expenses, net decreased by ¥7,941 million to ¥10,352 million as compared to ¥18,293 million for the fiscal year ended March 31, 2009. While Komatsu would have recorded income for the fiscal year ended March 31, 2010 as a result of gains recorded on the sale of some of its properties, such gains were fully offset by expenses incurred in connection with losses resulting from the disposal or sale of fixed assets. In addition, Komatsu recorded a decrease of its expenses associated with structural reforms of its production and sales operations, such as reorganization and relocation costs, during the fiscal year ended March 31, 2010, which also contributed to the decrease in other operating expenses.

Operating Income

Consolidated operating income for the fiscal year ended March 31, 2010 decreased by 55.9%, or ¥84,913 million, to ¥67,035 million (U.S.$721 million) as compared to ¥151,948 million for the fiscal year ended March 31, 2009. This decrease in operating income was due primarily to negative factors such as (1) the decrease in demand for Komatsu products and (2) unfavorable changes in foreign exchange rates, which outweighed positive factors such as (1) the decrease in fixed costs, such as R&D expenses, and personnel expenses and facility related expenses (that is, depreciation expenses relating to fixed assets), which Komatsu was able to reduce through structural reforms, (2) the realization of product sales at higher prices and (3) the decrease in expenses relating to structural reforms of its production and sales operations.

As a result, operating margin for the fiscal year ended March 31, 2010 decreased by 2.8 percentage points to 4.7% from 7.5% for the fiscal year ended March 31, 2009.

Other Income (Expenses), net

Consolidated other expenses, net for the fiscal year ended March 31, 2010 decreased by 91.1%, or ¥21,110 million, to ¥2,056 million (U.S.$22 million) as compared to ¥23,166 million for the fiscal year ended March 31, 2009. This decrease was due primarily to the decrease in foreign exchange rate losses and losses recorded as a result of impairments in Komatsu’s securities investments. Foreign exchange rate losses decreased by ¥12,868 million for the fiscal year ended March 31, 2010 to a gain of ¥1,066 million as compared to a loss of ¥11,802 million for the fiscal year ended March 31, 2009 mainly due to the favorable changes in foreign exchange rates, such as the depreciation of the U.S. dollar against the Canadian Dollar and Russian Ruble. In addition, Komatsu recorded losses on its securities investments of ¥204 million for the fiscal year ended March 31, 2010, a decrease of ¥9,237 million as compared to ¥9,441 million for the fiscal year ended March 31, 2009. This decrease in losses on its securities investments was due primarily to the overall recovery in the stock markets. Interest expense for the fiscal year ended March 31, 2010 decreased by 41.7%, or ¥6,074 million, to ¥8,502 million as compared to ¥14,576 million for the fiscal year ended March 31, 2009, due primarily to lower interest rates and the decrease in borrowings from external sources, and contributed to the decrease in other expenses. Interest and dividend income decreased by 28.6%, or ¥2,463 million, to ¥6,158 million for the fiscal year ended March 31, 2010 as compared to ¥8,621 million for the fiscal year ended March 31, 2009, due primarily to a decrease in interest rates.

Income from Continuing Operations Before Income Taxes and Equity in Earnings of Affiliated Companies

As a result of the above factors, consolidated income from continuing operations before income taxes and equity in earnings of affiliated companies for the fiscal year ended March 31, 2010 decreased by 49.5%, or ¥63,803 million, to ¥64,979 million (U.S.$699 million) as compared to ¥128,782 million for the fiscal year ended March 31, 2009.

Income Taxes

Consolidated income tax expense for the fiscal year ended March 31, 2010 decreased by ¥16,929 million to ¥25,364 million (U.S.$273 million) from ¥42,293 million for the fiscal year ended March 31, 2009. The actual effective tax rate for the fiscal year ended March 31, 2010 increased to 39.0% from 32.8% for the fiscal year ended March 31, 2009. This increase was due primarily to an increase in non-deductible expenses and valuation allowance of consolidated subsidiaries. The increase in the valuation allowance was mainly the result of additional valuation allowances recorded on deferred tax assets for net operating loss carryforwards at certain subsidiaries.

The difference between the Japanese statutory tax rate of 40.8% and the actual effective tax rate of 39.0% was caused by income of certain foreign subsidiaries being taxed at a rate lower than the Japanese statutory tax rate, which was offset in part by an increase in non-deductible expenses and valuation allowance. For additional information, see Note 16 to the Consolidated Financial Statements.

Income from Continuing Operations Before Equity in Earnings of Affiliated Companies

As a result of the above factors, consolidated income from continuing operations before equity in earnings of affiliated companies for the fiscal year ended March 31, 2010 decreased by ¥46,874 million to ¥39,615 million (U.S.$426 million) as compared to ¥86,489 million for the fiscal year ended March 31, 2009.

Equity in Earnings of Affiliated Companies

Consolidated equity in earnings of affiliated companies for the fiscal year ended March 31, 2010 increased by ¥1,192 million to ¥1,588 million (U.S.$17 million) as compared to ¥396 million for the fiscal year ended March 31, 2009, due primarily to increased earnings recorded by affiliated companies held under the equity accounting method, such as L&T-Komatsu Limited whose products were in greater demand in the Indian market.

Net income

As a result of the above factors, consolidated net income for the fiscal year ended March 31, 2010 decreased by ¥45,682 million to ¥41,203 million (U.S.$443 million) as compared to ¥86,885 million for the fiscal year ended March 31, 2009.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests for the fiscal year ended March 31, 2010 decreased by ¥444 million to ¥7,644 million (U.S.$82 million) as compared to ¥8,088 million for the fiscal year ended March 31, 2009. Noncontrolling interests in income of consolidated subsidiaries decreased mainly as a result of declined earnings recorded primarily by subsidiaries in the Construction, Mining and Utility Equipment operating segment, such as Komatsu Australia Pty. Ltd.

Net Income Attributable to Komatsu Ltd.

As a result of the above, consolidated net income attributable to Komatsu Ltd. for the fiscal year ended March 31, 2010 decreased by 57.4%, or ¥45,238 million, to ¥33,559 million (U.S.$361 million) as compared to ¥78,797 million for the fiscal year ended March 31, 2009. Accordingly, basic net income attributable to Komatsu Ltd. per share fell to ¥34.67 for the fiscal year ended March 31, 2010 from ¥79.95 for the fiscal year ended March 31, 2009. Diluted net income attributable to Komatsu Ltd. per share fell to ¥34.65 for the fiscal year ended March 31, 2010 from ¥79.89 for the fiscal year ended March 31, 2009.

Segment Profit

Segment profit, which is one of Komatsu’s key management indices, is determined in a manner that is consistent with Japanese accounting principles by subtracting cost of sales and selling, general and administrative expenses from net sales. Komatsu considers segment profit to be one of its key management indices because it enables management to evaluate financial data without taking into account the effect of nonrecurring events and other factors unrelated to business activities, such as impairment loss or interest income/expense. For information about impairment loss by segment, see Note 23 to the Consolidated Financial Statements. Based on such evaluation of financial data, management assesses performance and determines how to allocate resources.

Segment profit on a consolidated basis decreased by 57.2%, or ¥107,939 million, to ¥80,719 million (U.S.$868 million) for the fiscal year ended March 31, 2010 from ¥188,658 million for the fiscal year ended March 31, 2009. This decrease in segment profit was due primarily to negative factors such as (1) the decrease in demand for Komatsu products and (2) unfavorable changes in foreign exchange rates, which outweighed positive factors such as (1) the decrease in fixed costs, such as R&D expenses, and personnel expenses and facility related expenses (that is, depreciation expenses relating to fixed assets), which Komatsu was able to reduce through structural reforms, (2) the realization of product sales at higher prices and (3) the decrease in the prices of materials used in the production of Komatsu products.

For information regarding segment profit by operating segments and geographic segments, see “Performance by Operating Segments” and “Performance by Geographic Segments (based on the geographic origin of the seller)” below.

Performance by Operating Segments

The following table presents net sales and segment profit broken down by operating segments for the fiscal years ended March 31, 2010 and 2009. In evaluating the financial data for each operating segment, Komatsu’s management considers sales by the location of its customers to be particularly helpful for the Construction, Mining and Utility Equipment operating segment, its primary operating segment. Accordingly, in addition to providing performance information by operating segments, the below table and related discussion provide information regarding sales in the Construction, Mining and Utility Equipment operating segment broken down by geographic locations of Komatsu’s customer. Performance information by geographic segments (which are separately identified by management), which provides performance information based on the geographic location of the seller (as opposed to the customer), is provided under “Performance by Geographic Segments (based on the geographic origin of the seller).”

Performance by Operating Segments

		Millions of Yen
		Fiscal Years Ended								Percentage				Millions of
		March 31,								Change				U.S. dollars
		2010				2009				2010 vs. 2009				2010
Net sales:
Construction, Mining and Utility Equipment
Customers		¥	1,268,575			¥	1,744,733				-27.3	%		$	13,641
Japan			228,505				309,895				-26.3	%			2,457
Americas			306,135				462,405				-33.8	%			3,292
Europe and CIS			122,018				273,259				-55.3	%			1,312
China			244,509				179,221				36.4	%			2,629
Asia (excluding Japan, China) and Oceania			281,878				309,721				-9.0	%			3,031
Middle East and Africa			85,530				210,232				-59.3	%			920
Intersegment			2,690				4,653				-42.2	%			29
Total			1,271,265				1,749,386				-27.3	%			13,670
Industrial Machinery and Others
Customers			162,989				277,010				-41.2	%			1,753
Intersegment			15,619				26,389				-40.8	%			168
Total			178,608				303,399				-41.1	%			1,921
Elimination			(18,309	)			(31,042	)			-41.0	%			(197	)
Consolidated Net Sales		¥	1,431,564			¥	2,021,743				-29.2	%		$	15,393
Segment Profit:
Construction, Mining and Utility Equipment		¥	83,061			¥	180,455				-54.0	%		$	893
Industrial Machinery and Others			2,998				12,891				-76.7	%			32
Total			86,059				193,346				-55.5	%			925
Corporate expenses and elimination			(5,340	)			(4,688	)			13.9	%			(57	)
Consolidated Segment Profit		¥	80,719			¥	188,658				-57.2	%		$	868

Construction, Mining and Utility Equipment

Net sales

Consolidated net sales to customers in the Construction, Mining and Utility Equipment operating segment for the fiscal year ended March 31, 2010 decreased by 27.3%, or ¥476,158 million, to ¥1,268,575 million (U.S.$13,641 million) as compared to ¥1,744,733 million for the fiscal year ended March 31, 2009. This decrease in sales was due primarily to negative factors such as (1) the decrease in demand for Komatsu products during the fiscal year (which decreased net sales of this operating segment by approximately ¥433.9 billion) and (2) unfavorable changes in foreign exchange rates, such as the appreciation of the Japanese yen against the U.S. dollar, the Euro and other currencies (which decreased net sales in this operating segment by approximately ¥69.8 billion), which outweighed positive factors, such as the realization of product sales at higher prices (which increased net sales in this operating segment by approximately ¥27.5 billion).

Net sales to customers in Japan (based on sales destination) for the fiscal year ended March 31, 2010 decreased by 26.3%, or ¥81,390 million, to ¥228,505 million (U.S.$2,457 million) as compared to ¥309,895 million for the fiscal year ended March 31, 2009. While public-sector investment remained firm in the fiscal year ended March 31, 2010, due primarily to the economic stimulus package provided by the Japanese government, private-sector capital investment and residential investment continued to remain slack. As a result, overall demand for construction, mining and utility equipment in Japan decreased from the previous fiscal year. Accordingly, Komatsu’s sales of construction, mining and utility equipment in Japan decreased compared to the previous fiscal year.

Net sales to customers in the Americas (based on sales destination) for the fiscal year ended March 31, 2010 decreased by 33.8%, or ¥156,270 million, to ¥306,135 million (U.S.$3,292 million) as compared to ¥462,405 million for the fiscal year ended March 31, 2009. While the operating rate of construction equipment in North America showed signs that the market had bottomed out during the fiscal year ended March 31, 2010, demand for such equipment fell short of increasing as a result of the continuing economic uncertainty. As a result, the business environment in North America remained challenging. In light of such market conditions, Komatsu (1) reorganized its production and sales operations in North America by, among other things, closing certain manufacturing facilities and merging certain sales companies, and (2) continued to make efforts to reduce distributors’ inventory to appropriate levels. In Latin America, market demand that decreased after the financial crisis showed signs of recovery in Brazil and some other countries. To capture such recovery in demand in Latin America, Komatsu reinforced its sales and service operations by establishing a new subsidiary in Chile and opening a service support center in Mexico. The positive signs in Latin America, however, were not sufficient to fully offset the decrease in demand in North America. As a result, overall sales in the Americas for the fiscal year ended March 31, 2010 decreased as compared to the fiscal year ended March 31, 2009.

Net sales to customers in Europe and CIS (based on sales destination) for the fiscal year ended March 31, 2010 decreased by 55.3%, or ¥151,241 million to ¥122,018 million (U.S.$1,312 million) as compared to ¥273,259 million for the fiscal year ended March 31, 2009. A sharp drop in demand for construction, mining and utility equipment in Europe and CIS continued during the fiscal year ended March 31, 2010, against the backdrop of sluggish economies. Under such circumstances, Komatsu doubled sales promotion and other efforts in collaboration with its distributors in Europe, while reinforcing its product support capability for mines in CIS. However, net sales to customers in Europe and CIS (based on sales destination) for the fiscal year ended March 31, 2010 decreased due primarily to Komatsu’s continuing efforts to (1) reduce distributors’ inventory to an appropriate level and (2) decrease the number of construction, mining and utility equipment models that are manufactured in Europe, which action was undertaken to improve manufacturing efficiency and profitability by eliminating models that were no longer in demand.

Net sales to customers in China (based on sales destination) for the fiscal year ended March 31, 2010 increased by 36.4%, or ¥65,288 million to ¥244,509 million (U.S.$2,629 million) as compared to ¥179,221 million for the fiscal year ended March 31, 2009. Demand for construction, mining and utility equipment increased in China in light of the Chinese government’s economic stimulus measures, which advanced large-scale infrastructure developments, such as railways and highways projects, and resulted in an increase in year-on-year monthly demand since June 2009. The increase in year-on-year monthly demand was particularly significant after the Chinese New Year in February 2010. By increasing its production capacity at its existing plants, teaming up with its distributors to aggressively market its products and implementing an ICT system that enables Komatsu and its distributors to exchange real-time information in order to minimize excess inventory, Komatsu recorded an increase in net sales to customers in China for the fiscal year ended March 31, 2010. As a result, sales in China increased to account for 19.3% of total sales of the Construction, Mining and Utility Equipment operating segment.

Net sales to customers in Asia and Oceania (based on sales destination) for the fiscal year ended March 31, 2010 decreased by 9.0%, or ¥27,843 million to ¥281,878 million (U.S.$3,031 million) as compared to ¥309,721 million for the fiscal year ended March 31, 2009. In Indonesia, India and Thailand, year-on-year monthly demand showed signs of recovery in the second half of the fiscal year ended March 31, 2010. Demand remained firm for mining-related equipment in Australia throughout the entire fiscal year. Against this backdrop, Komatsu strived to strengthen its operations by (1) enhancing its global Reman (Re-manufacturing) capability by establishing and reorganizing its Reman entities in Indonesia and (2) reinforcing its market and product support capabilities by entering into a joint-venture arrangement with its distributors in Thailand. Notwithstanding such efforts, while sales picked up quickly in Asia in and after the third quarter, such increase in sales was not sufficient to fully offset the decrease in demand from customers in Asia and Oceania in the first half of the fiscal year ended March 31, 2010. As a result, Komatsu recorded a decrease in net sales in Asia and Oceania for the fiscal year ended March 31, 2010.

Net sales to customers in Middle East and Africa (based on sales destination) for the full fiscal year ended March 31, 2010 decreased by 59.3%, or ¥124,702 million to ¥85,530 million (U.S.$920 million) as compared to ¥210,232 million for the fiscal year ended March 31, 2009. Although commodity prices showed signs of an increase from the drastic plunge in 2008, market demand failed to recover in the Middle East and Africa as affected by the recessionary economies. In light of such market conditions and Komatsu’s continuing efforts to reduce distributors’ inventories, net sales to customers in the Middle East and Africa for the fiscal year ended March 31, 2010 decreased.

Segment Profit

Segment profit for the Construction, Mining and Utility Equipment operating segment for the fiscal year ended March 31, 2010 decreased by 54.0%, or ¥97,394 million, to ¥83,061 million (U.S.$893 million) from ¥180,455 million for the fiscal year ended March 31, 2009.

This decrease in segment profit was due primarily to negative factors such as (1) the decrease in demand for Komatsu products (which decreased segment profit by approximately ¥139.9 billion) and (2) unfavorable changes in foreign exchange rates, such as the appreciation of the Japanese yen against the U.S. dollar, the Euro and other currencies (which decreased segment profit by approximately ¥34.9 billion), which outweighed positive factors such as (1) the decrease in fixed costs, such as R&D expenses, and personnel expenses and facility related expenses (that is, depreciation expenses relating to fixed assets), which Komatsu was able to reduce through structural reforms (which increased segment profit by approximately ¥43.3 billion), (2) the realization of product sales at higher prices (which increased segment profit by approximately ¥27.5 billion) and (3) the decrease in the prices of materials used in the production of Komatsu products (which increased segment profit by approximately ¥6.6 billion).

Industrial Machinery and Others

Net Sales

Consolidated net sales to customers in the Industrial Machinery and Others operating segment for the fiscal year ended March 31, 2010 decreased by 41.2%, or ¥114,021 million, to ¥162,989 million (U.S.$1,753 million) as compared to ¥277,010 million for the fiscal year ended March 31, 2009. During the fiscal year ended March 31, 2010, the automobile and other industries to which Komatsu supplied industrial machinery and other products continued to limit their capital investments in light of the global economic downturn. As a result, new orders for Komatsu products decreased sharply and resulted in a decrease in net sales in the Industrial Machinery and Others operating segment.

Segment Profit

Segment profit for the Industrial Machinery and Others operating segment for the fiscal year ended March 31, 2010 decreased by 76.7%, or ¥9,893 million, to ¥2,998 million (U.S.$32 million) from ¥12,891 million for the fiscal year ended March 31, 2009. This decrease was due primarily to the decrease in demand for Komatsu products (which decreased segment profit by approximately ¥15.7 billion), which fully offset the decrease in costs, such as fixed costs (which increased segment profit by approximately ¥5.8 billion).

Performance by Geographic Segments (based on the geographic origin of the seller)

The following table presents net sales and segment profit broken down by the geographic origin of the seller for the fiscal years ended March 31, 2010 and 2009.

Performance by Geographic Segments

		Millions of Yen
		Fiscal Years Ended								Percentage				Millions of
		March 31,								Change				U.S. dollars
		2010				2009				2010 vs. 2009				2010
Net sales:
Japan		¥	716,719			¥	1,212,449				-40.9	%		$	7,707
Americas			347,717				511,821				-32.1	%			3,739
Europe and CIS			162,610				294,398				-44.8	%			1,748
Others			490,256				481,250				1.9	%			5,272
Elimination			(285,738	)			(478,175	)			-40.2	%			(3,073	)
Consolidated		¥	1,431,564			¥	2,021,743				-29.2	%		$	15,393
Segment Profit (Loss):
Japan		¥	(19,783	)		¥	37,876				-152.2	%		$	(213	)
Americas			33,982				52,133				-34.8	%			365
Europe and CIS			10,460				22,279				-53.0	%			112
Others			60,151				61,008				-1.4	%			647
Corporate and elimination			(4,091	)			15,362				-126.6	%			(43	)
Consolidated		¥	80,719			¥	188,658				-57.2	%		$	868