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SA

NK

YO

CO

.,LTD

.A

nnualRep

ort2006

SANKYO CO., LTD.Annual Report 2006Year ended March 31, 2006

Living Your Lifeto the Full

Board of Directors and Corporate Auditors(As of June 29, 2006)

ChairmanKunio Busujima*

Chief Executive OfficerHideyuki Busujima*

Executive Vice PresidentAkihiko Sawai*

Managing DirectorsKimihisa TsutsuiJunzo Hamaguchi

DirectorsYasuji SuzukiJunko TakimotoAkiyoshi SuzukiAkira YamadaHitoshi EtoShohachi Ugawa

Standing Corporate AuditorYasuo Nakano

Corporate AuditorToshiaki Ishiyama

Outside AuditorsKoichiro Makishima Yoshiro Sanada

*Representative Directors

Corporate Data(As of March 31, 2006)

Company NameSANKYO CO., LTD.

Head Office6-460 Sakaino-cho, Kiryu-shi, Gunma 376-0002, JapanTelephone: 81(277)44-3161 Facsimile: 81(277)47-4523

Tokyo Head Office3-29-14 Shibuya, Shibuya-ku, Tokyo 150-8327, JapanTelephone: 81(3)5778-7777 Facsimile:81(3)5778-6731

Sanwa Plant2732-1 Sanwa-cho, Isesaki-shi, Gunma 372-0011, JapanTelephone: 81(270)40-7777 Facsimile: 81(270)22-3007

Established April 12, 1966Paid-in Capital ¥14,840millionNumber of Shares Authorized 144,000,000Number of Shares Issued 97,597,500Number of Employees 820Number of Shareholders 15,870

Stock Price Range

Stock Exchange ListingThe Tokyo Stock Exchange, First Section,Code Number 6417Transfer AgentThe Chuo Mitsui Trust and Banking Company, LimitedAuditorChuoAoyama PricewaterhouseCoopers

(Thousands of Shares) (Yen)

Trading Volume (Thousands of Shares)

Stock Price (Yen)

32’06112111098765

’054

0

4,000

8,000

12,000

16,000

20,000

0

1,700

3,400

5,100

6,800

8,500

For Further Information Contact:Corporate Planning Division, SANKYO CO., LTD.3-29-14 Shibuya, Shibuya-ku, Tokyo 150-8327, JapanTelephone: 81(3)5778-7773 Facsimile: 81(3)5778-6731http://www.sankyo-fever.co.jp

37

Profile

Since its establishment in 1966, SANKYO Co., Ltd. has been a source of pleasure for the Japanese peo-

ple. As a leading manufacturer of pachinko machines, we have fostered pachinko as an immensely

popular leisure activity unique to Japan and enjoyed by millions of people.

From the very beginning, ingenuity has been the hallmark of the SANKYO spirit. To cite just one

example: our creation in 1980 of the highly entertaining Fever-type machine equipped with a slot-

machine movement revolutionized the concept of pachinko machines. SANKYO’s track record as a

developer and manufacturer of pachinko machines that set the pace in the pachinko industry is based

on a tradition of out-of-the-box thinking and technological prowess.

The scope of SANKYO’s business extends beyond manufacturing and sales of pachinko machines to

encompass production of pachislo machines as well as wide-ranging equipment for pachinko parlors

such as parlor management computer systems, ball bearing supply systems and prepaid card systems.

These strengths underpin SANKYO’s powerful presence as a provider of cutting-edge items for

pachinko parlors and pachinko players nationwide.

Contents

1. What is Pachinko? / Trend of the Pachinko Industry2. History of Hit Models3. Consolidated Financial Highlights4. Dear SANKYO Investors6. Interview with the CEO9. Divisional Review

12. Ground-breaking Products / Topics13. Consolidated Five-Year Summary14. Financial Review18. Consolidated Balance Sheets20. Consolidated Statements of Income21. Consolidated Statements of Shareholders’ Equity22. Consolidated Statements of Cash Flows23. Notes to the Consolidated Financial Statements36. Report of Independent Auditors37. Board of Directors and Corporate Auditors /

Corporate Data

Cautionary Statements with Respect to Forward-Looking Statements

Statements contained in this report with respects to the SANKYO Group’s plans, strategies and beliefs that are not historical facts areforward-looking statements about the future performance of the SANKYO Group which are based on management’s assumptions andbeliefs in light of the information currently available to it. These forward-looking statements involve known and unknown risks, uncertaintiesand other factors that may cause the SANKYO Group’s actual results, performance or achievements to differ materially from theexpectations expressed herein.

(Thousands of units)

0

1,000

2,000

3,000

4,000

5,000

Pachinko/Pachislo Industry Trend

Number of shipped pachinko

Number of shipped pachislo

Number of installed pachinko

Number of installed pachislo

200520042003200220012000199919981997199619951994199319921991CY1990

1

Trend of the Pachinko IndustryIn fiscal 2006, the impact of the revised regulationsconcerning game machines implemented in July 2004 hasbeen like the difference between day and night for thepachinko and pachislo markets. Relaxation of regulationscovering development of pachinko machines allowedmanufacturers to introduce a spate of new modelscomplying with the revised regulations featuring a richchoice of gaming possibilities. In contrast, in the yearfollowing the revision that tightened regulations on pachislomachines, relatively few new pachislo models complyingwith the revised regulations were released and the marketstagnated. Although the number of pachislo modelscomplying with the new regulations has increased sincethe autumn of 2005, the failure of these machines toachieve market penetration persists owing to concernsabout a drop in spending per customer at parlors, whichreflects the substantial curtailment of the gamblingcharacteristics of pachislo machines.

In addition, based on a business strategy emphasizingspending per customer, for several years parlors have showna preference for game machines that require a certainamount of time and money. As a result, light players have

given parlors a wide berth and the player population hasdecreased by more than 10 million since the early 1990s.

Although the extraordinary demand for new pachinkomachine models complying with the revised regulationsthat occurred in fiscal 2005 has run its course, demand formachines has remained firm as operators have beenopening larger pachinko parlors and competing forcustomers. Nevertheless, if the industry remainscharacterized by parlors scrambling to attract a limitednumber of customers, parlor operators are likely toencounter difficulties in the near future. The pachinkoindustry faces the urgent task of increasing the playerpopulation by cultivating new players, including winningback light players who have turned away from pachinko.The industry is looking to manufacturers to develop gamemachines that help expand the player population. The taskfor manufacturers is to develop and provide gamemachines capable of offering enjoyment to large numbersof people. The crunch is fast approaching: the winners willbe those manufacturers that have what it takes to rise tothe challenge.

Building toward a Brighter Tomorrow.

What is Pachinko?By any measure, pachinko is one of the most popularleisure activities in Japan. 17.1 million people playedpachinko in 2005 and the pachinko market was worth¥28.7 trillion, accounting for 36% of the total leisure marketin Japan, making it far bigger than any other leisure activity.SANKYO’s products can be found in most of the 15,000pachinko parlors in Japan.

Although pachinko is far more than just gambling, theobjective of many players is to win prizes. Therefore, toprevent pachinko from becoming excessively orientedtoward gambling, the manufacture of pachinko machinesand the operation of pachinko parlors are regulated by theAct to Control Businesses That May Affect Public Moralsand other relevant laws and regulations.

Source: The Nikkoso, The Nichidenkyo and National Police Agency

1966

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2005

2006

SANKYO Co., Ltd. established

The head office and a plant open in Nagoya

Asuka, a new type of pachinko machine, released

Pearl Line, automated ball bearing supply system, released

The first Fever releasedCreates a sensation in the industry

Azuma

Blend

King Star

Super Combi

Magic Carpet

Fever Natsumatsuri and VICTORY Model Frame released

Fever Powerful III released

Fever Neptune and NASUKA 94 Model Frame released

Fever Big Powerful and FF Model Frame released

Fever Zeus and FF 99 Model Frame released

Fever Wide Powerful and TATSUMAKI Model Frame released

Bomber Powerful, the first SANKYO-brand pachislo machine, released

Fever Daiyamato 2 and LUMINA Model Frame released©2002 Leiji Matsumoto / Yuga, from Daiginga Series

Neon Genesis Evangelion second impact released©GAINAX / Project Eva., TV Tokyo

Nippon Game Card Corporation, an affiliate accounted for by the equity method, went public on the JASDAQ market.

Kiryu Plant opens

The head office is relocated to Kiryu-shi, Gunma prefecture

Tokyo Head Office Building opens in Higashi-ueno, Taito Ward

Paid-in capital is increased to ¥14,840 million

SANKYO shares are registered on the over-the-counter market of Japan Securities Dealers Association

SANKYO shares listed on the second section of the Tokyo Stock Exchange

SANKYO acquires Daido Co., Ltd. (current Bisty Co., Ltd.)

SANKYO shares listed on the first section of the Tokyo Stock Exchange

Tokyo Head Office is relocated to a new building in Shibuya Ward

Japan Game Card Co., Ltd. and Japan Advanced Card Systems Co., Ltd., affiliates of SANKYO consolidated by the equity method are merged to form Nippon Game Card Corporation

Sanwa Plant gains ISO 9001 certification (2000 version)

SANKYO ties up with Fields Corp. for sales of products of Daido Co., Ltd. (current Bisty Co., Ltd.), a consolidated subsidiary

Daido Co., Ltd. is renamed Bisty Co., Ltd.

Sanwa Plant opens

2

History of Hit Models

3

Consolidated Financial Highlights

SANKYO CO., LTD. and Its Consolidated SubsidiariesYears ended March 31, 2006 and 2005

Thousands ofMillions of yen U.S. dollars

2006 2005 2006

For the year:

Net sales ¥214,500 ¥233,903 $1,826,154Operating income 72,138 72,344 614,150Net income 45,443 45,887 386,880

At year-end:

Total assets 406,611 418,886 3,461,698Total shareholders’ equity 328,676 288,523 2,798,195

Yen U.S. dollars

Per share data:

Net income (basic) ¥463.77 ¥469.24 $3.95Cash dividends ¥100.00 70.00 0.85

Note: The U.S. dollar amounts in this report represent translations of Japanese yen, for convenience only, at the rate of¥117.46=U.S.$1. See Note 2 to the consolidated financial statements.

(Billions of yen)

Net Sales

200620052004200320020

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(Billions of yen)

Net Income

200620052004200320020

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Net Income per Share

200620052004200320020

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4

As the foremost pachinko machine manufacturer, SANKYO has led the

industry by proposing creative ideas imbued with the spirit of ingenuity,

paying the utmost attention to satisfying rapidly evolving customer

preferences. We will press ahead with the creation of game machines

that captivate our shareholders, pachinko parlors, and players by pur-

suing new added value in pachinko and pachislo and providing amuse-

ment attuned to people’s aspirations.

The key points of the revised game machine

regulations implemented in July 2004 are as

follows: 1) the relaxation of regulations on

pachinko machine specifications; 2) the

strengthening of regulations on pachislo

machines, whose pronounced gambling

characteristics were considered problematic;

and 3) the strengthening of security features

to prevent unauthorized use of game

machines. The regulations clearly reflect the

view that pachinko machines and pachislo

machines, as a form of mass entertainment,

should be devices that anyone can play with

peace of mind.

SANKYO was quick to seize the opportu-

nities created by regulatory relaxation con-

cerning pachinko machines by responding

swiftly to changes in the market. In fiscal

2005, immediately following the regulatory

revision, we achieved a 40% year-on-year

increase in unit sales of pachinko machines.

In fiscal 2006, although unit sales inevitably

decreased owing to the winding down of the

extraordinary demand triggered by deregula-

tion, the shift to a more profitable business

structure has paid off handsomely, enabling

us to maintain record levels of profit. In the

mainstay pachinko business, we deployed

the two-brand structure encompassing

SANKYO and Bisty to achieve a powerful

market presence. In the pachislo business,

product development anticipating market

needs has propelled SANKYO into the ranks

of the top five companies in this field. In

April 2006 leading prepaid card system sup-

plier Nippon Game Card, a member of the

SANKYO Group, listed its shares on the JAS-

DAQ market. The SANKYO Group intends

to reinforce its position as the provider of an

excellent one-stop service to pachinko par-

Dear SANKYO Investors,

5

lors that extends far beyond the supply of

game machines.

The pachinko industry faces the critical

problem of a downward trend in the player

population. In these circumstances, major

pachinko parlor chains are attempting to sat-

isfy the needs of a broader base of pachinko

players by actively opening new large-scale

parlors and installing a wide choice of game

machines. Even small parlors are groping for

a distinctive operating style as they seek to

establish themselves as a form of mass enter-

tainment in local communities.

SANKYO will strive to expand the player

population and support parlor management

by providing an extensive product line suit-

ed to the preferences of everyone from first-

timers to veteran players. We will continue

to contribute to the development of whole-

some leisure activities and the creation of a

vibrant society by demonstrating the spirit of

ingenuity that has been SANKYO’s hallmark

ever since its establishment. Specifically, we

intend to fulfill our mission by being the

preeminent source of game machines that

are a unique combination of sophisticated

technology and sparkling creativity.

June 2006

Hideyuki Busujima,

Chief Executive Officer

Hideyuki Busujima, Chief Executive Officer

6

Interview with the CEO

In an adverse business environment where the number of pachinko parlors has fallen for ten consecu-tive years, although SANKYO’s net sales decreased 8.3%, recurring income increased 0.6%. Pleasecomment on the results achieved in fiscal 2006.

In fiscal 2005 SANKYO succeeded in greatlyincreasing unit sales of pachinko machines by

implementing a product strategy attuned to thecircumstances, including responding to revised regula-

tions governing game machines implemented in July 2004 byintroducing machines complying with the new regulationsahead of competitors. Although a decrease in unit sales ofpachinko machines in fiscal 2006 following the previousyear’s success was inevitable, the brand power of subsidiaryBisty Co., Ltd. increased thanks to the operating alliance withFields Corp maintained since November 2003, bolsteringunit sales of pachinko machines for the SANKYO Group as awhole. Moving forward with the

two-brand structure, we pursued a multi-concept strategydesigned to broaden the future pachinko player base. Forinstance, with the SANKYO brand we actively introducedmodels that enable pachinko players to play casually withcomparatively little money. At the same time, we were able toshift the pachislo machine business to a more profitablestructure and break into the top five in market share forpachislo machines by introducing the hit products MumuWorld DX and Palot Kagetsu Densetsu R, the industry’s firstpalot machine. Judging from these successes, I feel that wehave developed the intrinsic strength to sustain and increasethe current level of profitability even without benefit of extra-ordinary demand.

What strategy do you have in mind to cope with the decrease in the population of pachinko players?

The pachinko player population hasdecreased by more than 10 million from itspeak in the early 1990s. On the other hand,

ball rental income, the indicator of market scalein the pachinko industry, remains at a high level

of about ¥29 trillion. What these figures indicate isthat as a result of the pachinko industry’s reliance on gamemachines supported by a limited number of enthusiasts,pachinko has become a pastime requiring too much moneyand time. Consequently, the industry has estranged itselffrom casual players.

The opening of large pachinko parlors and vitalization ofexisting parlors through conversion to new machines toattract customers are likely to continue for the time being andgame machine demand is expected to remain strong.

However, looking to the future, we believe that it is necessaryfor pachinko machine manufacturers and pachinko parlorsalike to avoid being overly concerned about immediate profitsand to win back dormant users by increasing installations ofgame machines that people can play with small amounts ofmoney and for short periods of time. For our part, SANKYOhas actively introduced easy-to-play models with toned-downgambling characteristics; for instance, in May 2006 wereleased Fever Powerful ZERO, a machine reproducing thegaming characteristics of Fever Powerful III, a major hit prod-uct loved by countless pachinko players in the early 1990s.As a result of trial events for pachinko parlors and players andnewspaper advertising emphasizing a return to the source ofpachinko, these machines have met with an even more favor-able reception than we anticipated.

As regulations governing pachislo machines become stricter, how do you see the market for pachinkomachines and pachislo machines developing?

Although the number of pachislo machinesinstalled has increased rapidly for the past few

years, the recent revision of regulations hasgreatly reduced the gambling characteristics of these

machines. There is no question that pachislo machines com-plying with the new regulations will seem less appealing tothe players who have supported the market up to now.Because the deadline for removal of all machines complying

with the former regulations is the summer of 2007, harshconditions likely lie ahead in the pachislo market. However,the gambling characteristics of pachislo are not the only factorthat has underpinned market expansion; pachislo involvesmany player participation elements, and the diversification ofgaming characteristics is a factor that cannot be ignored.Although SANKYO is a latecomer to pachislo machine manu-facturing, we view the market adjustment prompted by the

© TAITO CORP. 1996, 2006

7

a buyback of shares would result in reclassification as a familycorporation. As this would lead to a decrease in earnings pershare, in our judgment a buyback of shares would be inap-propriate from the perspective of protecting shareholderreturns.

recent regulatory revisions as an opportunity for us to increaseour market share. Accordingly, we are devoting efforts to thedevelopment of pachislo machines. Also, we regard the grow-ing impetus to reconsider the traditional pachinko parlor man-agement style, with its emphasis on game machines with

strong gambling characteristics and increasing spending percustomer, and instead to concentrate on increasing the numberof players and the game machine utilization rate as a majorbusiness opportunity for SANKYO, since we have a fine trackrecord of developing ground-breaking pachinko machines.

Please describe SANKYO’s growth strategy, competitive advantage, and business prospects for fiscal 2007.

The basic concept behind the SANKYOGroup’s growth strategy is to steadfastly

specialize in the pachinko and pachislo mar-kets, focusing on the highly profitable game

machines business while also engaging in the ball bearingsupply systems and intellectual property rights businesses.

Our medium- to long-term targets are to raise ourpachinko machine market share to 30% from the currentlevel of about 20% and our pachislo machine share from thecurrent single-digit level to above 10%.

As a result of working to strengthen our development andproduction systems to maintain and increase our competitiveadvantage, we have been able to continue to supply productsthat enjoy the support of pachinko parlors and players, andmoreover, increase confidence in SANKYO products.

Although the pachinko industry can be viewed as a matureindustry, a polarization trend affecting manufacturers andparlors alike has become prominent and we believe that furthergrowth in profits through higher market share is possible.Accordingly, at this time we are not considering entry intothe game software or arcade game industries or other busi-nesses from which high returns on investment are difficult toenvision. On the other hand, we have successful experienceswith M&A activities in pachinko-related markets, such as our

experiences with Bisty and Nippon Game Card. Accordingly,we will continue to positively consider mergers, acquisitions,and alliances that will contribute to maintaining and increas-ing our competitive advantage in pachinko-related markets.

In fiscal 2007, anticipating a positive impact within theGroup from competition between SANKYO and Bisty, weplan to increase unit sales of pachinko machines and pachislomachines. We will actively introduce machines based on avariety of development concepts, notably models with toned-down gambling characteristics aimed at winning back dor-mant players. As an industry leader, we will work to expandthe player population.

With regard to dividends, SANKYO paid an annual dividend of ¥100, ¥30 higher than initiallyplanned. What is the policy on measures to return profits to shareholders?

At SANKYO, we emphasize dividends as ameans of distributing profits to our share-

holders. Although in the past we have fol-lowed a basic policy of paying stable dividends

over the long term and considering dividendincreases in line with profit levels, beginning in fiscal 2006we have adopted a policy of aiming for a dividend payoutratio of 20% of consolidated net income together with divi-dend increases when warranted by profit levels.

On that basis, we paid a common dividend of ¥100 pershare for fiscal 2006. As the dividend per share for fiscal 2005was ¥70, including a commemorative dividend of ¥20, thisrepresents an increase of ¥50 on a common dividend basis.

At this time we have no plan to buy back SANKYO shares.Until fiscal 2001 SANKYO was classified as a family corpora-tion under the Corporation Tax Law of Japan, resulting in theapplication of an additional tax on retained earnings.Although this situation has been eliminated since fiscal 2002,

Growth image

Attractiveness

Pos

ition

ing

Pachinko

Pachislo

Intellectualproperty

Ball Bearing Supply(Including Pre-paid System)

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Forecast2007

20062005200420032002FY2001

(Yen per share)

Dividend Trend

Interim

Final

Commemorative

8

Concentrating Core Competencies for a New Round of Growth

Amid intense competition to create a new generation of smash-hit products,

SANKYO has risen to the challenge. Our latest models, making full use of

the freedom given to developers by the new regulatory environment, have

won a place in the hearts of players and parlor operators alike, giving added

luster to the celebrated SANKYO brand. SANKYO roared ahead, achieving

record-breaking net sales.

9

Divisional Review

Principal models introduced and numbers of machines soldduring fiscal 2006 are as follows (Only models with sales of 30,000 units or more are listed):

No. of machines sold Principal models Released (thousand machines)

Fever Yukemurikiko April 2005 73Fever Takarabune May 2005 46Fever Yoon Sona June 2005 42Fever Yoshida Takuro no Natsuyasumi ga Ippai August 2005 35 Fever Kagetsu Gaiden September 2005 37Marilyn Monroe* September 2005 40Ashita ga arusa Yoshimoto World* November 2005 39Fever Onmyoji November 2005 41Fever The Galaxy Railways January 2006 111Neon Genesis Evangelion second impact* January 2006 139*Bisty brand

Pachinko MachinesBusinessThis segment, whichincludes manufacturingand sales of pachinkomachines and gaugeboards, sales of relatedparts and pachinko-machine-related royaltyincome, is SANKYO’smainstay business andaccounted for 75.7% of net sales.

SANKYO Group introduced numerous game

machines based on new concepts, capitaliz-

ing on the greater freedom of development

due to the revised regulations, including the

National Public Safety Commission’s

Enforcement Regulation of the Act to

Control Businesses That May Affect Public

Morals in July 2004, and the advantage of a

large number of development themes thanks

to the two-brand (SANKYO and Bisty) strat-

egy. However, since explosive expansion of

the demand for pachinko machines triggered

by the implementation of the revised regula-

tions came to an end, the number of

pachinko machines and pachinko gauges

sold decreased 115,000 units or 13.5% from

the previous year to 735,000 units. Segment

sales were ¥162.5 billion, a decrease of

13.3% year on year, and operating income

was ¥66.8 billion, down 9.0%.

Fever The Galaxy Railways

© Leiji Matsumoto/PLANET INC.&PartnershipTMMarilyn Monroe, LLC by CMGWorldwide.com;www.MarilynMonroe.com. © 2005 Twentieth Century Fox FilmCorporation. All rights reserved.TMMarilyn Monroe, LLC by CMGWorldwide.com;www.MarilynMonroe.com. © 2005 Twentieth Century Fox Film Corporation(© 1955 Charles K. Feldman Group Productions,renewed 1983). All rights reserved.

Marilyn Monroe

(Billions of yen)

162.5 (75.7%)

Net Sales

10

Sales of Fever The Galaxy Railways (intro-

duced in January 2006) under the SANKYO

brand, the third product in the Leiji

Matsumoto animation series, and Neon

Genesis Evangelion second impact (introduced

in January 2006) under the Bisty brand, the

second product in the series based on col-

laboration involving a tremendously popular

anime, exceeded 100,000 units each, mak-

ing them big hits. Also, products based on

tie-ups with celebrities were vigorously

introduced, including Fever Yoshida Takuro

no Natsuyasumi ga Ippai (introduced in

August 2005) under the SANKYO brand,

and Marilyn Monroe (introduced in

September 2005) and Ashita ga arusa

Yoshimoto World (introduced in November

2005) under the Bisty brand. While Bisty’s

partnership with Fields began delivering

solid results, SANKYO introduced products

based on more diverse concepts than ever

before, including Uchino pochi (introduced in

October 2005), a basic product addressing

the preferences of light users, Miracle Carpet

(introduced in October 2005), an Airplane-

Type machine complying with the revised

regulations, and Fever Onmyoji (introduced

in November 2005) adopting the Double

start system.

Pachislo MachinesBusinessThis segment, whichincludes manufacturingand sales of pachisloand palot machines,sales of related partsand pachislo-machine-related royalty income,accounted for 15.9% ofnet sales.

Thanks to brisk sales of Mumu World DX and

also of palot and pachislo machines comply-

ing with the new regulations, sales volume

greatly exceeded the initial plan and

amounted to 112,000 units, a surge of

39,000 units or 54.4% year on year.

Segment sales soared 60.2% to ¥34.0 billion

and operating income jumped 208.2% to

¥9.7 billion.

Mumu World DX (introduced in August

2005), a SANKYO-brand pachislo machine,

met with a very enthusiastic reception due

to its innovative gaming performance based

on diverse and dynamic visual presentation

on a 15” LCD screen and high awareness of

(Billions of yen)

34.0 (15.9%)

Net Sales

11

Palot Kagetsu Densetsu R Neon Genesis Evangelion

the featured character. In July 2005, the

Group introduced the industry’s first palot

machine, Palot Kagetsu Densetsu R, a new

type of game machine complying with the

new regulations. Also, Neon Genesis

Evangelion (introduced in July 2005), is the

industry’s first pachislo machine complying

with the new regulations.

Ball Bearing SupplySystems BusinessBall bearing supply sys-tems, card systems,related equipment forparlors and ball-bearing-supply-system-relatedroyalty income con-tribute most of the salesof this segment, whichaccounted for 7.8% ofnet sales.

Although sales of the BLICZ new prepaid

card readers manufactured by Nippon Game

Card Corporation, an affiliate accounted for

by the equity method, were robust, segment

sales declined 25.2% to ¥16.8 billion, and

operating income decreased 38.3% to ¥0.5

billion, because of the completion of the

special demand stemming from the intro-

duction of newly designed banknotes.

Other BusinessThis segment, consisting

primarily of rental rev-

enues of SANKYO

Create Co., Ltd., a con-

solidated subsidiary,

accounted for 0.5% of

net sales. Segment sales

were ¥1.2 billion, a decline of 57.9%, and

operating income of ¥187 million was

recorded compared with an operating loss of

¥51 million for the previous year.

Principal models introduced and numbers of machines soldduring fiscal 2006 are as follows (Only models with sales of 10,000 units or more are listed):

No. of machines sold Principal models Released (thousand machines)

Palot Kagetsu Densetsu R July 2005 13Neon Genesis Evangelion* July 2005 23Mumu World DX August 2005 75*Bisty brand

(Billions of yen)

16.8 (7.8%)

Net Sales

(Billions of yen)

1.2 (0.5%)

Net Sales

12

Ground-breaking Products

Pachinko: Neon Genesis Evangelion second impact In January 2006 Bitsy introduced Neon Genesis Evangelion second impact, a new model that has

been the object of great anticipation from pachinko parlors and players alike. This is a succes-

sor model signaling the evolution of Neon Genesis Evangelion, the game machine released in

December 2004 that propelled the Bitsy brand to fame.

While following the highly popular visual presentation of the previous model, we newly

incorporated an “Awakened Mode” and added full-animation reproductions of famous scenes

from the original anime to express its distinctive and magnificent view of the world. For the

second model of a series, this is a highly accomplished pachinko machine that has been rec-

ognized as a crowning achievement.

Pachislo: Mumu World DXMumu World DX, the second SANKYO-branded pachislo machine, debuted in August 2005.

Whereas the gaming possibilities of conventional pachislo machines are largely determined by

center reels, this machine dispenses with center reels and instead breaks new ground by incor-

porating a high-visual-impact 15-inch full-screen liquid crystal display, “Infinity Vision”. A reel

located at the top plays a supporting role in the presentation. An epic saga of the adventures of

Mumu-Chan, a popular original SANKYO character, unfolds on the large screen. Mumu World DX

has created a stir as a pachislo machine offering a videogame-style experience.

As the Pachislo industry enters a new era dominated by machines that comply with the new

regulations, the key to success is to compensate for the toning down of gambling characteris-

tics by heightening gaming characteristics. SANKYO believes that “Infinity Vision”, by virtue of

the superb entertainment experience it delivers, will become established as a new pachislo category.

SANKYO Holds Fever Powerful ZERO Trial Eventsfor Pachinko FansIn the first initiative of its kind in the pachinko industry, SANKYO held trial events onApril 15, 2006, at 26 SANKYO showrooms nationwide to give pachinko players theopportunity to experience the new Fever Powerful ZERO pachinko machine. Thisunprecedented series of trials involving more than 3,300 people appraising the pre-launch model was a resounding success.

With the advent of Fever Powerful ZERO, a retro machine complying with the new regulations, players can experience thegaming characteristics of Fever Powerful III, a model introduced in 1992 that is an old favorite of countless pachinko fans.With the aim of winning back dormant players who no longer frequent pachinko parlors, SANKYO developed and intro-duced this model based on a product concept emphasizing the enjoyment of pachinko for a brief spell with limited funds.

Introduced at parlors nationwide on May 8, the new model has met with a tremendous reception, selling in impressivenumbers in recent years for a machine with limited gambling characteristics.

T o p i c s

Neon Genesis Evangelion second impact

Mumu World DX

13

Five-Year SummarySANKYO CO., LTD. and Its Consolidated SubsidiariesYears ended March 31, 2006, 2005, 2004, 2003 and 2002


2006 2005 2004 2003 2002 2006

For the year:

Net sales ¥214,500 ¥233,903 ¥151,726 ¥124,284 ¥144,663 $1,826,154

Gross profit 108,545 106,570 67,759 52,103 64,078 924,102

Selling, general and administrative expenses 36,407 34,226 23,778 23,529 25,303 309,952

Operating income 72,138 72,344 43,981 28,574 38,775 614,150

Net income 45,443 45,887 27,294 18,595 20,452 386,880

Research and development expenditure 7,324 7,441 6,536 6,278 5,690 62,353

At year-end:

Total assets 406,611 418,886 297,104 270,912 253,181 3,461,698

Total shareholders’ equity 328,676 288,523 244,715 219,611 205,304 2,798,195

Yen U.S. dollars

Per share data:

Net income ¥0,463.77 ¥0469.24 ¥0,278.37 ¥0,188.58 ¥0,210.42 $03.95

Cash dividends 100.00 70.00 40.00 40.00 40.00 0.85

Shareholders’ equity 3,371.93 2,959.27 2,517.81 2,258.76 2,112.32 28.71

%

Ratios:

Return on equity 14.7 17.2 11.8 8.8 10.4

Shareholders’ equity ratio 80.8 68.9 82.4 81.1 81.1

Note: The U.S. dollar amounts in this report represent translations of Japanese yen, for convenience only, at the rate of ¥117.46=U.S.$1. See Note 2 to the consolidated fi-nancial statements.

14

Financial Review

0

50

100

150

200

250Pachinko machines businesses

Pachislo machines businesses

Ball bearing supply systems businesses

Pachinko parlors businesses

Other businesses

Note: The pachinko parlors business is excluded from the segment information because the Company sold all its stake in Sanritsu Kigyo Co., Ltd., a pachinko parlor operator, which was previously included in the scope of consolidation.

(Billions of yen)

Net Sales

20062005200420032002

The Company’s financial position and operating results for the fiscal year ended March 31, 2006 (fiscal 2006), are ana-lyzed below.

Forward-looking statements in this annual report are based on SANKYO Group’s judgment as of the date of issue of thisannual report.

Business Environment in Fiscal 2006

During fiscal 2006, the performance of the Japanese econo-my was generally robust. Despite a sharp rise in oil pricesand other concerns, improvement of corporate earnings andgrowth of capital investment continued while the defeat ofdeflation and stock price increases had a positive impact onthe household sector.

In the pachinko industry, although explosive expansion ofthe demand for pachinko machines triggered by the imple-mentation of the revised regulations, including the NationalPublic Safety Commission’s Enforcement Regulation of theAct to Control Businesses That May Affect Public Morals inJuly 2004, has come to an end, pachinko parlors’ appetitefor pachinko machines remained robust due to their efforts

to attract players through frequent replacement of machinesagainst the background of vigorous opening of new parlorsby well-financed major chains.

On the other hand, the pachinko player population isabout 17 million, 10 million lower than at its peak, andrekindling of the interest of light players is a pressing issuefor the entire industry. SANKYO Group introduced numer-ous machines based on new concepts in all categories,including pachinko, pachislo and palot, capitalizing on thegreater freedom of development due to the revised regula-tions and the advantage of a large number of developmentthemes thanks to the two-brand (SANKYO and Bisty) strategy.

Net Sales

Net sales for fiscal 2006 decreased ¥19.4 billion or 8.3%compared with the previous year to ¥214.5 billion. Thisdecrease was mainly due to weaker performance of thepachinko machines business. Sales volume of pachinkomachines at 735,000 units was 13.5% lower than in the pre-vious year and sales of the pachinko machines businessdecreased ¥24.9 billion or 13.3% year on year to ¥162.5 bil-lion. On the other hand, sales volume of the pachislo

machines business soared 54.4% to 112,000 units owing tothe introduction of palot and pachislo machines complyingwith the new regulations coupled with brisk sales of MumuWorld DX. Sales of the pachislo machines business jumped¥12.8 billion or 60.2% to ¥34.0 billion. Sales of the ballbearing supply systems business decreased ¥5.7 billion or25.2% to ¥16.8 billion. Sales of other business dropped¥1.6 billion or 57.9% to ¥1.2 billion.

Cost of Sales, Selling, General & Administrative Expenses and Income

Cost of sales for fiscal 2006 amounted to ¥106.0 billion,having decreased ¥21.4 billion or 16.8% from the previousyear. The ratio of cost of sales to net sales decreased 5.0 per-centage points from the previous year to 49.4%. This wasattributable to the increase in the ratio of gauge boards inthe pachinko machines business and higher sales of pachisloand palot machines manufactured by SANKYO whose profitmargins are relatively high. Selling, general and administra-tive expenses increased ¥2.2 billion or 6.4% from the previ-ous year, mainly due to the increase in sales commissionpaid to sales agents in line with the higher sales of Bisty-brand pachinko machines. The ratio of selling, general andadministrative expenses to net sales increased 2.3 percent-

15

(Billions of yen)

Operating Income and Ratio of Operating Income to Net Sales

20062005200420032002

(%)(%)

Return on Sales (ROS)

200620052004200320020

5

10

15

20

25

(Billions of yen)

Gross Profit and Cost of sales

200620052004200320020

30

60

90

120

150

Operating Income (left scals)

Ratio of Operating Income to Net Sales

Gross Profit (left scals)

Cost of sales

0

20

40

60

80

0

10

20

30

40

age points from the previous year to 17.0%. As a result,operating income edged down ¥0.2 billion or 0.3% to ¥72.1billion and the ratio of operating income to net sales was33.6%, having increased 2.7 percentage points.

Segment Information by Business(Millions of yen)

Sales: 2006 2005

Pachinko machines business 162,482 187,422Pachislo machines business 34,047 21,255Ball bearing supply systems business 16,806 22,456Other business 1,165 2,770

Total 214,500 233,903

(Millions of yen)

Operating income: 2006 2005

Pachinko machines business 66,776 73,357Pachislo machines business 9,698 3,147Ball bearing supply systems business 533 862Other business 187 (51)Elimination/Corporate (5,056) (4,971)

Total 72,138 72,344

Fiscal 2007 Forecast

Regarding the pachinko machine market, triggered by thediversification of gaming performance of pachinko machinesthanks to the revised regulations that came into effect in July2004, there is an industry-wide drive to accomplish a majorobjective, namely, recovery of the population of pachinkoplayers. In these circumstances, demand for game machines isexpected to be robust due to parlors’ needs for pachinkomachines designed to attract not only the enthusiastic playerswho are underpinning the current market but also formerpachinko players and new players, coupled with competitionfocusing on development among manufacturers and vigorousopening of new parlors by major chains.

In this environment, SANKYO Group is striving to develop avariety of products ranging from those incorporating well-known

content and cutting-edge technologies to those usingSANKYO’s original characters, offering simple and easy-to-understand gaming performance and reasonably priced forparlors, such as Fever Powerful ZERO introduced in May2006. By expanding the variation in terms of not only gam-ing performance but also prices, the Group intends to estab-lish a product line-up attuned to the needs of a wide range ofplayers and parlors, thereby maintaining and expanding itsshare of the pachinko machine market. In the pachislomachine market, by seizing the opportunities presented bythe enhanced awareness of the SANKYO and Bisty brands inrecent years and the shift in the market to machines compli-ant with the revised regulations, the Group intends toincrease its market share.

Recurring income increased 0.6% to ¥75.6 billion and netincome decreased 1.0% to ¥45.4 billion. Net income per sharewas ¥463.77 compared with ¥469.24 for the previous year.

16

Cash dividends for fiscal 2007 are expected to be ¥100 pershare, including an interim dividend of ¥50.

In view of these measures, for the fiscal year ending March31, 2007 (fiscal 2007), management forecasts consolidated

net sales of ¥225.0 billion, a 4.9% year-on-year increase,operating income of ¥74.0 billion, a rise of 2.6%, recurringincome of ¥77.0 billion, up 2.0%, and net income of ¥47.0billion, a 3.4% increase.

Risk Factors

Risks that may have an impact on the Group’s businessresults, stock price and financial position for fiscal 2007 andbeyond include the items described below. Forward-lookingstatements in this document represent the Group’s assump-tions and judgment as of the end of fiscal 2006, but do notcover all the potential risks.

Change in the market environmentThe principal customers of the Group’s core business, salesof game machines and ball bearing supply systems, arepachinko parlors nationwide. Therefore, deterioration of thebusiness environment for pachinko parlors, accompanyingreduction in demand or change in the market structure,determines the Group’s sales results.

While players are becoming more discriminating in theirevaluation of game machines, increasing numbers of rela-tively large-size parlors with more than 500 game machineshave been opened. This is the background to the tendencyin recent years for parlors to have a large number of units ofcertain hit title machines for long periods, which naturallyundermines sales of competitors’ products. Also, intensify-ing competition is reflected in the increasing number of newmodels debuting in the market. Therefore, if the timing ofthe introduction of one of the Company’s new productscoincides with the introduction of a competitor’s very popu-lar product, the Group’s sales plans and business results maybe affected.

The Group will strive to manufacture and sell gamemachines meeting the diverse needs of not only players butalso parlors by fully utilizing original ideas, cutting-edgetechnology and other know-how.

RegulationsThe main business of the Group, namely, the development,manufacture and sales of game machines, is governed by theAct to Control Businesses That May Affect Public Moralsand other regulations and is required to strictly comply withthe relevant laws and regulations. Thus, material revisions torelevant laws and regulations may affect the Group’s salesplans and business results.

Intellectual property rightsA number of game machines introduced in recent yearsinvolve tie-ups with celebrities, animation characters andother popular characters. In accordance with this trend, asintellectual property rights, such as portrait rights and copy-rights of characters used for game machines, become moreimportant to the business, conflicts concerning intellectualproperty are increasing.

In regard to the handling of characters, the Group con-ducts thorough investigations and takes the greatest possiblecare to prevent such conflicts. However, in the event thatnew intellectual property rights are approved without theCompany’s knowledge, the Group may be subject to risksassociated with claims for damage by the holders of therights. In such case, if the Group is deemed to be liable, theGroup’s business results may be affected.

Development of new modelsTo manufacture and sell a pachinko, pachislo or other gamemachine, it is a prerequisite that the machine passes an offi-cial format inspection executed by a testing agency, such asHotsukyo (Security Electronics and CommunicationsTechnology Association), designated by the National Public

(%)

Return on Equity (ROE)Return on Assets (ROA)

20062005200420032002

(Billions of yen) (%)

Total Shareholders’ Equity and Equity Ratio

200620052004200320020

80

160

240

320

400

0

20

40

60

80

100

0

5

10

15

20

25

(Billions of yen)

Total Assets

200620052004200320020

100

200

300

400

500

Total Shareholders’ Equity (left scale)

Equity Ratio

Retum on Equity (ROE)

Retum on Assets (ROA)

ROA=(Operating income + Interest and dividend income + Interest on marketable securities) / Total assets (yearly average)

17

Financial Position

Although fixed assets increased ¥51.7 billion from the endof the previous fiscal year-end, total assets were ¥12.3 bil-lion lower than at the previous fiscal year-end as a result of a¥64.0 billion decrease in current assets centering on cashand deposits and notes and accounts receivable-trade. Total

liabilities decreased ¥52.4 billion mainly due to a decreasein accounts payable. Shareholders’ equity increased ¥40.2billion mainly due to an increase in retained earnings. As aresult, the equity ratio rose 11.9 percentage points to 80.8%.

Cash Flows

Cash and cash equivalents at the end of fiscal 2006 were¥200.8 billion, having decreased ¥14.1 billion from the pre-vious fiscal year-end.

Cash flows from operating activitiesNet cash provided by operating activities amounted to¥36.3 billion, a decrease of ¥23.1 billion compared with theprevious fiscal year. The principal factors increasing cashflows included income before income taxes amounting to¥75.2 billion, a decrease of ¥31.9 billion in notes andaccounts receivable-trade, and a decrease of ¥10.1 billion inaccounts receivable for provision of parts and materials forvalue. Cash outflows included a decrease of ¥44.3 billion innotes and accounts payable-trade and income taxes paidamounting to ¥38.3 billion.

Cash flows from investing activitiesNet cash used in investing activities was ¥42.5 billion com-pared with net cash provided by investing activities of ¥4.4billion in the previous fiscal year. The main factors were pay-ments for purchase of fixed assets amounting to ¥12.4 billionand cash outlays amounting to ¥31.5 billion due to anincrease in the financial instruments held by the Group.

Cash flows from financing activitiesNet cash used in financing activities decreased ¥2.7 billionfrom the previous year to ¥7.9 billion. The principal item was¥7.8 billion in cash dividends paid.

Forecast of the Financial Position in Fiscal 2007

For fiscal 2007, the Company forecasts net cash provided byoperating activities of ¥50.0 billion, net cash used in invest-ing activities of ¥41.0 billion due to capital investment andan increase in medium- to long-term cash management, and

net cash used in financing activities of ¥11.0 billion mainlyattributable to payment of cash dividends.

As a result, the Company forecasts a ¥2.0 billion decreasein cash and cash equivalents at the end of fiscal 2007 com-pared with the figure at the end of fiscal 2006.

(Billions of yen)

Depreciation

20062005200420032002

(Billions of yen)

Free Cash Flows

20062005200420032002-50

0

20

40

60

80

0

1

2

3

4

5

(%)

Payout Ratio

200620052004200320020

5

10

15

20

25

Net Cash Provided by Operating Activities

Net Cash Provided by (used in) Investing Activities

Free Cash Flows

Safety Commission, in accordance with the EnforcementRegulation of the Act to Control Businesses That May AffectPublic Morals and other regulations. The number of newmodels for which the Group applies for format inspection isamong the largest in the industry. As game machinesbecome technologically more advanced so as to meet theincreasingly sophisticated expectations of players and as a

consequence of technological progress, test procedures andtechnical specifications are becoming ever more complex.Therefore, the Group’s business results might suffer. TheGroup will strive to smoothly introduce new models inaccordance with the initial plan by capitalizing on its indus-try-leading product development capabilities.

18

Consolidated Balance SheetsSANKYO CO., LTD. and Its Consolidated SubsidiariesAs of March 31, 2006 and 2005

Thousands ofU.S. dollars

ASSETS Millions of yen (Note 2)

2006 2005 2006

Current assets:

Cash and deposits (Note 3) ¥173,440 ¥200,433 $1,476,588

Marketable securities (Notes 3 and 4) 40,363 35,893 343,632

Notes and accounts receivable-trade 61,955 93,848 527,456

Inventories (Note 5) 8,775 8,682 74,706

Deferred income taxes (Note 11) 2,362 2,643 20,109

Other current assets 8,716 17,788 74,204

Allowance for doubtful accounts (595) (307) (5,066)

Total current assets 295,016 358,980 2,511,629

Fixed assets:

Property, plant and equipment

Land 23,205 17,645 197,557

Buildings and structures 18,809 17,547 160,131

Machinery and equipment 17,249 16,582 146,850

Construction in progress 209 — 1,779

59,472 51,774 506,317

Accumulated depreciation (16,800) (14,954) (143,027)

42,672 36,820 363,290

Intangible fixed assets 204 207 1,737

Investments and other assets:

Investment securities (Note 4) 67,644 21,831 575,890

Long-term loans 33 124 281

Deferred income taxes (Note 11) 251 264 2,137

Other assets 1,218 1,051 10,369

Allowance for doubtful accounts (427) (391) (3,635)

68,719 22,879 585,042

111,595 59,906 950,069

Total assets ¥406,611 ¥418,886 $3,461,698

The accompanying notes are an integral part of these financial statements.

19


LIABILITIES AND SHAREHOLDERS’ EQUITY Millions of yen (Note 2)

2006 2005 2006

Current liabilities:

Notes and accounts payable-trade ¥ 41,350 ¥ 85,618 $ 352,035

Accrued income taxes 15,513 24,323 132,070

Other current liabilities 13,798 16,196 117,470

Total current liabilities 70,661 126,137 601,575

Long-term liabilities:

Accrued retirement allowances (Note 6) 3,078 2,769 26,205

Other long-term liabilities 4,196 1,457 35,723

Total long-term liabilities 7,274 4,226 61,928

Shareholders’ equity (Note 9):

Common stock, no-par value–

Authorized :144,000,000 shares

Issued :97,597,500 shares 14,840 14,840 126,341

Additional paid-in capital 23,821 23,821 202,801

Retained earnings 284,599 247,259 2,422,944

Net unrealized gain on other securities (Note 4) 6,201 3,352 52,792

Less: treasury stock, at cost (785) (749) (6,683)

Total shareholders’ equity 328,676 288,523 2,798,195

Contingent liabilities (Note 7)

Total liabilities and shareholders’ equity ¥406,611 ¥418,886 $3,461,698


20

Consolidated Statements of IncomeSANKYO CO., LTD. and Its Consolidated SubsidiariesFor the years ended March 31, 2006 and 2005


Millions of yen (Note 2)

2006 2005 2006

Net sales (Note 12) ¥214,500 ¥233,903 $1,826,154

Cost of sales (Note 12) 105,955 127,333 902,052

Gross profit 108,545 106,570 924,102

Selling, general and administrative expenses (Notes 10 and 12) 36,407 34,226 309,952

Operating income 72,138 72,344 614,150

Other income (expenses):

Interest and dividend income 1,073 1,073 9,135

Equity in earnings of affiliates 1,808 1,450 15,392

Interest expense — (55) —

Gain on sales of investment securities, net 571 15 4,861

Loss on impairment of investment securities — (20) —

Loss on sales or disposal of property, plant and equipment, net (863) (191) (7,347)

Other, net 455 175 3,873

Income before income taxes 75,182 74,791 640,064

Income taxes (Note 11):

Current 29,710 30,455 252,937

Deferred 29 (1,551) 247

29,739 28,904 253,184

Net income ¥045,443 ¥ 45,887 $ 386,880

U.S. dollarsYen (Note 2)

Net income per share

Basic ¥463.77 ¥469.24 $3.95

Diluted — — —

Cash dividends per share 100.00 70.00 0.85


21

Consolidated Statements of Shareholders’ EquitySANKYO CO., LTD. and Its Consolidated SubsidiariesFor the years ended March 31, 2006 and 2005

Millions of yen

Additional Net unrealizedNumber of Common paid-in Retained gains on Treasury

shares issued stock capital earnings other securities stock

Balance at April 1, 2004 97,597,500 ¥14,840 ¥23,750 ¥206,012 ¥2,101 ¥(1,988)

Net income 45,887

Cash dividends (4,373)

Bonuses to directors and statutory auditors (267)

Net unrealized gain on other securities 1,251

Net increase in treasury stock 1,239

Gain on sale of treasury stock 71

Balance at March 31, 2005 97,597,500 14,840 23,821 247,259 3,352 (749)

Net income 45,443


Bonuses to directors and statutory auditors (305)


Net increase in treasury stock (36)


Balance at March 31, 2006 97,597,500 ¥14,840 ¥23,821 ¥284,599 ¥6,201 ¥ (785)

Thousands of U.S. dollars (Note 2)

Additional Net unrealizedNumber of Common paid-in Retained gains on Treasury

shares issued stock capital earnings other securities stock

Balance at March 31, 2005 97,597,500 $126,341 $202,801 $2,105,049 $28,537 $(6,377)

Net income 386,881


Bonuses to directors and statutory auditors (2,597)


Net increase in treasury stock (306)


Balance at March 31, 2006 97,597,500 $126,341 $202,801 $2,422,944 $52,792 $(6,683)


22

Consolidated Statements of Cash FlowsSANKYO CO., LTD. and Its Consolidated SubsidiariesFor the years ended March 31, 2006 and 2005


Millions of yen (Note 2)

2006 2005 2006Cash flows from operating activities:

Income before income taxes ¥075,183 ¥ 74,791 $0,640,073Depreciation and amortization 4,170 3,585 35,501Gain on sales of investment securities, net (571) (15) (4,861)Loss on impairment of investment securities — 20 —Loss on sales or disposal of property, plant and equipment, net 862 184 7,339Increase in accrued retirement allowances 308 317 2,622Interest and dividend income (1,074) (1,073) (9,144)Interest expense — 55 —Equity in earnings of affiliates (1,808) (1,450) (15,392)(Increase) decrease in notes and accounts receivable-trade 31,892 (53,733) 271,514Increase in inventories (92) (4,943) (783)Increase (decrease) in notes and accounts payable-trade (44,268) 63,456 (376,877)(Increase) decrease in onerous provision accrued revenue 10,093 (13,360) 85,927Increase in accounts payable-other 1,057 5,304 8,999(Increase) decrease in other current assets (210) 627 (1,788)Increase (decrease) in other current liabilities (2,576) 2,689 (21,931)Other 772 282 6,572

Sub total 73,738 76,736 627,771Interest and dividend income received 836 1,328 7,117Interest paid — (79) —Income taxes paid (38,289) (18,636) (325,975)

Net cash provided by operating activities 36,285 59,349 308,913

Cash flows from investing activities:Payment for purchase of marketable securities (29,290) (43,968) (249,361)Proceeds from sale of marketable securities 34,400 56,000 292,866Payment for purchase of property,

plant and equipment and intangible fixed assets (12,448) (9,523) (105,977)Proceeds from sale of property,

plant and equipment and intangible fixed assets 1,167 3,638 9,935Payment for purchase of investment securities (Note 3) (40,163) (2,650) (341,929)Proceeds from sale of investment securities 3,589 800 30,555Payment for long-term loans — (2,000) —Proceeds from collection of long-term loans (Note 3) 406 2,121 3,456Other (186) 22 (1,584)

Net cash provided by (used in) investing activities (42,525) 4,440 (362,039)

Cash flows from financing activities:Payment for long-term debt — (7,530) —Payment for purchase of treasury stock (58) (76) (494)Proceeds from sales of treasury stock 1 1,385 9Cash dividends paid (7,798) (4,372) (66,389)

Net cash used in financing activities (7,855) (10,593) (66,874)

Net increase in cash and cash equivalents (14,095) 53,196 (120,000)Cash and cash equivalents at beginning of year 214,930 161,734 1,829,814Cash and cash equivalents at end of year (Note 3) ¥200,835 ¥214,930 $1,709,814


23

1 Summary of Significant Accounting Policies

(a) Basis of Presentation of Consolidated Financial Statements

The accompanying consolidated financial statements have been prepared based on the accounts main-tained by SANKYO CO., LTD. (the “Company”) and its consolidated subsidiaries (the “Companies”) inaccordance with the provisions set forth in the Commercial Code of Japan and the Securities andExchange Law, and in conformity with accounting principles and practices generally accepted in Japan,which are different in certain respects from the application and disclosure requirements of InternationalAccounting Standards.

Certain items presented in the consolidated financial statements submitted to the Director of theKanto Finance Bureau in Japan have been reclassified in these accounts for the convenience of readersoutside Japan.

The accompanying consolidated financial statements of the Company and its subsidiaries are pre-pared on the basis of accounting principles generally accepted in Japan, which are different in certainrespects as to application and disclosure requirements of International Financial Reporting Standards,and are compiled from the consolidated financial statements prepared by the Company as required bythe Securities and Exchange Law of Japan.

(b) Consolidation Principles

The consolidated financial statements include the accounts of the Company and its three significantwholly owned subsidiaries. The remaining unconsolidated subsidiaries have assets, net sales and netincome which are not significant in relation to those of the Companies, and, accordingly, the accountsof such subsidiaries have been excluded from consolidation.

On October 1st, DAIWA ELECTRIC CO.,LTD., a wholly owned subsidiary of the Company, wasmerged into SANKYO PLASTIC CO.,LTD., which is also a wholly owned subsidiary of the Company.SANKYO PLASTIC CO.,LTD. changed its name to SANKYO EXCEL CO.,LTD. on the same day. As aresult, the number of consolidated subsidiaries changed from 4 to 3.

In accounting for the investments in unconsolidated subsidiaries and affiliates, over which the ability toexercise significant influence exists, with minor exceptions due to materiality, the equity method is used.

All significant intercompany transactions, account balances and unrealized profits among theCompanies have been eliminated on consolidation.

On the elimination of investments in the common stock of consolidated subsidiaries with the underly-ing equity in the net assets of such subsidiaries, any difference between the cost of an investment in asubsidiary and the amount of underlying equity in the net assets of the subsidiary is charged to incomefor the year.

(c) Foreign Currency Translation

All monetary assets and liabilities denominated in foreign currencies, whether long-term or short-term,are translated into Japanese yen at the exchange rates prevailing at the balance sheet date. The result-ing gains and losses are included in net income or loss for the period.

Notes to the Consolidated Financial Statements

24

(d) Cash and Cash Equivalents

Cash and cash equivalents in the consolidated statements of cash flows are composed of cash onhand, bank deposits available for withdrawal on demand and short-term investments with an originalmaturity of three months or less and which represent a minor risk of fluctuations in value.

(e) Allowance for Doubtful Accounts

The allowance for doubtful accounts is calculated on the basis of the actual bad debt rate for generalaccounts receivable and the assessed recoverability of individual doubtful accounts receivable.

(f) Marketable Securities and Investment Securities

Held-to-maturity debt securities that the Company and its consolidated subsidiaries intend to hold tomaturity are stated at cost after accounting for any premium or discount on acquisition, which is amor-tized over the period to maturity. Other securities for which market quotations are available are stated atfair value. Net unrealized gains or losses on these securities are reported as a separate item in share-holders’ equity, net of tax. Other securities for which market quotations are unavailable are stated atcost, except as stated in the paragraph below.

In cases where the fair value of held-to-maturity debt securities, equity securities issued by unconsoli-dated subsidiaries and affiliates not accounted for under the equity method, or other securities hasdeclined significantly and such impairment of value is not deemed temporary, those securities are writ-ten down to fair value and the resulting losses are included in net income or loss for the period.

(g) Inventories

Inventories are stated at cost, determined as follows:

Finished goods, merchandise and raw materials Primarily, annual average methodWork in process Individual methodSupplies Last purchase price method

(h) Property, Plant and Equipment and Depreciation

Property, plant and equipment are stated at cost. Depreciation is computed principally by the declining-balance method at rates based on the estimated useful lives of the respective assets, except for build-ings, for which the straight-line method is applied.

Property, plant and equipment whose acquisition costs are more than ¥100,000 and less than¥200,000 are depreciated using the straight-line method over three years.

25

(i) Impairment of Property, Plant and Equipment

On August 9, 2002, the Business Accounting Council of Japan issued new accounting standards enti-tled “Statement of Opinion on the Establishment of Accounting Standards for Impairment of FixedAssets”. Further, on October 31, 2003, the Accounting Standards Board of Japan issued FinancialAccounting Standards Implementation Guidance No. 6 - “Application Guidance on AccountingStandards for Impairment of Fixed Assets”. These standards are effective from the fiscal years begin-ning April 1, 2005.

The Companies adopted these standards in the fiscal year ended March 31, 2006. As a result, prop-erty, plant and equipment decreased by ¥10 million($85 thousand), and income before income taxesand minority interest for the year ended March 31, 2006 decreased by the same amount, as comparedwith the amount which would have been reported if the previous standards had been applied consis-tently.

The sale of property, plant and equipment concerned was completed during this fiscal year.

(j) Accrued Retirement Allowances

The Company provides accrued retirement allowances for its employees, and directors and statutoryauditors.

The accrued retirement allowance for employees represents the estimated present value of projectedbenefit obligations in excess of the fair value of the plan assets and unrecognized actuarial differences,which are amortized on a straight-line basis over a period of five years from the year in which they arise.The unrecognized prior service costs are being amortized on a straight-line basis over a period of fiveyears from the year in which they arises.

The accrued retirement allowance for directors and statutory auditors was made at 100 percent ofthe liability which would be required to be paid if all eligible directors and statutory auditors were to leavethe Company at the balance sheet date.

(k) Leases

Leases that transfer substantially all the risks and rewards of ownership of the assets to the lessee areaccounted for as capital leases, except that leases that do not transfer ownership of the assets at theend of the lease term are accounted for as operating leases, in accordance with accounting principlesand practices generally accepted in Japan.

(l) Research and Development and Computer Software

Research and development expenses are charged to income as incurred. Expenditures relating to computer software developed for internal use are charged to income as

incurred, except where the software contributes to the generation of income or to future cost savings, inwhich case such expenditures are capitalized and amortized using the straight-line method over theestimated useful life of the software (five years).

26

(m) Income Taxes

Income taxes of the Company and its consolidated subsidiaries consist of corporate income taxes, localinhabitants’ taxes and enterprise taxes.

The Company and its consolidated subsidiaries have adopted the deferred tax accounting method.Income taxes are determined using the asset-and-liability approach, whereby deferred tax assets andliabilities are recognized in respect of temporary differences between the tax basis of assets and liabili-ties and those as reported in the financial statements.

(n) Appropriation of Retained Earnings

The Commercial Code of Japan stipulates that appropriations of retained earnings require approval bythe shareholders at an ordinary general meeting. The appropriations of retained earnings are, therefore,not reflected in the consolidated financial statements for the period to which they relate but are recordedin the consolidated financial statements in the subsequent accounting period after shareholders’approval has been obtained.

(o) Net Income and Dividends per Share

Net income per share of common stock shown in the accompanying consolidated statements ofincome is computed based on the weighted average number of shares outstanding during each year.

Cash dividends per share shown in the accompanying consolidated statements of income representdividends declared and paid as applicable to the respective fiscal year.

(p) Reclassification

Certain reclassifications of previously reported amounts have been made to conform with current classi-fications.

2 U.S. dollar AmountsAmounts in U.S. dollars are included solely for the convenience of readers outside Japan. The rate of¥117.46=U.S.$1, the rate of exchange on March 31, 2006, has been used for the translation. The inclu-sion of such amounts is not intended to imply that Japanese yen have been or could be readily convert-ed, realized or settled in U.S. dollars at this or any other rate.

27

3 Cash and Cash EquivalentsA reconciliation of cash and cash equivalents to the accounts disclosed on the balance sheet at March31, 2006 and 2005 is as follows:


2006 2005 2006

Cash and deposits ¥173,440 ¥200,433 $1,476,588Marketable securities 40,363 35,893 343,632

Total 213,803 236,326 1,820,220Bonds and debentures, investment funds and others (12,968) (21,396) (110,404)Cash and cash equivalents ¥200,835 ¥214,930 $1,709,816

With respect to non-cash transactions, ¥3,330 million of long-term loans receivable due fromSANKYO CREATE CO., LTD. was reclassified to investment securities as a contribution in kind duringthe year ended March 31, 2005.

4 Marketable Securities and Investment SecuritiesMarketable securities and investment securities at March 31, 2006 and 2005 were as follows:

(a) Held-to-MaturityMillions of yen

2006 2005Gross Gross Gross Gross

Carrying unrealized unrealized Market Carrying unrealized unrealized Marketamounts gains losses value amounts gains losses value

Market value available:Bonds and debentures ¥80,303 ¥2 ¥326 ¥79,979 ¥35,893 ¥6 ¥— ¥35,899

Market value not available:Bonds and debentures 80 100

¥80,383 ¥35,993

Thousands of U.S. dollars2006

Gross GrossCarrying unrealized unrealized Marketamounts gains losses value

Market value available:Bonds and debentures $683,663 $17 $2,776 $680,904

Market value not available:Bonds and debentures 681

$684,344

28

(b) Other SecuritiesMillions of yen

2006 2005Gross Gross Gross Gross

unrealized unrealized Carrying unrealized unrealized CarryingCost gains losses amounts Cost gains losses amounts

Market value available:Equity securities ¥1,457 ¥10,423 ¥— ¥11,880 ¥1,568 ¥5,666 ¥(32) ¥7,202Bonds and debentures — — — — — — — —

¥1,457 ¥10,423 ¥— 11,880 ¥1,568 ¥5,666 ¥(32) 7,202Market value not available:

Equity securities 65 71Other 50 79

¥11,995 ¥7,352


Gross Grossunrealized unrealized Carrying

Cost gains losses amounts

Market value available:Equity securities $12,404 $88,737 $— $101,141Bonds and debentures — — — —

$12,404 $88,737 $— 101,141Market value not available:

Equity securities 553Other 426

$102,120

5 InventoriesInventories at March 31, 2006 and 2005 comprised the following:


2006 2005 2006

Merchandise ¥ — ¥ — $ —Finished goods 1,719 1,551 14,634Work in process 588 892 5,006Raw materials 5,773 6,077 49,149Supplies 695 162 5,917

Total ¥8,775 ¥8,682 $74,706

29

6 Retirement Benefit PlanEmployees whose service with the Company and consolidated subsidiaries is terminated are usuallyentitled to receive lump-sum severance indemnities and/or pension payments based on a defined bene-fit formula, which takes into account current rates of pay and length of service.

The accrued retirement allowance for employees as of March 31, 2006 and 2005 was determined asfollows:


2006 2005 2006

Projected benefit obligations ¥2,215 ¥2,074 $18,857Plan assets — (49) —Unrecognized prior service cost (88) (134) (749)Unrecognized actuarial differences (123) (167) (1,047)

Accrued retirement allowance for employees ¥2,004 ¥1,724 $17,061

The net pension expense relating to retirement benefits for the years ended March 31, 2006 and2005 was as follows:


2006 2005 2006

Service costs ¥199 ¥168 $1,694Interest costs 29 26 247Amortization of prior service costs 47 46 400Amortization of actuarial differences 67 88 570Special load money according to secession of pension funds 73 — 622

Total ¥415 ¥328 $3,533

Assumptions used in the calculation of the preceding information are as follows:2006 2005

Discount rate 1.50% 1.50%Method of attributing the projected benefits to periods of service Straight-line basis Straight-line basis

Amortization of prior service cost Over five years Over five yearsAmortization of actuarial differences Over five years Over five years

30

7 Contingent Liabilities Contingent liabilities at March 31, 2006 and 2005 were as follows:


2006 2005 2006

As an endorser of notes endorsed ¥129 ¥339 $1,098

8 Leases

(1) Finance Lease Contracts without Ownership Transfer

(a) The Companies as Lessees

Pro forma information relating to the acquisition cost, accumulated depreciation and the net balance ofproperty held under finance leases which do not transfer ownership of the leased property to the lesseeon an “as if capitalized” basis for the years ended March 31, 2006 and 2005 is as follows:

Millions of yen2006

Acquisition Accumulatedcost depreciation Net balance

Machinery and equipment ¥1,040 ¥642 ¥398

Millions of yen2005


Machinery and equipment ¥1,161 ¥574 ¥587



Machinery and equipment $8,854 $5,466 $3,388

Future minimum lease payments under finance leases as of March 31, 2006 and 2005 were as follows:Thousands of

Millions of yen U.S. dollars2006 2005 2006

Due within one year ¥185 ¥450 $1,575Due after one year 217 527 1,847

Total ¥402 ¥977 $3,422

Future minimum lease payments for sub-leased properties are included in the above schedule.Payments of ¥231 million are included in the ‘Due within one year’ figures and payments of ¥153 millionare included in the ‘Due after one year’ figures for the year ended March 31, 2005, respectively.

The lease expense, depreciation and interest expense with respect to leased assets for the yearsended March 31, 2006 and 2005 were as follows:


2006 2005 2006

Lease expense ¥222 ¥274 $1,890Depreciation 216 266 1,839Interest expense 5 7 43

Depreciation is calculated using the straight-line method. The useful lives are equal to the lease termsand the residual value is zero.

(b) The Company as Lessor

Pro forma information relating to future minimum lease receipts for property held under finance leaseswhich do not transfer ownership of the leased property to the lessee as of March 31, 2006 and 2005 isas follows:


2006 2005 2006

Due within one year ¥— ¥232 $—Due after one year — 154 —

Total ¥— ¥386 $—

All future minimum lease receipts related to sub-leased property.

(2) Operating Leases

Future lease payments for non-cancelable operating leases as a lessee at March 31, 2006 and 2005were as follows:


2006 2005 2006

Due within one year ¥0 ¥— $ 0Due after one year 2 — 17

Total ¥2 ¥— $17

31

32

9 Shareholders’ EquityThe following appropriations were approved at the ordinary general meeting of shareholders of theCompany held on June 29, 2006.


Appropriations for:Cash dividends ¥6,335 $53,933Bonuses to directors and statutory auditors 262 2,231

¥6,597 $56,164

Under the Japanese Commercial Code (the "Code"), the entire amount of the issue price of newshares issued is required to be capitalized as stated capital, although the Company may, by resolutionof the Board of Directors, capitalize an amount not exceeding one-half of the issue price of the newshares as additional paid-in capital.

The Code requires a domestic company to appropriate as a legal reserve an amount equal to at least10% of the amount paid out by it as appropriation of retained earnings (including any payment by way ofannual dividend and bonuses to Directors and Statutory Auditors) for the period or equal to 10% of anyinterim dividend until the sum of the legal reserve and the additional paid-in capital equals 25% of itsstated capital. The legal reserve and additional paid-in capital may be transferred to stated capitalthrough suitable director actions or used to reduce a deficit through suitable stockholder actions.

Under the Code, the appropriation of retained earnings (including year-end cash dividend payment)proposed by the Board of Directors should be approved at shareholders' meeting, which must be heldwithin three months after the end of each fiscal year. The appropriation of retained earnings reflected inthe accompanying consolidated financial statements represents the results of such appropriations whichare applicable to the immediately preceding fiscal year but which are approved at the shareholders'meeting and disposed of during the current year.

As is customary practice in Japan, the payment of bonuses to directors and corporate auditors ismade out of retained earnings instead of being charged to net income for the year and constitutes apart of the appropriations cited above.

10 Research and Development Research and development expenditures charged to income were ¥7,324 million ($62,353 thousand)and ¥7,441 million for the years ended March 31, 2006 and 2005, respectively.

11 Income TaxesThe Company and its consolidated subsidiaries are subject to a number of different taxes based onincome which, in aggregate, indicate a statutory effective tax rate of approximately 40.5 percent for theyears ended March 31, 2006 and 2005.

Tax losses can be carried forward for a five-year period and be offset against future taxable income.

33

Significant components of deferred tax assets and liabilities at March 31, 2006 and 2005 are as follows:Thousands of

Millions of yen U.S. dollars2006 2005 2006

Deferred tax assets:Accrued enterprise taxes ¥(1,190 ¥1,821 $(10,131Loss on write-down of inventories 21 32 179Unrealized profits 468 381 3,984Allowance for doubtful accounts 254 28 2,162Accrued retirement allowances 1,243 1,099 10,582Accumulated depreciation 624 522 5,312Unrealized profit on property, plant and equipment 215 221 1,830Other 728 637 6,199Deferred tax assets 4,743 4,741 40,379

Deferred tax liabilities:Net unrealized gains on securities (4,221) (2,282) (35,936)Allowance for doubtful accounts (61) (28) (519)Reserve for special depreciation (9) (15) (76)Other (4) — (34)Deferred tax liabilities (4,295) (2,325) (36,565)Deferred tax assets, net ¥ (448 ¥2,416 $ (3,814

Since the difference between the statutory tax rate and the effective income tax rate was 5% or lessof the statutory tax rate, the breakdown of the difference at March 31,2006 and 2005 is not required.

12 Segment InformationThe Companies operate within four business segments in Japan: pachinko machines business, ballbearing supply systems business, pachislo machines business and other business.

Pachinko machines business Pachinko machines, machine gauges, relatedparts and royalty income relating to pachinkomachines

Ball bearing supply systems business Pachinko ball feeders, parlor equipment andperipherals and royalty income relating to ballfeeders

Pachislo machines business Pachislo machines, related parts and royaltyincome relating to pachislo machines

Other business General parts

Corporate items include general and administrative expenses and other expenses not identified withbusiness segments.

The Company had no overseas consolidated subsidiaries for the years ended March 31, 2006 and2005.

34

Sales of the Company and its consolidated subsidiaries from sources outside Japan for the yearsended 31 March 2006, and 2005 were not significant (less than 10 percent of consolidated sales foreach of the respective years).

Information by industry segment for the years ended March 31, 2005 and 2004, is as follows:Millions of yen

2006Pachinko Ball bearing Pachislo Eliminationmachines supply systems machines Other or corporatebusiness business business business items Consolidated

Sales :Customers ¥162,482 ¥16,806 ¥34,047 ¥ 1,165 ¥ — ¥214,500Intersegment 5 0 — — (5) —Total 162,487 16,806 34,047 1,165 (5) 214,500

Operating expenses 95,711 16,273 24,349 978 5,051 *1 142,362Operating income ¥066,776 ¥00,533 ¥09,698 ¥ 187 ¥ (5,056) ¥072,138Identifiable assets ¥ 72,572 ¥28,685 ¥12,923 ¥12,565 ¥ 279,866 *2 ¥406,611Depreciation and amortization 3,209 59 529 137 236 4,170Capital expenditures 3,184 2 343 8,456 84 12,069

*1. Netting of corporate items ¥5,056 million*2. Netting of corporate items ¥279,866 million

Millions of yen2005

Pachinko Ball bearing Pachislo Eliminationmachines supply systems machines Other or corporatebusiness business business business items Consolidated

Sales :Customers ¥187,422 ¥22,456 ¥21,255 ¥ 2,770 ¥ — ¥233,903Intersegment 45 0 — — (45) —Total 187,467 22,456 21,255 2,770 (45) 233,903

Operating expenses 114,110 21,594 18,108 2,821 4,926*1 161,559Operating income (loss) ¥ 73,357 ¥ 862 ¥ 3,147 ¥ (51) ¥ (4,971) ¥ 72,344Identifiable assets ¥101,372 ¥33,753 ¥12,502 ¥ 7,390 ¥ 263,869*2 ¥418,886Depreciation and amortization 2,847 73 375 57 233 3,585Capital expenditures 3,542 11 890 2,576 3,587 10,606

*1. Netting of corporate items ¥4,971 million*2. Netting of corporate items ¥263,869 million

35


Pachinko Ball bearing Pachislo Eliminationmachines supply systems machines Other or corporatebusiness business business business items Consolidated

Sales :Customers $1,383,296 $143,078 $289,860 $ 29,918 $ — $1,826,154Intersegment 43 0 — — (43) —Total 1,383,339 143,078 289,860 29,918 (43) 1,826,154

Operating expenses 814,839 138,540 207,296 8,326 43,001 *1 1,212,004Operating income (loss) $0,568,500 $004,538 $082,564 $ 1,592 $ (43,044) $0,614,150Identifiable assets $0,617,844 $244,211 $110,020 $ 106,973 $2,382,649 *2 $3,461,697Depreciation and amortization 27,320 502 4,504 1,166 2,009 35,501Capital expenditures 27,107 17 2,920 71,990 715 102,749

*1. Netting of corporate items $43,044 thousand*2. Netting of corporate items $2,382,649 thousand

13 Related Party TransactionsPrincipal transactions between the Company and INTERNATIONAL CARD SYSTEM CO., LTD., which isan unconsolidated subsidiary of the Company, for the years ended March 31, 2006 and 2005 are sum-marized as follows:


2006 2005 2006

Sales ¥ — ¥0,001 $ —Purchases 3,381 3,557 28,784Payment of research and development charges 296 553 2,520

14 Significant Subsidiaries and AffiliatesThe Company’s significant subsidiaries and affiliates are as follows:

Ownership Country ofName interest incorporation

SANKYO EXCEL., LTD. 100% JapanBISTY CO., LTD. 100% JapanSANKYO CREATE CO., LTD. 100% JapanNippon Game Card Corporation 41.49% Japan

36

To the Board of Directors of

SANKYO CO., LTD.

We have audited the accompanying consolidated balance sheets of SANKYO CO., LTD. and its sub-

sidiaries as of March 31, 2006 and 2005, and the related consolidated statements of income, share-

holders' equity, and cash flows for the years then ended, all expressed in Japanese Yen. These

consolidated financial statements are the responsibility of the Company's management. Our responsibility

is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Japan. Those

standards require that we plan and perform the audit to obtain reasonable assurance about whether the

consolidated financial statements are free of material misstatement. An audit includes examining, on a

test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.

An audit also includes assessing the accounting principles used and significant estimates made by man-

agement, as well as evaluating the overall consolidated financial statement presentation. We believe that

our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material

respects, the consolidated financial position of SANKYO CO., LTD. and its subsidiaries as of March 31,

2006 and 2005, and the consolidated results of their operations and their cash flows for the years then

ended in conformity with accounting principles generally accepted in Japan [see Note 1(a)].

The amounts expressed in U.S. dollars, which are provided solely for the convenience of the reader, have

been translated on the basis set forth in Note 2 to the accompanying consolidated financial statements.

ChuoAoyama PricewaterhouseCoopers

Tokyo, Japan

June 29, 2006

Report of Independent Auditors

Board of Directors and Corporate Auditors(As of June 29, 2006)

ChairmanKunio Busujima*

Chief Executive OfficerHideyuki Busujima*

Executive Vice PresidentAkihiko Sawai*

Managing DirectorsKimihisa TsutsuiJunzo Hamaguchi

DirectorsYasuji SuzukiJunko TakimotoAkiyoshi SuzukiAkira YamadaHitoshi EtoShohachi Ugawa

Standing Corporate AuditorYasuo Nakano

Corporate AuditorToshiaki Ishiyama

Outside AuditorsKoichiro Makishima Yoshiro Sanada

*Representative Directors

Corporate Data(As of March 31, 2006)

Company NameSANKYO CO., LTD.

Head Office6-460 Sakaino-cho, Kiryu-shi, Gunma 376-0002, JapanTelephone: 81(277)44-3161 Facsimile: 81(277)47-4523

Tokyo Head Office3-29-14 Shibuya, Shibuya-ku, Tokyo 150-8327, JapanTelephone: 81(3)5778-7777 Facsimile:81(3)5778-6731

Sanwa Plant2732-1 Sanwa-cho, Isesaki-shi, Gunma 372-0011, JapanTelephone: 81(270)40-7777 Facsimile: 81(270)22-3007

Established April 12, 1966Paid-in Capital ¥14,840millionNumber of Shares Authorized 144,000,000Number of Shares Issued 97,597,500Number of Employees 820Number of Shareholders 15,870

Stock Price Range

Stock Exchange ListingThe Tokyo Stock Exchange, First Section,Code Number 6417Transfer AgentThe Chuo Mitsui Trust and Banking Company, LimitedAuditorChuoAoyama PricewaterhouseCoopers

(Thousands of Shares) (Yen)

Trading Volume (Thousands of Shares)

Stock Price (Yen)

32’06112111098765

’054

0

4,000

8,000

12,000

16,000

20,000

0

1,700

3,400

5,100

6,800

8,500

For Further Information Contact:Corporate Planning Division, SANKYO CO., LTD.3-29-14 Shibuya, Shibuya-ku, Tokyo 150-8327, JapanTelephone: 81(3)5778-7773 Facsimile: 81(3)5778-6731http://www.sankyo-fever.co.jp

37

Profile

Since its establishment in 1966, SANKYO Co., Ltd. has been a source of pleasure for the Japanese peo-

ple. As a leading manufacturer of pachinko machines, we have fostered pachinko as an immensely

popular leisure activity unique to Japan and enjoyed by millions of people.

From the very beginning, ingenuity has been the hallmark of the SANKYO spirit. To cite just one

example: our creation in 1980 of the highly entertaining Fever-type machine equipped with a slot-

machine movement revolutionized the concept of pachinko machines. SANKYO’s track record as a

developer and manufacturer of pachinko machines that set the pace in the pachinko industry is based

on a tradition of out-of-the-box thinking and technological prowess.

The scope of SANKYO’s business extends beyond manufacturing and sales of pachinko machines to

encompass production of pachislo machines as well as wide-ranging equipment for pachinko parlors

such as parlor management computer systems, ball bearing supply systems and prepaid card systems.

These strengths underpin SANKYO’s powerful presence as a provider of cutting-edge items for

pachinko parlors and pachinko players nationwide.

Contents

1. What is Pachinko? / Trend of the Pachinko Industry2. History of Hit Models3. Consolidated Financial Highlights4. Dear SANKYO Investors6. Interview with the CEO9. Divisional Review

12. Ground-breaking Products / Topics13. Consolidated Five-Year Summary14. Financial Review18. Consolidated Balance Sheets20. Consolidated Statements of Income21. Consolidated Statements of Shareholders’ Equity22. Consolidated Statements of Cash Flows23. Notes to the Consolidated Financial Statements36. Report of Independent Auditors37. Board of Directors and Corporate Auditors /

Corporate Data

Cautionary Statements with Respect to Forward-Looking Statements

Statements contained in this report with respects to the SANKYO Group’s plans, strategies and beliefs that are not historical facts areforward-looking statements about the future performance of the SANKYO Group which are based on management’s assumptions andbeliefs in light of the information currently available to it. These forward-looking statements involve known and unknown risks, uncertaintiesand other factors that may cause the SANKYO Group’s actual results, performance or achievements to differ materially from theexpectations expressed herein.

Printed in JapanUses soybean ink in consideration of the environment

100% recycled paper

http://www.sankyo-fever.co.jp/

SA

NK

YO

CO

.,LTD

.A

nnualRep

ort2006

SANKYO CO., LTD.Annual Report 2006Year ended March 31, 2006

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