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ANNUAL REPORT 2008

ANNUAL REPORT 2008

This annual Report is printed on recycled paper.

Corporate Philosophy
To spread happiness across the globe by providing unforgettable experiences
This philosophy represents our company’s mission and the beliefs for which we stand.
Each of our customers has his or her own definition of happiness.
Square Enix provides high-quality content, services, and products to help those customers create their own wonderful,
unforgettable experiences, thereby allowing them to discover a happiness all their own.

Management Guidelines
These guidelines reflect the foundation of principles upon which our corporate philosophy stands, and serve as a standard of value
for the Group and its members. We shall strive to achieve our corporate goals while closely considering the following:
1. Professionalism
We shall exhibit a high degree of professionalism, ensuring optimum results in the workplace. We shall display initiative, makecontinued efforts to further develop our expertise, and remain sincere and steadfast in the pursuit of our goals, while ultimately
aspiring to forge a corporate culture disciplined by the pride we hold in our work.
2. Creativity and Innovation
To attain and maintain new standards of value, there are questions we must ask ourselves: Is this creative? Is this innovative?
Mediocre dedication can only result in mediocre achievements. Simply being content with the status quo can only lead to acollapse into oblivion. To prevent this from occurring and to avoid complacency, we must continue asking ourselves theaforementioned questions.
3. Harmony
Everything in the world interacts to form a massive system. Nothing can stand alone.
Everything functions with an inevitable accord to reason. It is vital to gain a proper understanding of the constantly changing tides,
and to take advantage of these variations instead of struggling against them. We shall continue to work towards harmony and serveas an integral part of this ever-fluctuating system.
In order to achieve ideal performance levels, we as individuals, shall aim for a mutual respect amongst our coworkers, remain
conscious of the duties assigned us, and place an emphasis on teamwork.
As a corporate organization, we shall work diligently to maintain an optimal balance culminating in the ultimate satisfaction of all
our stakeholders, including customers, shareholders, counterparties, and employees.
As a business entity, we shall contemplate what functions we are to perform within the realm of industry, while acting in a mannerthat ensures the mutual harmony and benefit of all parties within it.
Finally, as a member of society, we shall comply with laws and regulation while fulfilling our civic obligations, including community
involvement and environmental conservation.

CONTENTS

Disclaimer Regarding Forward-Looking Statements

01 Financial Highlights

SQUARE ENIX CO., LTD., and consolidated subsidiaries [collectively ”SQUARE ENIX”] include both

02 To Our Shareholders
08 Holding Company System Implementation
09 Review of Operations
13 Corporate Governance
14 Directors, Auditors and Executive Officers
15 Financial Section
54 Corporate Data
55 Investor Information

Statements in this annual report with respect to the current plans, estimates, strategy, and beliefs ofhistorical facts and forward-looking statements concerning the future performance of SQUARE ENIX.
Such information is based on management’s assumptions and beliefs in light of the information
currently available and, therefore, involve risks and uncertainties. Actual results may differ materially fromthose anticipated in these statements due to the influence of a number of important factors.
Such factors include but are not limited to: [1] general economic conditions in Japan and foreigncountries, in particular levels of consumer spending; [2] fluctuations in exchange rates, in particular theexchange rate of the Japanese yen in relation to the U.S. dollar, the euro and others, which SQUAREENIX uses extensively in its overseas business; [3] the continuous introduction of new products, andrapid technical innovation in the digital entertainment industry; and [4] SQUARE ENIX’s ability to continue
developing products and services accepted by consumers in the intensely competitive market, which isheavily influenced by subjective and quickly changing consumer preferences.

Financial Highlights
SQUARE ENIX CO., LTD. and Consolidated Subsidiaries
Years Ended March 31

Millions of Yen

Thousand of
U.S. Dollars

2004

2005

2006

2007

2008

2008

¥ 63,202¥ 73,864¥ 124,473¥ 163,472¥ 147,516$ 1,472,369

Operating income

19,39826,43815,47025,916

21,520214,794

Net income

10,993

14,932

17,076

11,6199,196

91,788

Total assets¥110,633¥131,695¥ 213,348¥ 215,679¥ 212,134$ 2,117,324

Total equity

96,700108,933

120,993

129,461

147,034

1,467,559

Yen

U.S. Dollars

For the YearNet sales

At year-end

Per Share of Common Stock
Net income¥ 100.04¥ 135.63

Total equity

878.85988.19¥154.65
1,094.50¥

105.06
1,168.91

¥

81.85

$

1,280.50

0.82
12.78

%
Key Ratios
Operating income margin

30.7%

35.8%

12.4%

15.9%

14.6%

Return on equity

11.9

14.5

14.9

9.3

6.7

Equity ratio

87.4

82.7

56.7

60.0

69.3

Notes: 1. For the convenience of readers, amounts in U.S. dollars have been translated using the currency exchange rates at March 31, 2008 of ¥100.19=US$1.
2. Total equity = Common stock + Capital surplus + Retained earnings + Treasury stock + Valuation and translation adjustments

Operating Income Margin

Return on Equity

50

25

40

20

30

15

20

10

10

5
0

0
2004

2005

2006

2007

2004

2008

2005

2006

2007

2008

Notes: 1. Return on equity = Net income / Average equity
2. Return on equity for fiscal 2004 has been calculated using the simple addition of the former Enix and the former Square’s equity as of the end of the previous period.

01

Network is the Game. Everything plays Games.

Yoichi Wada
President and Representative
Director

02

To O u r S h a r e h o l d e r s

I am grateful to our shareholders for the opportunity to present the Company’s annual report for the fiscal
year ended March 31, 2008.
In the fiscal year under review, on a consolidated basis, net sales declined 9.8% to ¥147,516 million.
Operating income decreased 17.0% to ¥21,520 million, and recurring income declined 28.1% to ¥18,864
million. Net income amounted to ¥9,196 million, a 20.9% decrease compared with the previous fiscal year.
As a result, the recurring income margin was 12.8%, and return on equity (ROE) stood at 6.7%.
The Company’s dividend policy is to maintain an optimal balance between performance-linked payouts
and stable returns to shareholders. In line with this policy, we have set dividends for the fiscal year ended
March 31, 2008 at ¥30 per share, resulting in a consolidated payout ratio of 36.7%.
We were unable to surpass the recurring income we achieved in the previous fiscal year.
Five years have now passed since the merger that led to the formation of SQUARE ENIX. After reviewing
the progress made during this period, we intend to refine and reaffirm our strategies for the future.

Fiscal year ended March 31, 2008:
Earnings Remain within Current Range¥45.7 billion in the fiscal year ended March 31, 2003 (simple

In April 2003, Square Co., Ltd., and Enix Corporation carriedcompanies), while in the fiscal year ended March 31, 2008, theout a merger in order to be better prepared for the coming

corresponding figure was ¥41.6 billion. With a CAGR of -1.9%,

industry reorganization. Since its formation, the Company has

we can see that this segment has fallen back to its starting

successfully raised recurring income from its previous range

point. This alludes to issues that must be addressed in bothof ¥5–¥18 billion to a new range of ¥15–¥27 billion (see Figure

product development and marketing, which I will discuss later.

1 on page 05). The synergies created between Square andMeanwhile, all of our other business segments have exhibited

Enix have acted to bolster the earning potential of the mergedrobust growth over this five-year period. The Games (Online)

Company, and have built a foundation to take us to the next

segment has achieved a 23.8% CAGR, with sales moving

stage of growth.

from ¥4.2 billion to ¥12.1 billion. The segment has also built

total of the corresponding segment sales of the pre-merged

a good balance among the three key regions of Japan, North

We have embarked on an array of initiatives to further
increase the Company’s earning potential to ¥50 billion;

America, and Europe, while exhibiting an extremely strong

however, we were unfortunately not able to make significant

operating income margin of 48.6% in the fiscal year ended

headway towards this target in the fiscal year ended March

March 31, 2008. In a very short time this segment has become31, 2008.

one of our core businesses. At present, the segment’s relianceon our flagship massively multiplayer online role-playing game

Results of the Company’s First Five Years:
Nearly All Business Segments on a Growth Track(MMORPG) is considerable; however, we see progress in our

To shape a basic business structure, management should

casual online games. We are also starting to experiment with

first focus on sales growth, while following with a focus ona range of new earnings models, such as per-item-based

earnings enhancement. To verify the effectiveness of ourcharging. These developments have enabled continuous growth

growth strategies, it is worthwhile to look at the compoundin the Games (Online) segment.

nurturing of different types of products and services, including

In the Mobile Phone Content segment, we have expanded

annual growth rate (CAGR) of sales for each businesssales from ¥1.7 billion to ¥6.6 billion, a CAGR of 31.1%. Not

segment. The Games (Offline) segment generated sales of03

only has the segment grown greatly, but it has achieved a highoperating income margin of 26.7% in the fiscal year underreview. However, a key issue for the Mobile Phone Content
segment is its over-dependence on the Japanese market. In
developing overseas markets, we will not rely excessively on
independent ventures, but work with strong partners in eachregion to accelerate business development.
In the Publication segment, sales recorded a CAGR of
11.7%, moving from ¥6.4 billion to ¥11.2 billion over the fiveyear period. The operating income ratio stood at 32.5% in thefiscal year ended March 31, 2008. This rate of sales growth andprofit margin are both exceptional when viewed within Japan’s
publishing industry.
Our cross-media strategy involving magazines, anime, andcomics is producing effective results. However, our unrivaled
strength lies in the harmonious teamwork between authors andour editorial staff, as well as our business stance emphasizing
early-stage investment in prospective talent and content.
Thanks to these strengths, we have produced a constantstream of hit titles each year in this unpredictable business,leading to a very healthy pattern of business development.
The Others segment comprises the sum of our

fiscal year ended March 31, 2007, we had turned this around,merchandising business and the arcade game machine

achieving an operating income of ¥1.0 billion (ditto). In the fiscal

business of SQUARE ENIX (excluding TAITO). Sales have risen

year under review, operating income reached ¥4.4 billion (ditto).

from ¥4.2 billion to ¥9.0 billion over five years, resulting in a

Seizing on this momentum, we plan to expand this segment to

CAGR of 16.4%, while exhibiting a robust operating income

a level of ¥10 billion.

margin of 36.9% in the fiscal year ended March 31, 2008. The

As can be seen from this summary, over the past fivemerchandising business has provided steady growth, and weyears all businesses outside of Games (Offline) have performed

have also made a sound start in the development of overseas

to a respectable level, although there are still a number ofbusinesses, so we anticipate significant progress in the nearoutstanding issues to be dealt with. Next, I will take a closer

future. In the fiscal year under review, arcade game machines,

look at the challenges we are facing in the Games (Offline)

including “DRAGON QUEST Monster Battleroad,” made asegment and outline some of the key strategies we havesignificant contribution to sales. By bringing TAITO into theformulated to deal with these issues.

Group, we have been able to utilize SQUARE ENIX’s renowned
game development capabilities to bolster the arcade game

Challenges in the Games (Offline) Businessbusiness, thus reaping valuable synergies.

The game software we create is primarily centered on roleplaying games (RPGs), and one of the features of our products

The Amusement segment is comprised of all the former
TAITO Group businesses to date. As TAITO was integrated into

is our unrelenting pursuit of the highest possible quality

the Group in September 2005, it falls outside the calculations

standards. This quality-focused culture is something in which

covering our business portfolio at the time SQUARE ENIX was

we take great pride, and we intend to maintain this approach.

formed. Consequently the whole of sales in this segment, ¥69.1

Contrarily, if this focus on quality becomes too extreme, it canbillion in the fiscal year ended March 31, 2008, contribute toturn into a form of stubbornness, which can sometimes lead to

growth in sales of the Group. Substantial improvement in profits

situations where an organization becomes unable to respondby the Amusement segment is of particular note. In the fiscal

appropriately to changes in its operating environment. Our track

year ended March 31, 2006, the initial year in which TAITO

record shows that we have created works of unrivaled quality

joined the Group, the segment recorded an operating loss ofby specializing in the development of games for the leading¥0.7 billion (before amortization of goodwill). However, by thegame console of the time, thus enabling us to fully capitalize04

(Figure 1)

on the capabilities of that particular platform. Furthermore, toConsolidated Recurring Income

efficiently develop major RPG titles, we were the first in theBillions of Yen

industry to adopt a development system based on functional

30

labor division. However, the success of this approach eventually
25

became the yoke around our necks.
Diversity is the keyword describing the current business

20

environment. First and foremost, we have to deliver our games
on multiple platforms and in various languages. Furthermore,

15

we have to cater to consumer tastes that are becoming

10

increasingly diverse. Our previous experience with focusing
on a single console has slowed our progress constructing a5

multi-platform strategy. In addition, our game development0system has become too segmented to allow us to maintain acomprehensive view of a project while preserving organization

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

2008 = Fiscal year ended March 31, 2008
Until 2003, figures shown are the simple sum of the two premerger companies’ results. For 1991–1993,
results for the former Square Co., Ltd., are on a non-consolidated basis. For 1991 and 1996–2001, results forthe former Enix Corporation are on a non-consolidated basis.

mobility. Such factors have hindered our progress toward
development in multiple languages and genre diversification.

(Figure 2)

In “FINAL FANTASY XI,” we have achieved multi-platform,

Net Sales by Business Segment and CAGR

simultaneous worldwide release almost every year for the past

Billions of Yen

four years, proving that there are no significant problems in

50

CAGR

terms of technical capabilities. As I have explained, the issues-1.9%

are primarily related to culture rather than capabilities. Failure

40

41.6

to fully recognize the importance of this problem is something30

for which I take personal responsibility, and am committed to
remedying.

20

We are substantially revamping our formerly pursued

CAGR

23.8%

management policy, and from the fiscal year ended March

12.1

10

31, 2008, embarked on a thorough transformation of

CAGR

CAGR

31.1%

11.7%
11.2

CAGR

16.4%
9.0

6.6

strategies. Accompanying this was the implementation of the

0

Games
(Offline)

reorganization of several game development lines. This led tolosses during the fiscal year under review totaling ¥4.8 billion,

Games(Online)Mobile Phone
Content

Publication

OthersCompound Annual Growth Rate (CAGR)= CAGR of net sales over the period from the fiscal year ended March
31, 2003 (the simple sum of premerger companies’ results immediately prior to merger) to fiscal year ended
March 31, 2008

comprising a ¥3.0 billion valuation loss within cost of sales anda ¥1.8 billion loss on write-offs of content production accounts(Figure 3)

within non-operating expenses.

Amusement (TAITO): Operating Income by Segment

My honest opinion is that this transformation process will

Billions of Yen

continue until the fiscal period ending March 31, 2009, to beOperating Income

6

fully effective, but I am confident we are making solid progress.
I believe we can successfully regain our position as one of the4

world’s preeminent game developers.
There are also issues apart from those related to internal

2

game development. Although we are a publisher, until now
we have not sold titles developed by other companies. While0

we have a strong sales force Japan, our sales and marketingorganizations in North America and Europe have not been fully
equipped for this task. Consequently, we have not been able to-2embark on a truly global publishing strategy. Although belated,

06(October 2005–March 2006)
Arcade facility
operations

we have recently completed a reinforcement of our organization,

Arcade machines

07
Software for home
use game consoles

08
Mobile phone
content

OthersTAITO Corporation was made a consolidated subsidiary at the end of September 2005.
Figures shown are prior to deduction of amortization of goodwill. 2008 = Fiscal year ended March 31, 2008

allowing us to begin the publishing of other companies’ titles.

05

Despite there being no particularly high barriers to entry, we

the most efficient strategy was to supply software only for thehave no track record in this field. However, I view this as anmost successful console manufacturer and to depend on theopportunity to enhance the performance of the entire Company,

manufacturer for marketing and all other operations beyond

and fully believe we are capable and seasoned enough togame development. The main strategic choice for gamesuccessfully launch this venture.

software developers was whether to adopt a high risk–highWith regard to game development projects with external

return strategy by completely relying on the dominant console

studios, we have heretofore only pursued this strategy withinmaker, or alternatively, a moderate risk–moderate return

Japan. Hereafter, we intend to add game development

strategy by retaining room for discretion.

functions to our North American and European operations, andThe former Square excessively adapted to the prevailingaggressively commission overseas development projects whereenvironment. A corporate culture resistant to changes wasdeemed appropriate.

created by a lack of self-awareness of the fact that its success
was built on an extremely rare set of market circumstances

Evolutional Stages of the Video Game Industry

and depended on a very unusual strategy. This is the ultimate

In my view, evolution of the video game industry can bereason why the reforms we are currently working on are taking aperceived as moving through three distinct stages, and I believe

long period to implement.

that execution of the optimal business strategy at each stage isthe core task for management.

Stage II: The era of publishers(Mid-2000s to early-2010s)

Stage I: The era of hardware manufacturers

Around 2000, the popularity of video games spread through(Industry Conception to the early-2000s)

most of the world and the following trends emerged:

The appearance of game consoles led to the birth of a

• Variation in the timing of product permeation as well ascompletely new form of entertainment—video games. At

varying regional trends at the time games became popular

the time, since there was no general-purpose hardware with

led to the formation of diverse user preferences among theseinteractive graphics capabilities available for consumers, video

regions. These can be thought of as “geological layers” withingames could only be played on specialized game consoles.

the game world.

Video game console makers produced and marketed consoles,• Since hardware performance capabilities in most consoles

while also developing and selling their own software. To enhance

had generally reached the level expected by users, makers

network externalities, console makers also sourced game

could finally focus on differentiation strategies related to othersoftware from third-party developers, with a large proportion of

product attributes.

these third-party games being fed through the console maker’s• Games could now be enjoyed on platforms other thanown distribution network. Hence it would be fair to call thisspecialized game consoles, including generic PCs and mobile

industry ecosystem based on a completely vertically integrated

phones.

business model “the video game console industry.”• Since a broad array of devices became network capable, aSince hardware during this phase was not yet able to satisfy

completely vertically integrated business model based onuser expectations, enhancing console functional capabilities

hardware alone began to lose its viability.

was the number one priority. All console makers worked

The era dominated by hardware manufacturers wasvigorously to bolster the processing capacity of their gamealready drawing to a close as the environment that gave rise

consoles, while failing to adopt differentiation strategies suchto a dominant console platform no longer prevailed. In theas the incorporation of unique attributes. This is illustrated bymeantime, however, the game-playing population continued

the fact that competition among console makers often focused

to expand briskly, and computer games became recognizedon central processing unit (CPU) performance, such as was

globally as an important entertainment genre. This marked thedisplayed in the “32-bit war,” and it is my view that competition

beginning of the “video game industry” as it is perceived today.

during that phase was unidirectional. The vertically integrated

Software developers were no longer able to rely on thebusiness model inevitably resulted in a winner-take-all scenario

ecosystem provided by a single platform manufacturer. Survivalin the console market where competitive parameters remained

now depended on the software developer’s own ability to exert

very limited.

influence on markets stretching around the globe.

Consequently, for third-party game software developers,

From a game development perspective, to reach the largest

06

audience possible, creating games in a multi-platform, multi-

cease to be limited to other video game companies. If we are

lingual format is now an essential element for competing in thiscomplacent, we may end up at the bottom rung of the industry

era. From a marketing perspective, software developers need toproviding only a very limited number of functions.

build their own robust global distribution network.

To become a major player in such an era, it will be vital toI have already covered how we lagged in the first half ofachieve at least top-five status within the video game industry. I

this era, as well as how we recovered lost ground. However, we

also believe the following capabilities will be essential.

are now entering the second half of this stage of the industry’s

The first essential capability is internally-developed

development.

intellectual property. If markets converge, even if a company

At this point, we must not only successfully make theholds rights in a particular medium there is no way to respondtransformation outlined above, but also execute a strategy

to the new market paradigm. Second, it will be essential toin which network factors are given even more importance.

build direct links with customer communities. No matter what

Fortunately, at present within the game industry a clear verdict

kind of era emerges, there will be enduring value in customer

has yet to emerge. In this light, we see this juncture a valuablecommunities united by customer preferences. Third, theopportunity for SQUARE ENIX.

Company must develop new types of human resources. In
the new era, relationships will not be built in accordance with

Stage III: The era of media and content market convergence

the old hierarchical structure but with a new network-oriented(From the mid-2010s)

structure.

In this era, the media and content industries will converge,

It is extremely difficult to maintain continuous growth of adissolving the boundaries between such industries as movies,

business enterprise through changes of the times.

music, and games, as well as making the borders between

While working to maintain and enhance current earnings, wecountries obsolete. Right now, in addition to maximizing current

must not delay these preparations for the next stage of theearnings by adapting to the environment of Stage II, we must

industry’s development. To maximize revenues and profits, it isstrive to fully prepare for Stage III of the industry’s development.

necessary to design the overall organization of the Company.
However, there is always the chance that this design may notCompetition in Stage III will not be limited to theVideo Game Industry

work in the next era. Changing times can be said to resemble

I see three material change drivers leading the industry towards

do not notice the changes. However, during this time, change

Stage III. The first of these is the evolution of telecommunicationis steadily taking place, and then one day, all of a sudden,

technology. It is now becoming feasible to sustain the transfer ofeverything changes completely.

phase transitions in physics. Until we reach the critical point, welarge volumes of data at speeds and scales that were previously
unattainable. This means that digital content is no longer tied

I believe that continuous growth is the key mission forto physical media, and that the boundaries separating various

management.

types of content—primarily owing to physical differences

We are absolutely committed to achieving our long-term

between media and distribution channels—are disappearing.

missions. In these endeavors, I look forward to your ongoing

The second change driver is the evolution of hardware.

support.

High-performance, multi-functional devices make it possible toprocess any type of content on any digital format.

July 2008

The third driver is the emergence of a “network culture.” Thefirst two drivers help free content from physical limitations,while the third driver fuses content through communication andcooperation among users. Communities will emerge throughthe unifying force of user preferences alone, rather than content
categories utilized in the past.
We do not yet clearly know what kind of industry
ecosystem will emerge in this new era. What is clear though,Yoichi Wadais that massive-scale competition will affect the entire media

President and Representative Director

and content industries. In such a scenario, our competitors will

SQUARE ENIX CO., LTD.

07

Holding Company System Implementation

Prior to move to pureholding-company structure

TAITO
CORPORATIONBEIJINGTAIXINCULTURAL
AMUSEMENT
CO., LTD.

SQUARE ENIX
CO., LTD.

SQUARE ENIX
OF AMERICAHOLDINGS,INC.

SQUARE
ENIX LTD.

SQUARE
ENIX(China)CO., LTD.

SQUARE ENIX
WEBSTAR
NETWORKTECHNOLOGY(BEIJING)
CO., LTD.

SQUARE
ENIX, INC.

SQUARE
L.L.C.

SQUAREPICTURES,INC.

HUANG LONG
CO., LTD.

TAITO
KOREA
CORPORATIONTAITO ARTCORPORATIONDIGITAL
ENTERTAINMENTACADEMYCO., LTD.

TAITOCORPORATION

FF.FILM.
PARTNERS(partnership)

FF.FILM.
PARTNERS(partnership)

Consolidated subsidiaries as of the fiscal year ended March 31, 2008(17 companies and 1 partnership)(The current SQUARE ENIX CO., LTD.,to change its corporate name)

SQUARE ENIX
OF AMERICAHOLDINGS,INC.

SQUARE
ENIX, INC.

BEIJINGTAIXINCULTURAL
AMUSEMENT
CO., LTD.

EFFORT
CO., LTD.

COMMUNITY
ENGINE INC.

SQUARE ENIX HOLDINGS CO., LTD.

Subsequent to move to pureholding-company structure

SQUARE ENIX
CO., LTD.
Succeeding company
keeps the business

TAITO
TECH CO., LTD.

DIGITAL
ENTERTAINMENTACADEMYCO., LTD.

SG Lab Inc.

SQUARE
ENIX(China)CO., LTD.

SQUARE
ENIX LTD.

SQUAREPICTURES,INC.

SQUARE
L.L.C.

TAITOKOREACORPORATIONSQUARE ENIX
WEBSTAR
NETWORKTECHNOLOGY(BEIJING)
CO., LTD.

SG Lab Inc.

COMMUNITY
ENGINE INC.

HUANG LONG
CO., LTD.

Subsequent to move to pure holding-company structure on October 1, 2008 (scheduled)
Approved by a resolution of the General Meeting of Shareholders on June 21, 200808

Review of Operations

computers (PCs). The Company also handles localization ofGeneral Overview

games developed and distributed in Japan, which are distributed

The Group’s operations are classified into six business segments—

overseas principally by two wholly owned subsidiaries of theGames (Offline), Games (Online), Mobile Phone Content,

Company. In North America, distribution is handled by SQUARE

Amusement, Publication and Others. In each business segment,

ENIX, INC., and in Europe and other regions that use the PAL

the Group strives to reinforce its business base and enhance its

video format, through SQUARE ENIX LTD.
During the fiscal year under review, the Company released aearnings potential. The Group has been pursuing research anddevelopment (R&D) in core technology areas, with particularnumber of titles for Nintendo DS, including “DRAGON QUEST

emphasis on network-related businesses, and aims to applyIV” (1.15 million units in Japan as of March 31, 2008; hereafter

network technologies to its products and services.

references to units sold are as of that date), “FINAL FANTASY

In fiscal 2007, ended March 31, 2008, on a consolidatedIV” (590 thousand units in Japan), “FINAL FANTASY XII: REVE-

basis, net sales declined 9.8%, to ¥147,516 million. Operating

NANT WINGS” (540 thousand units in Japan, 220 thousand

income decreased 17.0%, to ¥21,520 million, and recurring

units in North America and 280 thousand units in Europe),

income declined 28.1%, to ¥18,864 million. Net income“Itadaki Street DS” (430 thousand units in Japan), “FINALamounted to ¥9,196 million, a 20.9% decrease compared with

FANTASY CRYSTAL CHRONICLES: Ring of Fates” (380 thousand

the previous fiscal year.

units in Japan, 160 thousand units in North America and 150
thousand units in Europe) and “FINAL FANTASY III” (480 thou-

Overview by Business Segment

sand units in Europe). The Company also released “CRISIS
CORE—FINAL FANTASY VII—” (800 thousand units in Japan

Games (Offline)

and 450 thousand units in North America) for PlayStation
Portable (“PSP“) and “DRAGON QUEST SWORDS: The Masked

The Company plans, develops and distributes games for game

Queen and the Tower of Mirrors” (490 thousand units in Japan

consoles (including handheld game machines) and personaland 110 thousand units in North America) for Wii.

©2007 SQUARE ENIX CO., LTD. All Right Reserved.
CHARACTER DESIGN: TETSUYA NOMURA©2007 ARMOR PROJECT/BIRD STUDIO/ARTEPIAZZA/SQUARE ENIX All Rights Reserved.

Business Segment Information (Fiscal year ended March 31, 2008)(Millions of yen)Games
(Offline)

Games(Online)Mobile Phone
Content

Publication

Amusement

OthersElimination or
UnallocatedConsolidated
Total

Net sales

41,58812,098

6,579

11,158

69,104

9,005(2,017)

147,516

Operating income

8,882

5,880

1,758

3,626

3,129

3,324

(5,082)

21,520Operating income margin

21.4%

48.6%

26.7%

32.5%

4.5%

36.9%

—

14.6%

09

Review of Operations

As a result, sales in the Games (Offline) segment totaled

Mobile Phone Content¥41,588 million, a decrease of 19.0% compared with theprevious fiscal year, and operating income amounted to ¥8,882

The Company plans, develops and provides content for mobile

million, a decline of 45.7%.

phones, and provides a wide range of mobile content services,
including ringtones, wallpapers, games and portals. Led by such

Games (Online)

portal services as “DRAGON QUEST” and “FINAL FANTASY,”
the service lineup leverages the Company’s strength inoriginal content.

The Company plans, develops, distributes and operates network-compliant online games. The Company operates “FINAL

Sales in the Mobile Phone Content segment totaled ¥6,579

FANTASY XI” (“FFXI”), a massive multi-player online role-playing

million, a decrease of 15.3% compared with the previous fiscal

game (MMORPG) with approximately 500,000 paying subscribers,

year, and operating income amounted to ¥1,758 million, aand released a new expansion pack “FINAL FANTASY XI:

decline of 41.6%.

WINGS OF THE GODDESS” in November 2007 in Japan, North
America and Europe.
Sales in the Games (Online) segment totaled ¥12,098
million, a decrease of 11.4% compared with the previous fiscal
year, and operating income amounted to ¥5,880 million, adecline of 13.1%.

©2008 ARMOR PROJECT/BIRD
STUDIO/SQUARE ENIX All Rights
Reserved.

©2008 SQAURE ENIX CO., LTD.
All Rights Reserved.

©2002-2008 SQUARE ENIX CO., LTD. All Rights Reserved.

Consolidated Sales by Geographic Segment (Fiscal year ended March 31, 2008)(Millions of yen)Japan

North America

Europe

Asia

Total

Consolidated net sales

125,144

13,358

7,896

1,118

147,516

Percentage of share

84.8%

9.1%

5.4%

0.8%

100.0%

10

Publication

Amusement

The Company publishes comic magazines, comic books andThis segment comprises all businesses of the TAITO Group,game‐related books, including game strategy books.

along with amortization of goodwill relating to the consolidationof the TAITO Group.

In the fiscal year under review, the Company published theIn the fiscal year under review, this segment achieved amonthly magazines “SHONEN GANGAN,” “G Fantasy,”“GANGAN WING” and weekly magazine “YOUNG GANGAN,”

significant recovery in profitability, driven by a range of earnings

as well as comic collections taken from regular magazine serials

enhancement measures implemented during the previous

and various game strategy guide books.

fiscal year. An increase in revenues from its core arcade facility
operations—at existing arcade facilities—also contributed to theSales in the Publication segment totaled ¥11,158 million,

performance turnaround.

a decline of 0.4% compared with the previous fiscal year,

As a result, sales in the Amusement segment amounted toand operating income amounted to ¥3,626 million, an¥69,104 million, a decrease of 8.7% compared with the previous

increase of 0.6%.

fiscal year, and operating income totaled ¥3,129 million. The
Amusement segment recorded an operating loss of ¥351 million
in the previous fiscal year.

©SQUARE ENIX CO., LTD. All Rights Reserved.
©2008 SQUARE ENIX CO., LTD. All Rights Reserved.
©2008 Atsushi Ohkubo©2008 Hiromu Arakawa©TAITO CORPORATION 2008 ALL RIGHTS RESERVED.
©2007 SQUARE ENIX CO., LTD. / TAITO CORPORATION All Rights Reserved.

11

Review of Operations

OthersThe Others segment includes the planning, production, distribution
and licensing of derivative products related to SQUARE ENIX
titles, and the operation of a school for game engineers.
In the fiscal year under review, the successful launch in July
2007 of a kids card-game machine, “DRAGON QUEST Monster
Battleroad,” contributed significantly to segment earnings.
As a result, sales in the Others segment amounted to¥9,005 million, an increase of 126.4% compared with theprevious fiscal year, and operating income totaled ¥3,324
million, an increase of 153.4%.

©SQUARE ENIX CO., LTD. All Rights Reserved.
©1997,2007 SQUARE ENIX CO., LTD. All Rights Reserved. CHARACTERDESIGN: TETSUYA NOMURA©2007 ARMOR PROJECT/BIRD STUDIO/SQUARE ENIX All Rights Reserved.

12

Corporate GovernanceCompensation to independent audit firm
Compensation paid to Ernst & Young ShinNihon for contracted services
prescribed under Article 2, Paragraph 1, of the Certified Public
Accountants Law amounted to ¥57 million.

1. Basic Stance on Corporate Governance
The Company has adopted the corporate auditor system for its corporate
governance. To strengthen monitoring functions and ensure themaintenance of sound management, at least half of the corporate auditors
are drawn from outside the Company. Furthermore, in accordance withthe objective standards provided under the Company’s internal decisionmaking authority rules, the Board of Directors, which sets management
policy, is clearly separated from the decision-making bodies responsible
for the execution of operations. This system aims to enhance the efficiency
and balance of management decision-making and operational execution.

(2) Personal, financial business or other relationships constituting
conflicts of interest between the Company and its outside
director or outside corporate auditors
There are no such relationships to be specified.
(3) Basic policy on the establishment of internal control systems
The Board of Directors has passed a resolution establishing theCompany’s Basic Policy on Building an Internal Control System. The
Company is building such systems to ensure auditing and supervisory
functions are strictly maintained and to confirm that all business activities
comply with all relevant laws and regulations and the Company’s Articles
of Incorporation, as well as to enhance the efficiency of the directors’
exercise of duties.

2. Status of Implementation of Corporate Governance Policies(1) Management control structure and other corporate governancesystems relating to management decision-making, execution ofoperations and audit functions
The Board of Directors comprises five directors, including one outside
director. The Company has four corporate auditors, all of whom are drawn
from outside the Company. There is one standing corporate auditor. The
directors are appointed for a term of one year, the same as for companies
adopting the committee system.
The Auditing Division reports directly to the president as anautonomous internal unit currently comprising two members. The Auditing
Division performs regular monitoring and evaluation of internal control
systems, including those of Group companies, taking into account therelative importance and risk inherent in each part of the organization, andprovides reports and recommendations to the president. The Auditing
Division’s functions are carried out while sharing information with theBoard of Auditors and the independent audit firm.
To ensure a rigorous compliance system, the Company clearlyspecifies the importance of compliance in its management guidelines and
The Square Enix Group Code of Conduct. The Company has establishedthe Internal Control Committee and an internal compliance reporting(whistleblower) system, through which Companywide compliancemeasures are integrated laterally across organizational reporting lines. With
regard to the management and operation of the Company’s information
systems, which form the foundation of efficient operational functions, theCompany has established the Information System Management
Committee to oversee information systems on a companywide basis.
In principle, the Board of Directors convenes monthly, and each of thedirectors, including one outside director, engages in vigorous discussion
and exchange of opinions aimed at enhancing their mutual oversightfunctions.
In principle, the Board of Auditors convenes monthly, and conducts
accounting and operational audits based on the audit plan. The corporate
auditors attend meetings of the Board of Directors to audit the executionof duties of the directors.
With regard to the use of independent outside professionals, theCompany consults with several outside legal counsels as necessary on
significant transactions and legal matters. The Company retains Ernst &Young ShinNihon as its statutory audit firm under the Companies Act andthe Financial Instruments and Exchange Law to perform independent
third-party accounting audits. The Company fully cooperates with thestatutory audit firm to ensure smooth performance of their duties.
The following certified public accountants (CPAs) conducted audits of
the Company during fiscal 2007.
• CPAs performing audits:
Partners: Koichiro Watanabe, Kenichi Shibata, Tatsuya Yokouchi• Personnel providing audit assistance:
8 CPAs and 15 assistant CPAs

(4) Overview of liability limitation agreements
The Company has liability limitation agreements in place with its outside
director and outside corporate auditors in accordance with Article 427,
Paragraph 1, of the Companies Act to limit liabilities provided under Article
423, Paragraph 1, of the Companies Act. These agreements limit theliability of the outside director and each outside corporate auditor to ¥10
million or the legally specified amount, whichever is greater, on condition
that the director or corporate auditors have performed their duties in goodfaith and without gross negligence.
(5) Prescribed number of directors
The Company’s Articles of Incorporation stipulate that the number of
directors shall not exceed 12.
(6) Resolution requirements for the election of directors
The Company’s Articles of Incorporation stipulate that resolutions for theelection of directors shall be made by the majority of votes of shareholders
exercising their voting rights at the General Meeting of Shareholders
where shareholders in attendance hold one-third or more of outstanding
voting rights.
(7) Bodies able to determine dividends paid from retained earnings
The Company’s Articles of Incorporation stipulate that matters provided
under Article 459, Paragraph 1, of the Companies Act may be determinedby the Board of Directors unless legally stipulated otherwise. The objectiveof this provision is to expand the range of options enabling flexible
execution of capital policies.
(8) Exemption from liability of directors and corporate auditors
Pursuant to Article 426, Paragraph 1, of the Companies Act, theCompany’s Articles of Incorporation stipulate that a director (including
former directors) may be exempted from liability for actions related to
Article 423, Paragraph 1, of the Companies Act, up to the limit provided
by law, through a resolution passed by the Board of Directors. This
provision aims to ensure the maintenance of an environment in which
directors may exercise their duties to the maximum of their abilities andare able to fulfill the roles expected of them.
(9) Matters requiring special resolutions at the General Meeting of
Shareholders
The Company’s Articles of Incorporation stipulate that the special
resolutions provided under Article 309, Paragraph 2, of the Companies
Act may be passed by a majority of two-thirds or more of the votes ofshareholders present at the General Meeting of Shareholders where
shareholders in attendance hold one-third or more of outstanding voting
rights. The objective of this relaxation of special resolution requirements is
to ensure the smooth proceedings of the General Meeting of
Shareholders.

Remuneration to directors and corporate auditors
Remuneration paid to directors totaled ¥243 million, of which ¥7 million
was paid to the outside director.
Remuneration paid to corporate auditors totaled ¥30 million, of which ¥30
million was paid to outside auditors.

13

Directors, Auditors and Executive Officers(As of March 31, 2008)

Board of Directors

President andRepresentative Director
Yoichi Wada

Executive Vice President
and Representative Director
Keiji Honda

Director
Yosuke Matsuda

Director
Yukinobu Chida

Corporate Auditors

Corporate Executives/
Executive Producers

Honorary Chairman

Standing Auditor *2
Ryoichi Kobayashi

Yoichi Wada

Yasuhiro Fukushima

Auditor *2
Tamotsu Iba

Yosuke Matsuda

Auditor *2
Norikazu Yahagi

Keiji Honda

Akitoshi Kawazu
Yoshinori Kitase
Yosuke Saito
Michihiro Sasaki

Auditor *2
Ryuji Matsuda

Koji Taguchi*1: Outside Director*2: Outside Auditor

Toshiro Tsuchida

Hiromichi Tanaka

Tatsuo Tomiyama
Ken Narita
Shinji Hashimoto
Yoichi Haraguchi
Masashi Hiramatsu
Yu MiyakeAkihide Miyawaki
Koji Yamashita
John Yamamoto

14

Director *1
Makoto Naruke

Financial Section

CONTENTS

16

Management’s Discussion and Analysis of Operating Resultsand Financial Position (JPNGAAP)

22

Consolidated Balance Sheets (JPNGAAP)

24

Consolidated Statements of Income (JPNGAAP)

25

Consolidated Statements of Changes in Net Assets (JPNGAAP)

26

Consolidated Statements of Cash Flows (JPNGAAP)

28

Notes to Consolidated Financial Statements (JPNGAAP)SQUARE ENIX CO., LTD. assumes full responsibility for the accompanying consolidated financial
statements prepared in conformity with accounting principles generally accepted in Japan, which
are the English translation of the consolidated financial statements submitted to the Director of
the Kanto Finance Bureau in Japan ( yukashoken hokokusyo).

15

Management’s Discussion and Analysis of Operating Results and Financial Position (JPNGAAP)(4) Unrealized Losses on Investments
The Group owns shares in certain financial institutions and companies with which it sells or purchases goods. These shareholdings
include stock in listed companies subject to price fluctuation risk inthe stock market and stock in privately held companies for whichshare prices are difficult to calculate. In the event that the fair market value of these shares as of the end of the fiscal year declines noless than 50% of their acquisition cost, the entire amount is treatedas an impairment loss. In addition, in the event of a 30% to 50%
decline, an amount determined as necessary considering the importance and potential for recovery of the shares is treated as an
impairment loss. During fiscal 2007, the Company recorded a loss
on revaluation of investment securities amounting to ¥55 million.
Worsening market conditions or unstable performance at theinvested companies may require the recording of revaluation losses
in the event that losses are not reflected in current book value, or,the book value becomes irrecoverable.

The following statements are based on management’s view of
SQUARE ENIX CO., LTD. (the “Company”) as of June 30, 2008 andhave not been audited. The following management discussion andanalysis also contains forward-looking statements concerning thefuture performance of the Company. Please read the disclaimer
regarding forward-looking statements at the beginning of thisannual report.

1. Significant Accounting Policies and Estimates
The consolidated financial statements of the SQUARE ENIX Group(the “Group”) are prepared in accordance with generally accepted
accounting principles in Japan (JPNGAAP). In preparing the consolidated financial statements, management chooses and applies
accounting policies, and makes estimates that affect the disclosureof amounts in assets, liabilities, income and expenses. Management
formulated these estimates based on historical performance andcertain other factors. However, actual results may differ materiallyfrom these estimates due to uncertainties inherent in the estimates.
Important accounting policies used in the preparation of theGroup’s consolidated financial statements are contained in the section titled “Summary of Significant Accounting Policies Used in the
Preparation of Consolidated Financial Statements,” which begins
from page 28 of this report. In particular, judgments used in making
estimates in the preparation of the consolidated financial statements
are affected by accounting policies.

(5) Deferred Tax Assets
The Group records a valuation allowance to provide for amounts ofdeferred tax assets thought likely to decrease. In evaluating thenecessity of a valuation allowance, the Company examines future taxable income and possible tax planning for deferred tax assets with ahigh likelihood of realization. If the Company determines that all or a
portion of net deferred tax assets cannot be realized in the future, theCompany writes down such deferred tax assets during the fiscal year
in which the determination is made. If the Company determines thatdeferred tax assets in excess of the recorded amount can be realized
in the future, the Company recognizes deferred tax assets to therecoverable amount and increases profits by the same amount during
the period in which the determination is made.

(1) Revenue Recognition
Sales revenue of the Group is recognized when products are ordinarily shipped or services are provided, while royalty revenue is­r ecognized based on receipt of a statement from the licensee. In
certain cases, the recognition of sales is determined based on­c ontracts entered into with s­ uppliers and product type.

2. Analysis of Financial Policy, Capital Resourcesand Liquidity(2) Provision for Doubtful Accounts
The Group provides a provision for doubtful accounts based on­e stimated irrecoverable amounts to prepare for bad debt losses on
accounts receivable. In the event that the financial condition of a
supplier deteriorates and its solvency declines, the Group may provide additional amounts to the provision for doubtful accounts orrecord bad debt losses.

The Group internally finances working capital and capital investments, and utilizes the issuance of corporate bonds. The Company
has issued yen-denominated zero-coupon bonds with warrants
which mature in 2010. As of March 31, 2008, the Group’s balanceof interest-bearing debt was ¥26 million. The net assets ratio stoodat 69.3%. Cash and cash equivalents at end of year totaled¥111,479 million, an increase of ¥11,631 million compared withthe previous fiscal year end.
The Group believes that it will be possible to procure the funds
required for working capital and capital investments in the future to
maintain growth based on its sound financial standing and ability togenerate cash through operating activities.

(3) Content Production AccountWhen the Group determines that the difference between actual
costs and market value of the content production account based on
expected future demand and market conditions have reached a certain level, the Group recognizes a write-down of the content production account. If future demand and market conditions are worse thanmanagement’s forecasts, there is the possibility that f­ urther writedowns will become necessary.

16

3. Analysis of Business Performance in Fiscal 2007
(Ended March 31, 2008)

Content Production Account				March 31

AssetsTotal Assets
				March 312008

Change¥215,679¥212,134¥(3,544)

Total assets as of March 31, 2008 amounted to ¥212,134 million, adecrease of ¥3,544 million compared with the previous fiscal year
end. The main factors contributing to this change were as follows:
Cash and Deposits				March 31

Millions of yen

2007

2008

Change¥99,852¥111,515¥11,663

Cash flows in fiscal 2007, as well as the principal factors behindthese cash flows, are described below.

¥14,793¥2,890				
March 31

Current
Non-current

Millions of yen

2007

2008

Change¥5,634
4,939¥4,158852¥(1,476)(4,087)

In September 2005, the Company acquired 93.7% of the commonshares of TAITO CORPORATION via a takeover bid. Subsequently,
TAITO CORPORATION was merged with SQEX, Inc., a wholly-owned
subsidiary of the Company, resulting in TAITO CORPORATION
becoming part of a wholly-owned subsidiary of the Company.
The temporary tax differences associated with the takeover of
TAITO CORPORATION were recognized as a tax effect that theCompany is expected to recover in the future, and the expectedamount to be recovered was recorded as a deferred tax asset.
Current deferred tax assets as of March 31, 2008, amounted to¥4,158 million, a decrease of ¥1,476 million, and non-current tax
assets totaled ¥852 million, a decrease of ¥4,087 million.

(2) Net cash used in investing activities
Net cash used in investing activities totaled ¥5,805 million. The
main item within this was payments for acquiring property andequipment of ¥6,597 million.
(3) Net cash used in financing activities
Net cash used in financing activities amounted to ¥3,404 million.
The largest item within this was payments for dividends of¥3,882 million.
Notes and Accounts Receivable				Change¥11,903

Deferred Tax Assets(1) Net cash provided by operating activities
Net cash provided by operating activities amounted to ¥23,655 m­ illion.
In addition to income before income taxes and minority interests of¥16,681 million, there was a decrease in allowance for doubtful
accounts, a decrease in accounts receivable and a decrease inaccounts payable.

March 312008

As a rule, content development costs incurred during the period
from a title’s formal development authorization through to its
release are capitalized in the content production account. When thetitle is released, this amount is then recorded as an expense.
The content production account is reevaluated based on thecurrent business environment. In the event that a title development
project is canceled as a result of such reevaluation, the Company
may write-off capitalized development costs for the canceled title inthe content production account as an extraordinary loss. Costs
incurred during the pre-production phase—the phase before development is formally approved—are posted as selling, general andadministrative (SG&A) expenses as they are incurred.
As of March 31, 2008, the content production account totaled¥14,793 million, an increase of ¥2,890 million compared with theend of the prior fiscal year.

Millions of yen

2007

Millions of yen

2007

Millions of yen

2007

2008

Change¥21,206¥17,738¥(3,468)

Property and Equipment
				March 31

The year end balance of notes and accounts receivable varies
greatly depending on the timing of new game title releases. Notes
and accounts receivable at year end were ¥17,738 million, adecrease of ¥3,468 million compared with the previous year end.

Millions of yen

2007

2008

Change¥25,664¥19,939¥(5,725)

Net property and equipment decreased ¥5,725 million to ¥19,939­million, primarily owing to a decrease in amusement equipment from
¥10,798 million to ¥5,906 million. This was mainly due to a changeoverto leasing contracts when introducing new amusement equipment.

17

Intangible Assets
				March 31

payable from ¥4,773 million to ¥3,912 million, a decrease inaccrued expenses from ¥3,379 million to ¥1,859 million and adecrease in allowance for sales returns from ¥2,271 million to¥1,135 million. In addition, reflecting financial adjustments made in
the previous fiscal period relating to the closure of unprofitableamusement facilities, allowance for store closings decreased from¥2,973 million to ¥226 million.

Millions of yen

2007

2008

Change¥21,657¥20,024¥(1,633)

Total intangible assets decreased ¥1,633 million to ¥20,024 million,
primarily owing to amortization of goodwill. In the fiscal year underreview, ¥1,230 million in goodwill amortization was recorded as
SG&A expenses and ¥136 million in goodwill amortization was
posted as an extraordinary loss.
As of March 31, 2008, the balance of goodwill remaining within
intangible assets was ¥18,883 million.

Non-Current Liabilities
				
March 31

Investments and Other Assets
				March 31

2007

2008

Change¥16,440¥(5,308)

Total investments and other assets decreased ¥5,308 million to¥16,440 million. Significant items within this included a ¥4,087 million decrease in deferred tax assets and a decrease in rental deposits
from ¥14,198 million to ¥13,235 million, mainly owing to the closureof unprofitable amusement facilities in the Amusement business.
Owing to the Group’s withdrawal from the pachinko-slot
machine-related business in the Amusement business, claims inbankruptcy decreased from ¥5,065 million to ¥327 million andallowance for doubtful accounts decreased from ¥5,515 million to¥948 million.

March 31

2007

2008

Change¥63,940¥(21,099)¥40,858¥(11,777)

				March 31

Millions of yen¥85,040

Change¥52,635

Shareholders’ Equity/Net Assets

Liabilities
Total Liabilities
				

2008

Total non-current liabilities decreased ¥11,777 million to ¥40,858
million. Of the yen-denominated bonds with warrants issued by theCompany maturing in 2010, ¥13,000 million were exercised, leaving¥37,000 million as non-current liabilities as of March 31, 2008.
Since these bonds with warrants are zero-coupon bonds, no interest
expense has been incurred.

Millions of yen¥21,748

Millions of yen

2007

As of March 31, 2008, total liabilities amounted to ¥63,940 million, adecrease of ¥21,099 million compared with the previous fiscal year
end. The main factors contributing to this change were as follows.

Millions of yen

2007

2008

ChangeCommon stock¥ 8,038
Capital surplus
37,279Retained earnings
84,315
Treasury stock(540)
Total shareholders’ equity 129,092
Unrealized gain on
revaluation of otherinvestment securities(8)
Foreign currencytranslation adjustments
377
Total valuation andtranslation adjustments
368
Stock acquisition rights—
Minority interests inconsolidated subsidiaries
1,178
Total net assets¥130,639¥ 14,928
44,16990,295(841)
148,552¥ 6,890
6,890
5,979
(300)
19,459(12)(4)(1,504)(1,881)(1,517)81(1,886)81

1,077¥148,193(100)¥17,554

Current Liabilities
				
March 31

Millions of yen

2007

2008

Change¥32,404¥23,082¥(9,321)

As of March 31, 2008, total shareholders’ equity amounted to¥148,552 million, an increase of ¥19,459 million compared withthe previous fiscal year end. Common stock and capital surplus
increased owing to the exercise of yen-denominated bonds withwarrants, maturing in 2010, of ¥13,000 million, and the exercise ofstock options (stock acquisition rights).

Total current liabilities decreased ¥9,321 million to ¥23,082 m­ illion.
Major changes within this included a decrease in other accounts

18

Consolidated Statements of Income
Net Sales and Operating Income
Millions of yen
Years ended March 31

2007

Net sales¥163,472
Gross profit
76,210
Reversal of allowance for sales returns
1,186
Provision for allowance for sales returns
2,271
Net gross profit
75,125
Selling, general and administrative
expenses
49,209Operating income
25,916Composition

2008

Composition

Amount change

Percent change

100.0%
46.6
0.8
1.4
46.0

¥147,516
66,3142,271
1,135
67,450100.0%
45.0
1.5
0.8
45.7

¥(15,955)(9,895)
1,084(1,135)(7,675)(9.8)%(13.0)
91.4(50.0)(10.2)

30.1
15.9

45,92921,52031.1
14.6(3,279)(4,396)(6.7)(17.0)

Comparisons by segment with the preceding fiscal year are provided in the section describing operating performance on pages 8–11.
Non-Operating Income and Expenses
				Years ended March 31

Non-operating income
Non-operating expenses

Capital expenditures for fiscal 2007 amounted to ¥6,952 million, adecrease of ¥4,408 million compared with the previous fiscal year.
This was mainly owing to a changeover to leasing contracts for new
amusement equipment.

Millions of yen

2007

2008

Change¥1,176852¥1,367
4,023

¥ 190
3,171

Overseas Sales
Geographic segment sales are dependent on game title developmentby the Company in Japan. As a result, overseas sales fluctuate
depending on the timing of overseas game title releases.

Non-operating income increased ¥190 million to ¥1,367 million,
mainly owing to an increase in interest income.
Non-operating expenses increased ¥3,171 million to ¥4,023
million, primarily owing to a foreign exchange loss of ¥1,858 million
and a loss on write-off of content production account of ¥1,799
million.

North America				Years ended March 31

Extraordinary Gain and Loss				

Millions of yen

2007

2008

Change¥23,801¥13,358¥(10,443)

Millions of yen

Years ended March 31

2007

2008

ChangeExtraordinary gain
Extraordinary loss

¥ 3,778
11,629¥1,4393,618¥(2,339)(8,011)The Group primarily is engaged in the Games (Offline) and Games(Online) businesses in North America. In the Games (Offline) businessin this region, sales of game content developed by the Company arehandled primarily by SQUARE ENIX, INC., a wholly-owned subsidiaryof the Company. In the Games (Online) business in this region, theGroup provides online game services and sells software discs foronline games.
In the fiscal year under review, sales in North America totaled¥13,358 million, a decrease of ¥10,443 million, which was mainly
attributable to the absence of any major game title releases during
the period.

Extraordinary gain amounted to ¥1,439 million, primarily owing to areversal of allowance for closing of game arcades of ¥1,098 million.
In the previous fiscal year, disposal of the commercial karaoke business generated a gain on divestiture of a business amounting to¥2,697 million.
Extraordinary loss totaled ¥3,618 million. Significant items
within this included loss on disposal and write-downs of assets
associated with business restructuring of ¥1,302 million and loss on
disposal of property and equipment of ¥950 million. In the previous
fiscal year, extraordinary loss totaled ¥11,629 million, mainly owing
to the restructuring of the Amusement business.

Europe				Years ended March 31

Millions of yen

2007

2008

Change¥12,271¥7,896¥(4,375)

Capital Expenditures and Depreciation				Years ended March 31

The Group primarily is engaged in the Games (Offline) and Games(Online) businesses in Europe. In the Games (Offline) business inthis region, sales of game content developed by the Company arehandled primarily by SQUARE ENIX LTD., a wholly-owned subsidiaryof the Company. In the Games (Online) business in this region, theMillions of yen

2007

2008

ChangeCapital expenditures¥11,360
Depreciation and amortization 11,115¥6,952
9,933¥(4,408)(1,182)19

Group provides online game services and sells software discs foronline games.
In the fiscal year under review, sales in Europe amounted to¥7,896 million, a decrease of ¥4,375 million, which was mainly
attributable to the absence of any major game title releases during
the period.

Owing to the consolidation of TAITO at the end of September 2005,
TAITO’s operating results are reflected in the Company’s consolidated statements of income effective October 2005. Following thismerger, we have set an operating income ratio target of at least 20%
and a target for annual average growth in net income per share (EPS)of at least 10%. These are our two main numerical targets.

Asia

5. Dividend Policy				Years ended March 31

The Group recognizes the return of profits to shareholders as one ofits most important management tasks. The Company maintains
internal reserves to enable priority to be given to investments thatwill enhance the value of the Group. Such investments may include
capital investments and M&A for the purpose of expanding existing
businesses and developing new businesses. The retention of internal
reserves is done while also taking into account return to shareholders, operating performance and the optimal balance for stable dividends. Accordingly, the Company strives to maintain stable andcontinuous dividends. The portion of dividends linked to operating
results is determined by setting a consolidated payout ratio target of
approximately 30%.
The Company’s basic policy is to pay dividends from retained
earnings twice a year, through an interim dividend and a year end
dividend. The year end dividend is determined at the Annual General
Meeting of Shareholders, and the interim dividend is determined by
the Board of Directors.
For fiscal 2007, total dividends applicable to the year were ¥30
per share, comprising an interim dividend of ¥10 per share and ayear end dividend of ¥20 per share. The consolidated payout ratio
for fiscal 2007 was 36.7%.

Millions of yen

2007

2008

Change¥1,551¥1,118¥(433)In Asia, the Group primarily is engaged in the Games (Online) andAmusement businesses. In the Games (Online) business, the Group­p rimarily operates online game services for the PC platform in
China. In this business in fiscal 2007, the Group commenced a
restructuring of operations in response to changes in the market
environment. The Group will continue to pursue business opportunities in China based on a flexible approach, including tie-ups withlocal companies.
In the Amusement business, the Group operates game arcade
facilities in South Korea and China.
Sales in Asia in fiscal 2007 decreased ¥433 million to¥1,118 million.

4. Strategic Outlook, Issues Facing Management andFuture Direction
Management’s key task is to ensure growth in the Group in themedium- and long-term, maintaining profitability through the creation of advanced, high-quality content and services. As the development and popularization of information technology (IT) andnetwork environments rapidly advance, we anticipate a major transformation in the structure of the digital entertainment industry. We
believe that this will be driven by such factors as increased consumer needs in the area of network-compliant entertainment andgrowing access to a diverse range of content by users of devices
that provide multiple functions.
The Group will strive to respond to these changes, and has
adopted a medium- to long-term management strategy that focuses
on pioneering a new era in digital entertainment.
The Group’s operating targets for the fiscal year ending March
31, 2009 are as follows (as of May 23, 2008).
				Years ended/ending March 31

2004
results

2005
results

2006
results

2007
results

Yen
Dividends per share

November 19, 2007
Resolution of the Board of Directors¥1,115¥10

June 21, 2008
Resolution of the Annual General
Meeting of Shareholders

2,296

20

6. Risk Factors
The risks described below are those that could affect the Company’sbusiness performance. Forward-looking statements in this management discussion and analysis are in accordance with management’s
judgments as of June 30, 2008.

Millions of yen

2008
results

Millions of yen
Total dividends

Date of resolution

2009
targets(1) Changes in the Economic Environment
In the event of an exceptionally harsh downturn in the economy
causing consumer expenditure to fall, demand for the Group’s­p roducts and services in the entertainment field may decline. Suchcircumstances may lead to an adverse impact on the Group’s­b usiness performance.

Net sales¥63,202 ¥73,864 ¥124,473 ¥163,472 ¥147,516 ¥160,000
Operatingincome19,398 26,438 15,470 25,916 21,520
21,000Recurringincome18,248 25,901 15,547 26,241 18,864
20,000Net income 10,993 14,932 17,076 11,619
9,196
12,00020

(2) Changes in Consumer Preferences in the Digital Content
Market and the Group’s Ability to Respond to the Rapid
Progress of Innovative Technology
It is probable that the drastic changes stated in “4. Strategic
Outlook, Issues Facing Management and Future Direction” mayadversely affect the Group’s business performance if the Group isunable to respond adequately and promptly to these changes.

facility structures, interiors, lighting and noise. While complying withthe laws and regulations, the Group has actively pursued the establishment of new amusement centers. However, if regulations were tochange owing to the establishment of new laws or other reasons,the Group’s business performance may be affected.
(8) Management of Personal Information
In conjunction with the enactment of the Personal Information
Protection Law, the Group has bolstered employee training withthe aim of increasing awareness about the handling of personal
information. The Group has also improved the timeliness of its personal information management systems and identified all personal
information obtained by the Group. The Group has undertaken afull range of measures to strengthen its internal control systems,
including ongoing improvements to technology controlling accessto its customer database and to its data security systems, restrictions on personnel permitted to access information and establishment of a system to deal with customer inquiries regarding
personal information. To date, no leakage of personal information
has occurred from the Group. The Group intends to maintain its
stringent management systems for personal information by reviewing current systems and enhancing employee training. However, if
a leak of personal information were to occur from the Group, theGroup’s business performance may be affected.

(3) Changes in Game Platforms and the Group’s Response
The Group’s core business predominantly involves the sale of softwarefor use on home-use video game consoles. Consequently, the Group’sbusiness may be subject to the impact of transition to next-generation
console platforms and changes in console manufacturers’ strategies.
(4) Securing Human Resources to Execute the Group’s Growth
Strategies Concentrating on the Creation of New Content
The Group has been making rapid progress in expanding its business operations. Delays in securing human resources may adversely
affect the Group’s business performance.
(5) Expansion in the Group’s International Business
Operations
In the Games (Offline), Games (Online) and Mobile Phone Content
business segments, the Group is pursuing an expansion of its international business operations. A variety of factors present in the
countries and regions in which the Group operates may affect theGroup’s business performance. Such factors include market trends,
the political situation, the economic climate, laws and regulations,cultural factors, religious factors, customs and other factors.

(9) Accidents and Disasters
The Group periodically carries out accident prevention checks,­f acility checks and emergency drills to minimize accidents and theimpacts of disasters, including earthquakes, typhoons and flood damage, fires, electrical blackouts, computer system or server malfunctions, terrorist attacks, infectious diseases, food poisoning and otheraccidents. However, in the event of accidents or disasters, it may not
be possible to avoid or alleviate all adverse impacts. If a major earthquake or disaster occurs, which could impede the continuation ofbusiness, the Group’s business performance may be affected.

(6) Exchange Rate Fluctuations
The Group includes consolidated subsidiaries located in North
America, Europe and Asia. The risk of foreign exchange loss has
been reduced as foreign currency gained by subsidiaries is
expended for settlement or reinvestment in the applicable countries.
However, sales, expenses, assets, liabilities and net assets of theoverseas subsidiaries are converted into Japanese yen amounts inthe consolidated financial statements. Consequently, exchange rates
may affect the Group’s financial results if they fluctuate beyond
management is forecasts.

(10) Litigation
The Group is being managed strictly in compliance with laws andregulations and with full respect for third parties’ rights while­c arrying out its operations. However, in the course of its businessactivities in Japan and abroad, the risk of the Group becoming adefendant in litigation cannot be discounted. If such litigation wereto occur, the Group’s business performance may be affected.

(7) Entertainment Industry Laws
The operation of game centers is subject to government control
under the Law for Proper Control of Entertainment and Amusement
Businesses and other related laws and regulations. These laws andregulations include an approval and licensing system for the opening and operation of amusement centers, regulations on businesshours (ordinances vary, but operation is generally prohibited frommidnight to 10 a.m.), age restrictions (ordinances vary, but theadmittance of persons under 16 years of age after 6 p.m. and persons under 18 years of age after 10 p.m. is generally prohibited),area restrictions on outlet opening, and regulations concerning

21

Consolidated Balance Sheets (JPNGAAP)SQUARE ENIX CO., LTD. and Consolidated Subsidiaries
As of March 31
Millions of yen

			

2008

2007

AssetsI

Current assets
1.

Cash and deposits¥111,515¥ 99,852

2.

Notes and accounts receivable* 3

17,73821,2063.

Inventories

4,268

4,188

4.

Content production account

14,793

11,903

5.

Deferred tax assets

4,158

5,634

6.

Other

3,642

4,656

Allowance for doubtful accounts

(385)

(832)

155,730

146,608

17,024

17,316

11,641

11,354

		Total current assets
II

Non-current assets
1.

Property and equipment(1)

Buildings and structures

Accumulated depreciation
			

5,382

5,962

(2)

Tools and fixtures

11,357

11,365

Accumulated depreciation

8,124

7,963

			

3,233

3,401

(3)

31,393

41,577

Amusement equipment

Accumulated depreciation
			

(4)

Other

Accumulated depreciation
			

(5)

Land

(6)

Construction in progress		Net property and equipment

25,48630,778

5,906

10,798

19

24

15

19

3

5

5,404

5,404

8

91

19,93925,664
20,276

2.

Intangible assets(1)

Goodwill

18,883

(2)

Other

1,140

1,381

Total intangible assets

20,024

21,657455

		

3.

Investments and other assets(1)

Investment securities

656

(2)

Long-term loans

171

176

(3)

Rental deposits

13,235

14,198(4)

Construction cooperation fund

1,524

1,886

(5)

Claims in bankruptcy

327

5,065

(6)

Deferred tax assets

852

4,939

(7)

Other* 1

621

541

		

Allowance for doubtful accounts(948)(5,515)

		Total investments and other assets

16,44021,74856,404

69,071¥212,134¥215,679

Total non-current assets
Total assets
The accompanying notes are an integral part of these statements.

22Millions of yen

			

2008

2007

¥ 10,704¥ 13,275

Liabilities
I

Current liabilities
1.

Notes and accounts payable

2.

Short-term loans

3.

26

—

Other accounts payable

3,912

4,773

4.

Accrued expenses

1,859

3,379

5.

Accrued corporate taxes

763

994

6.

Accrued consumption taxes

699

895

7.

Advance payments received

1,145

1,188

8.

Deposits received

551

490

9.

Reserve for bonuses

1,802

1,872

10.

Allowance for sales returns

1,135

2,271

11.

Allowance for closing of game arcades

226

2,973

12.

Other

257

289

23,08232,404

Total current liabilities
II

Non-current liabilities
1.

Corporate bonds

37,00050,0002.

Allowance for employees’ retirement benefits

1,528

2,169

3.

Allowance for directors’ retirement benefits

215

262

4.

Allowance for closing of game arcades

796

—

5.

Other

1,318

204

Total non-current liabilities

40,85852,635

Total liabilities

63,94085,040Net assets
I

Shareholders’ equity
1.

Common stock¥ 14,928

2.

Capital surplus

44,16937,2793.

Retained earnings

90,29584,315

4.

Treasury stock

(841)

(540)

148,552

129,092

Total shareholders’ equity
II

¥

8,038

Valuation and translation adjustments
1.

Unrealized gain on revaluation of other investment securities

2.

Foreign currency translation adjustments

Total valuation and translation adjustments
III

Stock acquisition rights

IV

Minority interests in consolidated subsidiaries

(12)

(8)

(1,504)377(1,517)

368

81

—

1,077

1,178

Total net assets

148,193

130,639

Total liabilities and net assets¥212,134¥215,679

The accompanying notes are an integral part of these statements.

23

Consolidated Statements of Income (JPNGAAP)SQUARE ENIX CO., LTD. and Consolidated Subsidiaries
Years ended March 31
Millions of yen

			I
Net sales
II
Cost of sales
Gross profit
Reversal of allowance for sales returns
Provision of allowance for sales returns
Net gross profit
III Selling, general and administrative expenses
1. Packaging freight charges
2. Advertising expenses
3. Sales promotion expenses
4. Provision for doubtful accounts
5. Compensation for directors
6. Salaries
7. Provision of reserve for bonuses
8. Net periodic pension cost
9. Provision of reserve for directors’ retirement benefits
10. Welfare expenses
11. Rental expenses
12. Commissions paid
13. Depreciation and amortization
14. Other* 1
Operating income
IV Non-operating income
1. Interest income
2. Dividends received
3. Foreign exchange gain
4. Rental income
5. Facilities installation assistance fund fees
6. Investment profit on equity method
7. Miscellaneous income
V
Non-operating expenses
1. Interest expense
2. Foreign exchange loss
3. Loss on disposal of inventories
4. Loss on write-offs of content production account
5. Loss on inventory revaluation
6. Stock issuance expenses
7. Loss on write-off of advance license payment
8. Miscellaneous loss
Recurring income
VI Extraordinary gain
1. Gain on sale of investment securities
2. Gain on divestiture of a business
3. Reversal of allowance for doubtful accounts
4. Reversal of allowance for retirement benefits
5. Reversal of allowance for closing of game arcades
6. Other
VII Extraordinary loss
1. Loss on sale of property and equipment*2
2. Loss on disposal of property and equipment* 3
3. Impairment loss* 5
4. Loss on write-offs of bad debts
5. Loss on revaluation of investment securities* 4
6. Loss on disposal and write-downs of assets associated with business restructuring* 6
7. Severance payments associated with business restructuring
8. Accelerated amortization of goodwill
9. Provision of allowance for doubtful accounts
10. Provision of allowance for closing of game arcades
11. Legal settlement payment
12. Other		
Income before income taxes and minority interests and distribution of loss		in a partnership (tokumei-kumiai )		Distribution of loss in a partnership (tokumei-kumiai )		Income before income taxes and minority interests
		
Corporate, inhabitants’ and enterprise taxes		
Refunded income taxes
		Deferred income taxes
		
Minority interests in consolidated subsidiaries		
Net income
The accompanying notes are an integral part of these statements.

24

2008
¥147,516
81,201
66,3142,271
1,135
67,45045,929
2,421
5,892
642
8
567
15,889
1,403
36
47
2,024
2,483
3,209
1,463
9,839
21,520
1,367
959
2
—
70
52
23
258
4,023
0
1,858
119
1,799
170
—
—
75
18,864
1,439
64
47
204
—
1,098
24
3,618
145
950
9
170
55
1,302
45
136
452
54
156
140

2007
¥163,472
87,262
76,2101,186
2,271
75,12549,209
2,493
6,331
1,060
—
682
15,482
2,237
446
42
2,046
2,325
3,357
1,464
11,23825,916
1,176
467
3
147
69
51
29
407
852
2
—
119
—
281
31
244
172
26,241
3,778
410
2,697
2
465
—
203
11,629
17
1,085
368
—
194
2,275
925
1,831
2,086
2,784
—
60

16,685
4
16,681
1,865
(424)
6,116
(73)
¥ 9,196

18,39016
18,374
2,915
(127)
3,941
24
¥ 11,619

Consolidated Statements of Changes in Net Assets (JPNGAAP)SQUARE ENIX CO., LTD. and Consolidated Subsidiaries
Years ended March 31
Millions of yen		Shareholders’ equity
Valuation and translation adjustments				CommonCapital Retained Treasury
Total Unrealized
Foreign
Total
Stock
Minority		
stock
surplus earnings
stock shareholders’gain oncurrency
valuation acquisition interests in						
equity revaluationtranslation
andrights consolidated							of other adjustments translation		 subsidiaries							 investment		 adjustments			
							 securities

Balance as of March 31, 2007

¥ 8,038 ¥37,279 ¥84,315¥(540) ¥129,092

¥ (8)

¥ 377

¥ 368

¥—

Total
net assets¥1,178 ¥130,639

Changes during the year
Exercise of warrants attached
to bonds

6,499

6,499

—

—

12,999

—

—

—

—

—

New stock issuances

390

390

—

—

780

—

—

—

—

—

780

Dividends from retained earnings——(3,884)—(3,884)

—

—

—

—

—

(3,884)

Net income

—

—

9,196

—

9,196

—

—

—

—

—

9,196

Disposition of treasury stock

—

0

—

1

1

—

—

—

—

—

1

Acquisition of treasury stock

—

—

—

(301)

(301)

—

—

—

—

—

(301)

Change due to increasein consolidation

—

—

(63)

—

(63)

—

—

—

—

—

(63)

Increase in retained earnings due to
exclusion of subsidiaries fromthe scope of consolidation

—

—

731

—

731

—

—

—

—

—

731

Net changes in items other thanshareholders’ equity

—

—

—

—

—

(4)

(1,881)(1,886)81(100)(1,905)

6,890

6,890

5,979

(300)

19,459(4)(1,881)(1,886)81(100)

17,554¥(841) ¥148,552¥ (12)¥(1,504)¥(1,517)¥81

Total changes during the year
Balance as of March 31, 2008

¥14,928 ¥44,169 ¥90,295

12,999¥1,077 ¥148,193

The accompanying notes are an integral part of these statements.

Millions of yen		Shareholders’ equity
Valuation and translation adjustments				CommonCapital Retained Treasury
Total Unrealized
Foreign
Total
Minority
Total
		
stock
surplus earnings
stock shareholders’gain oncurrency
valuationinterests in
net assets						
equity revaluationtranslationand consolidated							of other adjustments translation subsidiaries							 investment		 adjustments			
							 securities

Balance as of March 31, 2006

¥7,803 ¥37,044 ¥76,022¥(506) ¥120,364

¥531

¥ 97

¥628

¥1,120 ¥122,114

Changes during the year
New stock issuances

234

234

—

—

469

—

—

—

—

469

Year end dividends fromretained earnings——(2,210)—(2,210)

—

—

—

—

(2,210)Interim dividends fromretained earnings——(1,105)—(1,105)

—

—

—

—

(1,105)

Net income——

11,619—11,619————11,619

Disposition of treasury stock

—

(0)

—

2

2

—

—

—

—

2

Acquisition of treasury stock

—

—

—

(37)

(37)

—

—

—

—

(37)

Change due to increasein consolidation

—

—

(10)

—

(10)

—

—

—

—

(10)

Net changes in items other thanshareholders’ equity
Total changes during the year
Balance as of March 31, 2007

—

—

—

—

—

(540)

280

(260)

57

(202)

234

234

8,293

(34)

8,727

(540)

280

(260)

57

8,525

¥(540) ¥129,092

¥ (8)

¥377

¥368

¥8,038 ¥37,279 ¥84,315

The accompanying notes are an integral part of these statements.

25¥1,178 ¥130,639

Consolidated Statements of Cash Flows (JPNGAAP)SQUARE ENIX CO., LTD. and Consolidated Subsidiaries
Years ended March 31
Millions of yen

			
I

2008

2007

¥ 16,681¥ 18,374

9,933

11,115

9368

Cash flows from operating activities
Income before income taxes and minority interests
Depreciation and amortization
Impairment loss
(Decrease) increase in allowance for doubtful accounts
Decrease in reserve for bonuses(4,949)

734

(69)

(775)

(1,136)

1,077

Decrease in allowance for employees’ retirement benefits

(640)

(832)

(Decrease) increase in allowance for directors’ retirement benefits

(46)

72

(1,795)

2,773

(962)

(470)

0

2

(Decrease) increase in allowance for sales returns(Decrease) increase in allowance for closing of game arcades and other allowancesInterest and dividends received
Interest expense
Foreign exchange loss (gain)
Gain on sale of investment securities

1,670

(76)

(64)

(410)

Loss on revaluation of investment securities

55

194

Loss on disposal of property and equipment

950

1,085

Loss on sale of property and equipment

145

17

(47)

(2,697)

1,230

1,386

Accelerated amortization of goodwill

136

1,831

Loss on disposal of assets associated with business restructuring

789—

Other loss—

693

Decrease in accounts receivable

2,940

11,090

Increase in inventories(2,365)(2,780)(Decrease) increase in accounts payable(3,095)

1,671

Decrease in accrued consumption taxes

(249)

(320)

(Increase) decrease in other current assets

(206)

800

Gain on divestiture of a business
Amortization of goodwill

Decrease (increase) in other non-current assets

4,827

(158)

Decrease in other current liabilities(1,809)(5,432)Other		

SubtotalInterest and dividends received
Interest paid
Income taxes paid
Net cash provided by operating activities
The accompanying notes are an integral part of these statements.

26

1,416

243

23,34539,577

974

487

(0)

(5)

(663)

(7,249)¥ 23,655¥ 32,809

Millions of yen

			
II

2008

Investments in time deposits

¥

(62)

¥

—

31

—

Payments for acquiring short-term securities(4,014)—

Proceeds from sale of short-term securities

4,014

—

Payments for acquiring investment securities

(347)

—

Proceeds from time deposits

Proceeds from sale of investment securities
Payments for acquiring property and equipment
Proceeds from sale of property and equipment
Payments for acquiring intangible assets

155

443

(6,597)(10,733)

59

—

(259)

(413)

0

—

Payments for acquisition of shares in subsidiaries and affiliated companies

(90)

(63)

Proceeds from sale of shares in subsidiaries and an affiliated company

113—

Proceeds from divestiture of a business

47

4,514

Proceeds from return of guarantee money deposited

1,903

1,113

Payments for provision of guarantee money

(591)

(398)

Other

(168)

(134)

(5,805)(5,671)

Proceeds from issuances of shares of common stock

780

438

Payments for acquisition of treasury stock

(301)

(37)

(3,882)(3,314)

Payments for dividends for minority interests

(2)

(2)

Other

1

2

(3,404)(2,912)

Proceeds from sale of intangible assets

Net cash used in investing activities
III

2007

Cash flows from investing activities

Cash flows from financing activities

Payments for dividends

Net cash used in financing activities
IV

Effect of exchange rate changes on cash and cash equivalents(2,756)356

V

Net increase in cash and cash equivalents

11,68924,582

VI

Cash and cash equivalents at beginning of the year

99,84775,252

VII

Cash and cash equivalents of newly consolidated subsidiaries

12

13

VIII Decrease in cash and cash equivalents due to exclusion of subsidiaries from the scopeof consolidation
IX

Cash and cash equivalents at end of the year* 1

The accompanying notes are an integral part of these statements.

27

(70)

—

¥111,479¥ 99,847

Notes to Consolidated Financial Statements (JPNGAAP)SQUARE ENIX CO., LTD. and Consolidated Subsidiaries

Summary of Significant Accounting Policies Used in
the Preparation of Consolidated Financial Statements

ZERO RESEARCH LTD. was liquidated during the fiscal year ended March
31, 2007. The Company established SG Lab Inc., Stylewalker, Inc., and
PlayOnline Co., Ltd. during the fiscal year ended March 31, 2007.

1. Scope of Consolidation• FY2006 (April 1, 2006 to March 31, 2007)(1) Number of consolidated subsidiaries:
19 and one partnership		 DIGITAL ENTERTAINMENT ACADEMY CO., LTD.
		 COMMUNITY ENGINE INC.
		 TAITO CORPORATION		 SQUARE ENIX OF AMERICA HOLDINGS, INC.
		 SQUARE ENIX, INC.
		 SQUARE L.L.C.
		 SQUARE PICTURES, INC.
		 SQUARE ENIX LTD.
		 SQUARE ENIX (China) CO., LTD.
		 SQUARE ENIX WEBSTAR NETWORK TECHNOLOGY
		 (BEIJING) CO., LTD.
		 COMMUNITY ENGINE NETWORK SOFTWARE
		 (BEIJING) CO., LTD.
		 UIEVOLUTION, INC.
		 FF·FILM·PARTNERS (partnership)
		 HUANG LONG CO., LTD.
		 BEIJING TAIXIN CULTURAL AMUSEMENT CO., LTD.
		 TAITO KOREA CORPORATION		 TAITO ART CORPORATION
		 EFFORT CO., LTD.
		 TAITO TECH CO., LTD.
		 UIE JAPAN CO., LTD.

(Rationale for the exclusion of subsidiaries from the scope of consolidation)
Non-consolidated subsidiaries conduct operations that are relatively
small in scale. The total amounts of the non-consolidated subsidiaries’
assets, sales, equity in net income (loss), and equity in retained earnings (deficit) are deemed to have an immaterial effect on the Company’s
financial performance and consolidated financial statements.
• FY2007 (April 1, 2007 to March 31, 2008)(1) Number of consolidated subsidiaries:
17 and one partnership		 DIGITAL ENTERTAINMENT ACADEMY CO., LTD.
		 COMMUNITY ENGINE INC.
		 TAITO CORPORATION		 SQUARE ENIX OF AMERICA HOLDINGS, INC.
		 SQUARE ENIX, INC.
		 SQUARE L.L.C.
		 SQUARE PICTURES, INC.
		 SQUARE ENIX LTD.
		 SQUARE ENIX (China) CO., LTD.
		 SQUARE ENIX WEBSTAR NETWORK TECHNOLOGY
		 (BEIJING) CO., LTD.
		 FF . FILM . PARTNERS (partnership)
		 HUANG LONG CO., LTD.
		 BEIJING TAIXIN CULTURAL AMUSEMENT CO., LTD.
		 TAITO KOREA CORPORATION		 TAITO ART CORPORATION
		 EFFORT CO., LTD.
		 TAITO TECH CO., LTD.
		 SG Lab Inc.

UIE JAPAN CO., LTD., has been included in the scope of consolidation of SQUARE ENIX CO., LTD. (the “Company”) effective this fiscal
year, owing to its increase in materiality.
In this fiscal year, the Company established SQUARE ENIX OFAMERICA HOLDINGS, INC., in November 2006 as a holding company
to oversee the Company’s operations in North America.
On December 6, 2006, through investment in kind of sharesamounting to US$19,100 thousand in certain of the Company’s subsidiaries, SQUARE ENIX, INC. and SQUARE PICTURES, INC., thesecompanies became special-purpose subsidiaries under Article 24,
Paragraph 5, Item 4 of the Securities Exchange Law and Cabinet
Ordinance No. 19 Concerning the Disclosure of Corporate Details.
SQUARE ENIX WEBSTAR NETWORK TECHNOLOGY (BEIJING) CO.,LTD. is currently undergoing liquidation procedures.

SG Lab Inc. has been included in the Company’s scope of consolidation
effective this fiscal year, owing to its increase in materiality.
COMMUNITY ENGINE NETWORK SOFTWARE (BEIJING) CO., LTD.,
was liquidated in this fiscal year.
UIEVOLUTION, INC. and UIE JAPAN CO., LTD. were excluded fromthe Company’s scope of consolidation in this fiscal year, owing to thetransfer of all shares held in these companies to another party.
SQUARE ENIX WEBSTAR NETWORK TECHNOLOGY (BEIJING) CO., LTD.
is currently undergoing liquidation procedures.
(2) Non-consolidated subsidiaries:
		 SOLID CO., LTD.
		 PlayOnline, Inc.
		 SQUARE ENIX MOBILE STUDIO CO., LTD.
		 SMILE-LAB Co., Ltd.

(2) Non-consolidated subsidiaries:
		 SOLID CO., LTD.
		 SG Lab Inc.
		 Stylewalker, Inc.
		 PlayOnline, Inc.

SQUARE ENIX MOBILE STUDIO CO., LTD. and SMILE-LAB Co., Ltd.
were established in this fiscal year.

28

(Rationale for the exclusion of subsidiaries from the scope of
consolidation)
Same as FY2006

For SQUARE ENIX WEBSTAR NETWORK TECHNOLOGY (­ BEIJING)
CO., LTD., a provisional settlement of accounts as of the Company’sbalance sheet date was used as the basis for the preparation of theconsolidated ­f inancial statements.

2. Application of the Equity Method of Accounting• FY2006 (April 1, 2006 to March 31, 2007)
Number of equity-method affiliates: 4
		 Baltec Co., Ltd.
		 Kaaku Ltd.
		 Kaasa Solution GmbH		 Brave, Inc.

• FY2007 (April 1, 2007 to March 31, 2008)
Among the Company’s consolidated subsidiaries, the fiscal years of
SQUARE ENIX (China) CO., LTD., HUANG LONG CO., LTD., BEIJINGTAIXIN CULTURAL AMUSEMENT CO., LTD., SQUARE PICTURES, INC.
and FF . FILM . PARTNERS end on December 31.
In the preparation of the accompanying consolidated financial
statements, their financial statements which have a December 31
fiscal year end, have been used. Significant transactions between
their fiscal year end and the consolidated balance sheet date ofMarch 31 are reconciled for consolidation.
For SQUARE ENIX WEBSTAR NETWORK TECHNOLOGY (BEIJING)
CO., LTD., a provisional settlement of accounts as of the Company’sbalance sheet date was used as the basis for the preparation of theconsolidated ­f inancial statements.

Non-consolidated subsidiaries that are not accounted for under theequity method (SOLID CO., LTD., SG Lab Inc., Stylewalker, Inc. and
PlayOnline, Inc.) and affiliated companies (BMF CORPORATION and
KUSANAGI INC.) were excluded from the scope of application of theequity method because their impact on consolidated net income andretained earnings was small.
During the fiscal year ended March 31, 2007, the Company
invested in Brave, Inc., turning this company into a subsidiaryaccounted for under the equity method.

4. S ummary of Significant Accounting Policies(1) Standards and valuation methods for major assets• FY2006 (April 1, 2006 to March 31, 2007)
A) Investment securities
Other investment securities
		 Securities for which fair values are available:			Market value, determined by the quoted market price as of
the balance sheet date, with unrealized gains and losses
reported as a separate component of net assets at a
net-of-tax amount, and cost of sales determined by the­m oving-average method
		 Securities for which fair values are unavailable:
			 Stated at cost determined by the average methodB) Inventories
Manufactured goods, merchandise:Stated at cost, determined by the monthly average method
Certain consolidated subsidiaries, however, determine cost by
the moving-average method
Content production account:
		 Stated at cost, determined by the identified cost method
Amusement equipment:
		 Stated at cost, determined by the identified cost method
Unfinished goods:
Some consolidated subsidiaries state unfinished goods
at cost, determined by the moving-average method
Supplies:
		 Stated at the last purchase price• FY2007 (April 1, 2007 to March 31, 2008)
Number of equity-method affiliates: 3
Kaaku Ltd.
Kaasa Solution GmbH
Brave, Inc.
Baltec Co., Ltd. was excluded from application of the equity methodin this fiscal year, owing to the transfer of all shares held in thatcompany to another party.
Non-consolidated subsidiaries that are not accounted for underthe equity method (SOLID CO., LTD., PlayOnline, Inc., SQUARE ENIX
MOBILE STUDIO CO., LTD. and SMILE-LAB Co., Ltd.) and affiliatedcompanies (BMF CORPORATION, Stylewalker, Inc. and KUSANAGI
INC.) were excluded from the scope of application of the equity
method because their impact on consolidated net income andretained earnings was small.
3. F iscal Year End of Consolidated Subsidiaries• FY2006 (April 1, 2006 to March 31, 2007)
Among the Company’s consolidated subsidiaries, the fiscal years of
SQUARE ENIX (China) CO., LTD., HUANG LONG CO., LTD.,COMMUNITY ENGINE NETWORK SOFTWARE (BEIJING) CO., LTD.,
BEIJING TAIXIN CULTURAL AMUSEMENT CO., LTD., SQUAREPICTURES, INC. and FF·FILM·PARTNERS end on December 31.
In the preparation of the accompanying consolidated financial
statements, their financial statements which have a December 31
fiscal year end, have been used. Significant transactions between
their fiscal year end and the consolidated balance sheet date ofMarch 31 are ­r econciled for consolidation.

• FY2007 (April 1, 2007 to March 31, 2008)
A) Investment securities
Other investment securities
		 Securities for which fair values are available:
			 Same as in FY200629	Additional information
	Pursuant to the revision of the Corporation Tax Law, effective
this fiscal year, for assets acquired on or before March 31,
2007, the Company and its domestic consolidated subsidiaries
apply the method of accounting for depreciation provided in the
Corporation Tax Law prior to the revision and depreciate the difference between 5% of an asset’s acquisition cost and its memorandum value using the straight-line method over a period offive years, from the fiscal year following the fiscal year in which
the net book value of the asset reaches 5% of its acquisitioncost. These differences are recorded in depreciation expense.
		 The impact of this change was a ¥149 million decrease inoperating income and recurring income, and a ¥146 million
decrease in income before income taxes and minority interestsfrom the corresponding amounts which would have beenrecorded under the previous method.
		 The impact of this change on segment information is­p resented in the applicable section of these notes.
B) Intangible assets
		 Same as in FY2006

		 Securities for which fair values are unavailable:
			 Same as in FY2006
B) Inventories
Manufactured goods, merchandise:		 Same as in FY2006
Content production account:
		 Same as in FY2006
Amusement equipment:
		 Same as in FY2006
Unfinished goods:
		 Same as in FY2006
Supplies:
		 Same as in FY2006(2) Method of depreciation and amortization of major assets:• FY2006 (April 1, 2006 to March 31, 2007)
A) Property and equipment
	Property and equipment of the Company and its domestic­c onsolidated subsidiaries are depreciated using the decliningbalance method. However, the straight-line method is applied tobuildings (excluding building fixtures) acquired on or after April
1, 1998. The estimated useful lives of major assets are as
follows:
			 Buildings and structures
3–65 years
			 Tools and fixtures
3–15 years
			 Amusement equipment
3–8 yearsB) Intangible assets
	The Company and certain consolidated subsidiaries amortize
software used in-house using the straight-line method, basedon an internal estimate of its useful life (five years).
		 Trademarks are amortized using the straight-line method overa period of 10 years.

(3) Accounting for allowances and reserves:• FY2006 (April 1, 2006 to March 31, 2007)
A) Allowance for doubtful accounts
	An allowance for doubtful accounts provides for possible losses
on defaults of accounts receivable. The allowance is made up of
two components: the estimated credit loss on doubtful receivables based on an individual assessment of each account, and ageneral reserve calculated based on ­h istorical default rates.
B) Reserve for bonuses	A reserve for bonuses is provided for payments to employees of
the Company and its consolidated subsidiaries at the amount
expected to be paid in respect of the ­c alculation period ended
on the balance sheet date.
C) Allowance for sales returns
	An allowance is provided for losses on the return of publishedmaterials, at an amount calculated based on ­h istorical experience, prior to this fiscal year. In addition, an allowance is provided for losses on the return of game software and other items,
at an estimated amount of future losses assessed by game title.
D) Allowance for closing of game arcades	For closing of game arcades determined during this fiscal year,
an allowance is provided at an amount in line with reasonableestimates of future losses on such closures.
E) Allowance for employees’ retirement benefits	An allowance for employees’ retirement benefits is provided at
the amount incurred during the fiscal year, which is based on
the estimated present value of the projected benefit obligation.
Unrecognized actuarial differences are fully amortized in the year
following the year in which they arise. At certain consolidated
subsidiaries, amortization for each fiscal year is made over a• FY2007 (April 1, 2007 to March 31, 2008)
A) Property and equipment
		 Same as in FY2006
	Change in method of depreciation
	Pursuant to the revision of the Corporation Tax Law, effective thisfiscal year, for tangible fixed assets acquired on or after April 1,
2007, the Company and its domestic consolidated subsidiaries
have changed their method of accounting for depreciation to thatprovided under the revised Corporation Tax Law.
		 The impact of this change was an ¥828 million decrease inoperating income, and an ¥829 million decrease in recurringincome and income before income taxes and minority interestsfrom the corresponding amounts which would have beenrecorded under the previous method.
		 The impact of this change on segment information is­p resented in the applicable section of these notes.

30

certain period (five years) using the straight-line method within
the average remaining years of service of the eligible employees
when the differences are recognized, commencing from the year
after the year in which they are incurred. Unrecognized prior service cost is amortized over a certain period (one year or five
years) within the average remaining service period of the eligible
employees. In addition, at certain of the Company’s domestic
consolidated subsidiaries, a reserve for employees’ retirement
benefits is provided at an amount equal to 100% of the benefits
the subsidiaries would be required to pay under the lump-­s um
retirement plan if all eligible employees were to voluntarily­t erminate their employment at the balance sheet date.
F) Allowance for directors’ retirement benefits	An allowance for directors’ retirement benefits is provided toadequately cover the costs of directors’ retirement b­ enefits,
which are accounted for on an accrual basis in accordance withinternal policy.

(4)	Translation of foreign currency transactions and accounts:• FY2006 (April 1, 2006 to March 31, 2007)
All monetary assets and liabilities of the Company and its domestic
consolidated subsidiaries denominated in foreign currencies aretranslated at the balance sheet date at the year end rates. The
resulting translation gains or losses are credited or charged toincome. All monetary assets and liabilities of overseas consolidated
subsidiaries are translated as of the balance sheet date at theyear end rates, and all income and expense accounts are translated
at rates for their respective periods. The resulting translation adjustments are recorded in net assets as “Foreign currency translation
adjustments” and are included in minority interests in consolidated
subsidiaries.
• FY2007 (April 1, 2007 to March 31, 2008)
Same as in FY2006(5) Accounting for leases:• FY2006 (April 1, 2006 to March 31, 2007)
Finance leases, other than those for which the ownership of theleased assets is considered to be transferred to the lessees, areaccounted for as operating leases.

• FY2007 (April 1, 2007 to March 31, 2008)
A) Allowance for doubtful accounts
		 Same as in FY2006
B) Reserve for bonuses
		 Same as in FY2006
C) Allowance for sales returns
		 Same as in FY2006
D) Allowance for closing of game arcades	For closures of game arcades that have been determined, anallowance is provided at an amount in line with reasonable­e stimates of future losses on such closures.
E) Allowance for employees’ retirement benefits	An allowance for employees’ retirement benefits is provided at
the amount incurred during the fiscal year, which is based on
the estimated present value of the projected benefit obligationand pension plan assets. Unrecognized actuarial differences are
fully amortized in the year following the year in which theyarise. At certain consolidated subsidiaries, amortization for eachfiscal year is made over a certain period (five years) using thestraight-line method within the average remaining years of­s ervice of the eligible employees when the differences are recognized, commencing from the year after the year in which they
are incurred. Unrecognized prior service cost is amortized overa certain period (one year or five years) within the averageremaining ­s ervice period of the eligible employees. In addition,
at certain of the Company’s domestic consolidated subsidiaries,
a reserve for employees’ retirement benefits is provided at an
amount equal to 100% of the benefits the subsidiaries would be
required to pay under the lump-­s um retirement plan if all eligible employees were to voluntarily t­ erminate their employment at
the balance sheet date.
F) Allowance for directors’ retirement benefits
		 Same as in FY2006• FY2007 (April 1, 2007 to March 31, 2008)
Same as in FY2006(6) Accounting for deferred assets:• FY2006 (April 1, 2006 to March 31, 2007)
A) Share delivery expenses
Costs associated with issuances of shares of common stock areexpensed as incurred.
• FY2007 (April 1, 2007 to March 31, 2008)
Not applicable(7)	Additional accounting policies used to prepare consolidated
financial statements:• FY2006 (April 1, 2006 to March 31, 2007)
A) Accounting treatment of consumption taxes	Income statement items are presented exclusive of ­c onsumption
taxes.
B) Accounting treatment of overseas consolidated subsidiaries
	The accounts and records of overseas consolidated subsidiaries
are maintained in conformity with accounting principles andpractices generally accepted in their respective countriesof domicile.
• FY2007 (April 1, 2007 to March 31, 2008)
A) Accounting treatment of consumption taxes
Same as in FY2006
B) Accounting treatment of overseas consolidated subsidiaries
Same as in FY200631

5. V aluation of Assets and Liabilities of Consolidated
Subsidiaries• FY2006 (April 1, 2006 to March 31, 2007)
All assets and liabilities of consolidated subsidiaries are revalued on
acquisition.

Standard for Business Divestitures” (Accounting Standards Board ofJapan Statement No. 7, December 27, 2005) and “Implementation
Guidance on Accounting Standard for Business Combinations andAccounting Standard for Business Divestitures” (AccountingStandards Board of Japan Guidance No. 10, December 27, 2005).

• FY2007 (April 1, 2007 to March 31, 2008)
Same as in FY2006• FY2007 (April 1, 2007 to March 31, 2008)
Not applicable

6. Amortization of goodwill• FY2006 (April 1, 2006 to March 31, 2007)
Goodwill is amortized using the straight-line method over a period ofeither five years or 20 years. However, goodwill whose value has
been extinguished is fully amortized during the fiscal year in which
it was incurred.

Reclassifications• FY2006 (April 1, 2006 to March 31, 2007)(Consolidated Balance Sheets)
In accordance with revisions made in the regulations for the consolidated balance sheet, the consolidation adjustment account and the“goodwill” portion of the “other” item within intangible assets at
March 31, 2006 were reclassified into “goodwill” effective the fiscal
year ended March 31, 2007. In the consolidated balance sheet atMarch 31, 2006, the “goodwill” portion of the “other” item within
intangible fixed assets amounted to ¥218 million.

• FY2007 (April 1, 2007 to March 31, 2008)
Same as in FY2006
7. S cope of Cash and Cash Equivalents in the Consolidated
Statements of Cash Flows• FY2006 (April 1, 2006 to March 31, 2007)
Cash and cash equivalents in the consolidated statements of cash
flows are comprised of cash on hand, bank deposits which are able
to be withdrawn on demand and highly liquid short-term investments with an original maturity of three months or less and withminor risk of significant fluctuations in value.

(Consolidated Statements of Cash Flows)
Within cash flows from operating activities, for the fiscal year ended
March 31, 2006, foreign exchange gains and losses were recordedin the “other” category of cash flows from operating activities. Thishas been listed as a separate accounting category effective the­f iscal year ended March 31, 2007.
The amount within the “other” category corresponding to foreignexchange gains and losses for the fiscal year ended March 31,
2006 was ¥(223) million.
For the fiscal year ended March 31, 2006, goodwill amortization was included within the “other” segment in cash flows fromoperating activities. This has been listed as a separate accounting
category effective the fiscal year ended March 31, 2007.
Amortization of the consolidated adjustment account, includedin the “other” category for the fiscal year ended March 31, 2006,
was ¥1,445 million.

• FY2007 (April 1, 2007 to March 31, 2008)
Same as in FY2006

New Accounting Standards• FY2006 (April 1, 2006 to March 31, 2007)(Accounting Standard for Presentation of Net Assets in the
Balance Sheet)“Accounting Standard for Presentation of Net Assets in the Balance
Sheet” (Accounting Standards Board of Japan Statement No. 5,
December 9, 2005) and “Guidance on Accounting Standard for
Presentation of Net Assets in the Balance Sheet” (AccountingStandards Board of Japan Guidance No. 8, December 9, 2005) wereadopted effective the fiscal year ended March 31, 2007. The amountcorresponding to total shareholders’ equity under the previous
method of presentation was ¥129,461 million.
The net assets section of the consolidated balance sheet was
prepared in accordance with the revised “Regulations for
Consolidated Financial Statements.”• FY2007 (April 1, 2007 to March 31, 2008)
Not applicable
Notes to Consolidated Balance Sheets• FY2006 (April 1, 2006 to March 31, 2007)*1 Investments in non-consolidated subsidiaries and affiliates:
		 Investments and other assets¥119 million*2 Contingent liabilities for guarantees:
The Company’s consolidated subsidiary, TAITO CORPORATION,
has issued a guarantee of ¥12 million covering its lease obligations
to Diamond Asset Finance Co., Ltd., one of the Company’s sales
partners.

(Accounting Standards for Business Combinations)
Effective the fiscal year ended March 31, 2007, the Company
adopted “Accounting Standard for Business Combinations”(Business Accounting Council, October 31, 2003), “Accounting32

*3 Notes maturing at the end of FY2006:
Notes maturing at the end of FY2006 were accounted for as if
the notes had been settled as of the end of FY2006, although thatdate fell on a bank holiday. The amount of notes maturing at the endof FY2006 was as follows:
Notes receivable¥410 million

individually. In addition, assets related to the Group’s headquarters
and welfare facilities are classified as common-use assets.
Of the assets listed above, as a result of the restructuring of theamusement business, the assets owned by the pachinko and slot
machine department were marked down to their respective recoverable values, resulting in an impairment loss of ¥102 million, which
was recorded as an extraordinary loss.
For e-commerce assets, tools and fixtures were marked down totheir respective recoverable values, resulting in an impairment loss of¥66 million, which was posted as an extraordinary loss. As the market
values of buildings, land and telephone subscription rights that wereidle were substantially lower than their respective market values, andas they were not expected to be used in the future, they were marked
down to their respective recoverable values, resulting in an impairment
loss of ¥112 million, which was posted as an extraordinary loss.
In principle, the recoverable amounts for these assets are determinedbased on market prices calculated using real estate appraisals.
Related to the Republic of Korea (TAITO KOREA CORPORATION),
an impairment loss of ¥40 million was posted as an extraordinary
loss. This amount represents the difference between the appraised
income potential in excess of acquisition cost for amusement facilities in the Republic of Korea at the time of acquisition, and the current level of income assessed as recoverable above acquisition cost.
*6 A breakdown of loss on disposal and write-downs of assets­a ssociated with business restructuring is as follows:
Inventories¥1,368 million
Amusement equipment
666 million
Other (current assets)
239 million
Total		
¥2,275 million• FY2007 (April 1, 2007 to March 31, 2008)*1 Investments in non-consolidated subsidiaries and affiliates:
		 Investments and other assets¥173 million*2 Contingent liabilities for guarantees:
The Company’s consolidated subsidiary, TAITO CORPORATION,
has issued a guarantee of ¥1 million covering its lease obligations
to Diamond Asset Finance Co., Ltd., one of the Company’s sales
partners.
*3 Not applicable
Notes to Consolidated Statements of Income• FY2006 (April 1, 2006 to March 31, 2007)*1 Selling, general and administrative
expenses include R&D costs of¥2,374 million*2 Breakdown of loss on sale of property and equipment
Tools and fixtures¥17 million*3 Breakdown of loss on disposal of property and equipment
Buildings and structures¥ 269 million
Tools and fixtures
266 million
Amusement equipment
484 million
Software56 million
Other
7 million
Total		
¥1,085 million*4 Loss on revaluation of investment securities was due to a­s ignificant decline in market prices of marketable securities.
*5 Impairment loss
In this fiscal year, the Group posted impairment losses on thefollowing asset groups:• FY2007 (April 1, 2007 to March 31, 2008)*1 Selling, general and administrative
expenses include R&D costs of¥1,581 million*2 Breakdown of loss on sale of property and equipment
Tools and fixtures¥145 million*3 Breakdown of loss on disposal of property and equipment
Buildings and structures¥ 62 million
Tools and fixtures
131 million
Amusement equipment
741 million
Other
15 million
Total		
¥950 million*4 Loss on revaluation of investment securities was due to a­s ignificant decline in market prices of marketable securities.
*5 Impairment loss
In this fiscal year, the Group posted impairment losses on a­f ollowing asset group:

Millions of yen
				
Location
Usage
Category

Impairment
amountKumagaya-shi, Saitama Idle assets
Buildings, land
Chiyoda-ku, Tokyo
Idle assets,
Tools andand otherotherfixtures
Chiyoda-ku, Tokyo
Idle assets
Telephoneand other		 subscription rights
Republic of Korea		
Goodwill
Other			Total			

¥ 91
169
21
40
44
¥368

Cash inflows from business segments of the Group are complementary to one another in terms of similarities in the nature of products,
merchandise, services and markets. Consequently, all assets for
operational purposes are classified in one asset group, and idle
assets which are not used for operational purposes are classified

Millions of yen

33

				
Location
Usage
Category

Impairment
amountShibuya-ku, Tokyo
Idle assets
Telephoneand other		 subscription rights
Total		

¥9¥9

Items Pertaining to the Consolidated Statements of Changes
in Net Assets• FY2006 (April 1, 2006 to March 31, 2007)
1. Type and number of shares issued and outstanding, and typeand number of shares of treasury stock

Cash inflows from business segments of the Group are complementary to one another in terms of similarities in the nature of products,
merchandise, services and markets. Consequently, all assets for
operational purposes are classified in one asset group, and idle
assets which are not used for operational purposes are classified
individually. In addition, assets related to the Group’s headquarters
and welfare facilities are ­c lassified as common-use assets.
Telephone subscription rights in the above table were idle
assets and their market value fell substantially below their respective book value. Since they were not expected to be used in the
future, they were marked down to their respective recoverable value,
resulting in an impairment loss of ¥9 million, which was posted as
an extraordinary loss.
In principle, the recoverable amounts for these assets are­d etermined based on their respective fair value calculated using
market prices.
*6 A breakdown of loss on disposal and write-downs of assets­a ssociated with business restructuring is as follows:
Inventories¥ 658 million
Current assets
249 million
Other
394 million
Total		
¥1,302 million

Thousands of shares
		
		
		

Shares at
the end of
FY2005

Shares issued andoutstanding
Common stock* 1
Total
Treasury stock* 2
Common stock
Total

Share
Share Shares atincreases
decreases the end of
during the Year during the Year
FY2006

110,729
110,729

218
218— 110,947— 110,947

182
182

12
12

0
0

193
193

*1 The increase of 218 thousand shares of common stock issued and outstanding
was due to the exercise of stock options.
*2 The increase of 12 thousand shares of treasury stock was due to the acquisitionof fractional shares constituting less than one trading unit.
		 The decrease of 0 thousand shares of treasury stock was due to the sale offractional shares constituting less than one trading unit.

2. Stock options and the Company’s stock options
Number of shares allocated for the purpose of stock options
Type of shares issuable					for the exercise of
End ofIncrease during Decrease during
End ofstock options
FY2005
FY2006
FY2006
FY2006

		Details of stock
Category
options
			

		
		
		
Supplying company(parent company)
		
		
		

Issuance of yendenominated zerocoupon warrant bonds
maturing in 2010,
pursuant to a resolution of
the Board of Directors
on November 9, 2005
Total

Balance atthe end of FY2006(Millions of yen)

Commonstock

9,803,921

4,901,961—

14,705,882——

9,803,921

4,901,961—

14,705,882—

Note: The increase of 4,901,961 shares during the year was due to conversion price adjustment conditions being applied to warrant bonds in accordance with the debenture indenture.

3. Dividends(1) Dividend payments			Date of approval
Type of shares

June 24, 2006
(Annual General Meeting of Shareholders)November 17, 2006
(Board of Directors’ Meeting)Total dividends(Millions of yen)

Dividends per share(Yen)

Record date

Effective dateCommon stock¥2,210¥20

March 31, 2006

June 26, 2006

Common stock

1,150

10

September 30, 2006 December 8, 2006

(2) Dividends with a record date during this fiscal year, but whose effective date falls in the following fiscal year			Date of approval
Type of shares

June 23, 2006
(Annual General Meeting of Shareholders)Common stock

Total dividends		
Dividends per share(Millions of yen) Source of dividends(Yen)¥2,76834

Retained earnings¥25

Record date

Effective date

March 31, 2007 June 25, 2007

• FY2007 (April 1, 2007 to March 31, 2008)
1. Type and number of shares issued and outstanding, and typeand number of shares of treasury stockThousands of shares
		
		
		

Shares issued andoutstanding
Common stock* 1
Total
Treasury stock* 2
Common stock
Total

Shares at
Share
Share Shares atthe end ofincreases
decreases the end of
FY2006 during the Year during the Year
FY2007110,947
110,947

4,170
4,170

193
193

98
98

— 115,117— 115,117
0
0

291
291

*1 The increase of 4,170 thousand shares of common stock issued and outstanding
was due to the exercise of stock options and warrants attached to bonds.
*2 The increase of 98 thousand shares of treasury stock was due to the acquisitionof treasury stock in accordance with a resolution approved by the Board of
Directors at a meeting held on January 25, 2008, and the acquisition of fractional
shares c­ onstituting less than one trading unit.
		 The decrease of 0 thousand shares of treasury stock was due to the sale offractional shares constituting less than one trading unit.

2. Stock options and the Company’s stock options
Number of shares allocated for the purpose of stock options
Type of shares issuable					for the exercise of
End ofIncrease during Decrease during
End ofstock options
FY2006
FY2007
FY2007
FY2007

		Details of stock
Category
options
			

		
		
		
Supplying company(parent company)
		
		
		
		
		

Issuance of yendenominated zerocoupon warrant bonds
maturing in 2010,
pursuant to a resolution of
the Board of Directors
on November 9, 2005
Stock acquisition rights
as stock options
Total

Commonstock

14,705,882——

Balance atthe end of FY2007(Millions of yen)—

3,949,443 10,756,439———
14,705,882		

——
3,949,443 10,756,439

81
81

Note: The decrease of 3,949,443 shares during the year was due to the exercise of warrants attached to bonds and conversion price adjustment conditions being applied to warrant
bonds in ­a ccordance with the debenture indenture.

3. Dividends(1) Dividend payments			Date of approval
Type of shares

June 23, 2007
(Annual General Meeting of Shareholders)November 19, 2007
(Board of Directors’ Meeting)Total dividends(Millions of yen)

Dividends per share(Yen)

Record date

Effective dateCommon stock¥2,768¥25

March 31, 2007

June 25, 2007

Common stock

1,115

10

September 30, 2007 December 7, 2007

(2) Dividends with a record date during this fiscal year, but whose effective date falls in the following fiscal year			Date of approval
Type of shares

June 21, 2008
(Annual General Meeting of Shareholders)Common stock

Total dividends		
Dividends per share(Millions of yen) Source of dividends(Yen)¥2,29635

Retained earnings¥20

Record date

Effective date

March 31, 2008 June 23, 2008

Notes to Consolidated Statements of Cash Flows• FY2006 (April 1, 2006 to March 31, 2007)*1 A reconciliation of cash and cash equivalents in the consolidated statement of cash flows to the corresponding amount­d isclosed in the c­ onsolidated balance sheet is as follows:(As of March 31, 2007)
		 Cash and deposits¥99,852 million
		 Time deposits with maturity
		 periods over three months(5 million)
		 Cash and cash equivalents¥99,847 million

Lease Transactions• FY2006 (April 1, 2006 to March 31, 2007)
Information related to finance leases other than those that transfer
ownership to the lessee
1. Acquisition cost, accumulated depreciation and net book valueof leased assets:
Millions of yen				

Buildings and structures
Tools and fixtures
Total*2 Breakdown of key assets and liabilities resulting from the­t ransfer of a business.
The following figures represent reductions in key assets and­liabilities as a result of the transfer of the karaoke business of aconsolidated subsidiary, TAITO CORPORATION:
		 Current assets¥ 552 million
		 Non-current assets
1,879 million
			 Total assets¥2,431 million
		 Current liabilities¥ 614 million
			 Total liabilities¥ 614 million

Acquisition
cost

Accumulated
depreciation

Net book
value

¥ 238
2,182
¥2,420

¥ 73
811
¥884

¥ 165
1,371
¥1,536

Note: The total amount of future lease payments at the end of the year constituted
an insignificant portion of net property and equipment at the end of the year.
Accordingly, total acquisition cost included the interest portion thereon.

2. Ending balances of future lease payments:
		 Due within one year
		 Due after one year
		 Total¥ 451 million
1,084 million¥1,536 million

Note: The total future lease payments at the end of the year constituted an­insignificant portion of total property and equipment at the end of the year.
Accordingly, total future lease payments included the interest portion thereon.

• FY2007 (April 1, 2007 to March 31, 2008)*1 A reconciliation of cash and cash equivalents in the consolidated statement of cash flows to the corresponding amount­d isclosed in the c­ onsolidated balance sheet is as follows:(As of March 31, 2008)
		 Cash and deposits¥111,515 million
		 Time deposits with maturity
		 periods over three months(36 million)
		 Cash and cash equivalents¥111,479 million*2 Not applicable*3 Important non-cash transactions
The Company had the following important n­ on-cash transactions:
Increase in common stock due toconversion of convertible bonds¥ 6,499 million
Increase in capital surplus due toconversion of convertible bonds
6,499 million
Total		
¥12,999 million
Decrease in convertible bonds due totheir conversion¥13,000 million

3. Lease payments and depreciation expense:
		 Lease payments
		 Depreciation expense¥499 million
499 million

4. Method of calculation for depreciation
Depreciation is calculated using the straight-line method over auseful life with no residual value.
Operating lease transactions
Not applicable(Impairment loss)
No impairment loss was recognized on leased assets.

36

• FY2007 (April 1, 2007 to March 31, 2008)
Information related to finance leases other than those that transfer
ownership to the lessee
1. Acquisition cost, accumulated depreciation and net book valueof leased assets:

3. Other investment securities with market value:
Millions of yen				Type		

Securities with bookvalue exceeding(1) Stocks
acquisition cost
Subtotal
Securities withacquisition cost(1) Stocks
exceeding book value Subtotal
Total				Millions of yen				

Acquisition
cost

Accumulated
depreciation

Net bookvalue¥1,246
1,037¥2,283¥ 589
527¥1,116¥ 657
510¥1,167

Buildings and structures
Tools and fixtures
Total
Note: Same as in FY2006

2. Ending balances of future lease payments:
		 Due within one year
		 Due after one year
		 Total¥ 421 million
746 million¥1,167 million

Difference¥102 ¥142
102 142¥ 39
39

260 203260 203¥363 ¥345

(57)
(57)
¥(17)

4. Securities sold during the fiscal year:(April 1, 2006 to March 31, 2007)¥455 million
455 million

Millions of yen
Amount of sale

4. Method of calculation for depreciation
Same as in FY2006
Operating lease transactions
		 Future lease payments
		 Due within one year
		 Due after one year
		 Total

Book
value

Note: For the year ended March 31, 2007, the impairment loss associated with thefair market value determination of other investment securities with market
value was ¥36 million. Impairment loss on securities is charged to income
when the market price at the end of the fiscal year falls less than 50% of theacquisition cost. In addition, impairment loss on securities is charged toincome when the market price at the end of the fiscal year falls between
30% and 50% of the acquisition cost after considering factors such as thesignificance of the amount and the likelihood of recovery.

Note: Same as in FY2006

3. Lease payments and depreciation expense:
		 Lease payments
		 Depreciation expense

Acquisition
cost

¥443

Gain on sale

Loss on sale

¥410

¥—

5.	Investment securities whose fair values are not readily
determinable:
Millions of yen¥1,729 million
2,477 million¥4,207 million

				(1) Other investment securities
Unlisted securities (excluding OTC securities)
Unlisted overseas bonds(Impairment loss)
Same as in FY2006

Book value¥1080

Note: For the fiscal year ended March 31, 2007, the Company posted ¥157 million
in impairment losses related to its investments in unlisted companies.

Securities• FY2006 (April 1, 2006 to March 31, 2007)
1. Held-for-sale securities
Not applicable

6.	Redemption schedule of other securities with maturities andHeld-to-maturity securities
		 Not applicable

2. Held-to-maturity securities with market value
Not applicable• FY2007 (April 1, 2007 to March 31, 2008)
1. Held-for-sale securities
Not applicable
2. Held-to-maturity securities with market value
Not applicable37

3. Other investment securities with market value:(2) Transaction policy
The Company enters into forward foreign exchange contracts tocover anticipated transactions denominated in foreign currencies
but does not enter into such contracts for speculative purposes.

Millions of yen				Type		

Acquisition
cost

Securities with bookvalue exceeding(1) Stocks
acquisition cost
Subtotal
Securities withacquisition cost(1) Stocks
exceeding book value Subtotal
Total				

Book
value

Difference¥217 ¥266
217 266¥ 48
48

263 198
263 198¥481 ¥465

(65)
(65)
¥(16)

(3) Risks
Forward foreign exchange contracts are subject to market
risk arising from fluctuations in foreign exchange rates. The
Company deems the risk of nonperformance by the counterparties to forward foreign exchange contracts to be low because
the Company only enters into such contracts with financial­institutions that have high credit ratings.

Note: For the year ended March 31, 2008, the impairment loss associated with thefair market value determination of other investment securities with market
value was ¥31 million. Impairment loss on securities is charged to income
when the market price at the end of the fiscal year falls less than 50% of theacquisition cost. In addition, impairment loss on securities is charged toincome when the market price at the end of the fiscal year falls between
30% and 50% of the acquisition cost after considering factors such as thesignificance of amount and the likelihood of recovery.

(4) Risk management
Contracts are approved by a representative director and the
director with responsibility for this area. The Accounting and
Finance Division administers risk management.
2. Market valuation of transactions
Not applicable

4. Securities sold during the fiscal year:(April 1, 2007 to March 31, 2008)• FY2007 (April 1, 2007 to March 31, 2008)
1. Terms of transactions(1) Types and purposes of transactions
In principle, the Company does not engage in derivative transactions. However, from time to time, the Company enters into
forward foreign exchange contracts for the purpose of reducing
the risk of exposure to foreign exchange rate fluctuations.

Millions of yen
Amount of sale

¥155

Gain on sale

Loss on sale

¥64

¥—

5.	Investment securities whose fair values are not readily
determinable:
Millions of yen
				(1) Other investment securities
Unlisted securities (excluding OTC securities)
Unlisted overseas bonds

Book value(2) Transaction policy
The Company enters into forward foreign exchange contracts tocover anticipated transactions denominated in foreign currencies
but does not enter into such contracts for speculative purposes.

¥191
0

6.	Redemption schedule of other securities with maturities andHeld-to-maturity securities
		 Not applicable(3) Risks
Forward foreign exchange contracts are subject to market
risk arising from fluctuations in foreign exchange rates. The
Company deems the risk of nonperformance by the counterparties to forward foreign exchange contracts to be low because
the Company only enters into such contracts with financial­institutions that have high credit ratings.

Derivative Transactions• FY2006 (April 1, 2006 to March 31, 2007)
1. Terms of transactions(1) Types and purposes of transactions
In principle, the Company does not engage in derivative transactions. However, from time to time, the Company enters into
forward foreign exchange contracts for the purpose of reducing
the risk of exposure to foreign exchange rate fluctuations.

(4) Risk management
Contracts are approved by a representative director and the
director with responsibility for this area. The Accounting and
Finance Division administers risk management.
2. Market valuation of transactions
Not applicable38

Retirement Benefits• FY2006 (April 1, 2006 to March 31, 2007)
1. Overview of retirement benefit plan	The Company and its domestic consolidated subsid­iaries havea lump-sum retirement payment plan in accordance with theirinternal bylaws.
		 The projected benefits are allocated to periods of service ona straight-line basis. The Company’s domestic consolidated­s ubsidiaries apply a simplified method in the ­c alculation of theretirement benefit obligations. In addition, ­c ertain of theCompany’s overseas subsidiaries maintain defined contribution
retirement ­p ension plans.

4.	Assumptions used in accounting for the above plans:Periodic allocation method for projected benefits• FY2007 (April 1, 2007 to March 31, 2008)
1. Overview of retirement benefit plan	The Company and its domestic consolidated subsid­iaries have a
lump-sum retirement payment plan in accordance with theirinternal bylaws.
		 The projected benefits are allocated to periods of service ona straight-line basis. The Company’s domestic consolidated­s ubsidiaries apply a simplified method in the ­c alculation of theretirement benefit obligations. In addition, ­c ertain of theCompany’s overseas subsidiaries maintain defined contribution
retirement ­p ension plans.

2. Retirement benefit obligation:
Millions of yen

Retirement benefit obligation
Fair value of plan assets
Net unfunded obligation
Unrecognized prior service cost
Unrecognized actuarial gain
Allowance for retirement benefits

Straight-line basis

Discount rates
1.700%–2.093%
Expected rate of return on plan assets
1.700%
Period over which prior service cost is amortized
1–5 years
Period over which net actuarial gain or loss
is amortized
1–5 years¥(10,612)
9,871
(741)
(1,138)(289)¥ (2,169)

2. Retirement benefit obligation:
Millions of yen

Retirement benefit obligation
Fair value of plan assets
Net unfunded obligation
Unrecognized prior service cost
Unrecognized actuarial loss
Allowance for retirement benefits

3. Retirement benefit expenses:
Millions of yen

Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net actuarial loss
Retirement benefit expenses

¥600
172
(170)
(406)
190
¥386

¥(11,343)
8,830(2,513)(805)
1,790¥ (1,528)

3. Retirement benefit expenses:
Millions of yen

Note: Due to the restructuring of certain businesses, such as the amusement business, in the fiscal year ended March 31, 2007, a substantial number of
employees retired, and the Company recognized a curtailment of its retirement benefit plan in accordance with “Accounting for Transfers between
Retirement Benefit Schemes” (Application Guideline No. 1 of BusinessAccounting Principles). As a result, the Company recognized a partial­r eversal of allowance for employees’ retirement benefits and a lump-sum
amortization of unrecognized gain/loss amounting to ¥465 million as an
extraordinary gain, which was included in the amortization of prior service
cost and amortization of net actuarial gains and losses in the fiscal year
ended March 31, 2007.
			 In addition to the above, the Company recorded an extraordinary loss forpremium severance payments of ¥925 million.

Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net actuarial gain
Retirement benefit expenses

¥ 509
180
(158)
(333)
(201)
¥ (3)

4.	Assumptions used in accounting for the above plans:

39

Periodic allocation method for projected benefits

Straight-line basis

Discount rates
Expected rate of return on plan assets
Period over which prior service cost is amortized
Period over which net actuarial gain or loss
is amortized

1.700–2.026%
1.700%
1–5 years
1–5 years

Stock Options• FY2006 (April 1, 2006 to March 31, 2007)
1. Details, scale of and changes in stock options(1) Details of stock options

Category and2001
stock options

2002
stock options

2004
stock options

2005
stock options

2005
stock options

Company directors

Company directors

Company directors

Company directors

Directors and employees ofnumber of grantees

and employees

and employees

and employees

and employees

the Company’s subsidiaries

766

696

206

52

3

Number of

520,710 shares

2,550,000 shares

600,000 shares of902,000 shares of

7,000 shares ofstock optionsof common stock* 1of common stock* 2

common stock

common stock

common stock

Date granted

June 23, 2001

June 22, 2002

June 19, 2004

June 18, 2005

June 18, 2005

Conditions for

No conditions have been

No conditions have been

No conditions have been

No conditions have been

No conditions have beenvesting of interests

set for vesting of interests

set for vesting of interests

set for vesting of interests

set for vesting of interests

set for vesting of interests

No service period has

No service period has

No service period has

No service period has

No service period has

been establishedbeen establishedbeen establishedbeen establishedbeen established

January 4, 2002 to

July 1, 2004 toJuly 1, 2006 to

July 1, 2007 to

July 1, 2007 toJune 30, 2006

June 30, 2009

June 30, 2009

June 30, 2010

June 30, 2010

Service period
Rights exercise period

Notes: 1 The number of stock options indicated for 2001 was adjusted for the April 1, 2003 business merger (1 to 0.85) with SQUARE CO., LTD.
2 The number of stock options indicated for 2002 was adjusted for the April 1, 2003 business merger (1 to 0.85) with SQUARE CO., LTD.

(2) Scale of and changes in stock options
With respect to stock options outstanding at this fiscal year end, the number of stock options and the status of their exercise to shares of­c ommon stock are­ indicated below:
1) Number of stock options
2001
stock options

2002
stock options

2004
stock options

2005
stock options

Before vesting (shares)
March 31, 2006——
561,000
902,000
		 Granted————
		 Forfeited
—
—
4,000
23,000		 Vested——
557,000—
		 Unvested balance———
879,000
After vesting (shares)					March 31, 2006
327,165
1,621,545——
		 Vested——
557,000—
		 Exercised—
218,195——
		 Forfeited
327,165
30,60017,000—		 Balance unexercised—
1,372,750
540,000—

2005
stock options

7,000
—
—
—
7,000
—
—
—
—
—

2) Price information
Yen

Exercise price
Average share price at exercise
Fair market value on grant date2001
stock options

2002
stock options

2004
stock options

2005
stock options

2005
stock options¥3,430——¥2,152
3,059—¥2,981——¥3,365——¥3,360——40

2. Estimate of fair value of stock options
Not applicable
3. Method of estimating vested interests in stock options
Not applicable• FY2007 (April 1, 2007 to March 31, 2008)
1. Expense items and amounts during the fiscal year related to stock options:
Cost of sales¥ 6 million
Selling, general and administrative expenses
67 million
2. Details, scale of and changes in stock options(1) Details of stock options
2002
stock options

2004
stock options

2005
stock options

2005
stock options

2007
stock options

2007
stock options

Category andCompany directors

Company directors

Company directors

Directors andCompany

Company employees,

number ofand employees

and employees

and employees

employees of

directors

and directors

grantees				the Company’s		

and employees of				

subsidiaries		the Company’s						

subsidiaries

696

206

52

3

5

59

Number of

2,550,000 shares

600,000 shares of902,000 shares of

7,000 shares of

450,000 shares of

670,000 shares ofstock optionsof common stock*common stock

common stock

common stock

common stock

common stock

Date granted

June 22, 2002

June 19, 2004

June 18, 2005

June 18, 2005

December 4, 2007

December 4, 2007

Conditions for

No conditions

No conditions

No conditions

No conditions

No conditions

No conditions

vesting of

have been set forhave been set forhave been set forhave been set forhave been set forhave been set forinterests

vesting of interests

vesting of interests

vesting of interests

vesting of interests

vesting of interests

vesting of interests

No service

No service

No service

No service

No service

No service

period has

period has

period has

period has

period has

period has

been establishedbeen establishedbeen establishedbeen establishedbeen establishedbeen established

Rights exercise

July 1, 2004 toJuly 1, 2006 to

July 1, 2007 to

July 1, 2007 to

November 20, 2009 to

A. One-third of options granted:

periodJune 30, 2009

June 30, 2009

June 30, 2010

June 30, 2010

November 19, 2012

November 20, 2009 toService period						

November 19, 2012						

B. One-third of options granted:						

November 20, 2010 to						
						

November 19, 2012
C. One-third of options granted:						

November 20, 2011 to						

November 19, 2012

Note: The number of stock options indicated for 2002 has been adjusted for the April 1, 2003 business merger (1 to 0.85) with SQUARE CO. LTD.

41

(2) Scale of and changes in stock options
With respect to stock options outstanding at this fiscal year end, the number of stock options and the status of their exercise to shares ofcommon stock are indicated below:
1) Number of stock options
			
			

2002
stock options

2004
stock options

2005
stock options

2005
stock options

2007
stock options

Before vesting (shares)						March 31, 2007——
879,000
7,000—
		 Granted————
450,000
		 Forfeited
—
—
—
—
—
		 Vested——
879,000
7,000—
		 Unvested balance————
450,000
After vesting (shares)						March 31, 2007
1,372,750
540,000———
		 Vested——
879,000
7,000—
		 Exercised
305,150
41,400———		 Forfeited
10,20033,00051,0001,000—
		 Balance unexercised
1,057,400
465,600
828,000
6,000
—

2007
stock options—
670,000——
670,000—————

2) Price information
Yen
2002stock options

2004
stock options

2005
stock options

2005
stock options

2007
stock options

2007
stock options

Exercise price¥2,152¥2,981¥3,365¥3,360¥3,706
Average share price at exercise
3,572
3,582
—
—
—
Fair market value on grant date
—
—
—
—
526
																

¥3,706—
A. 526
B. 594
C. 715

Note: A, B and C indicated above refer to the three rights exercise periods A, B and C indicated in Table 2 (1).

3. Estimate of fair value of stock options(1) Method of valuation employed—Black–Scholes Model(2) Main basic values and methods of estimation2007 stock options

2007 stock options

Stock price volatility*
24.0%
		
		
3.5 years
Expected remaining period* 3				Dividend yield 0.99%
Expected dividend* 4
0.87%
Risk-free interest rate* 5				

A. 24.0%
B. 25.0%
C. 27.9%A. 3.5 years
B. 4.0 years
C. 4.5 years
Dividend yield 0.99%
A. 0.87%
B. 0.92%
C. 0.97%2

Notes: 1. A, B and C indicated above refer to the three rights exercise periods A, B and C indicated in Table 2 (1).
2. Stock price volatility is calculated based on the actual stock price from the stock option grant date extending back the length of the expected remaining period.
3. Owing to a lack of sufficient historical data, it is difficult to determine the expected remaining period in a reasonable manner. Consequently, the expected
remaining period is determined to be the period from the option grant date to the mid-point of the exercisable period.
4. The expected dividend is calculated based on the actual dividend applicable to the fiscal year ended March 31, 2007.
5. The risk-free interest rate represents the interest rate of Japanese government bonds whose remaining periods correspond to the expected remaining periods ofthe stock options.

42

4. Method of estimating the number of vested stock options
Owing to the difficulty of estimating the number of stock options
that will be forfeited in future periods, estimation of the vested
number is based upon actual forfeitures in prior periods.

Deferred tax liabilities
1) Current liabilities
		 Accrued expenses and other cost calculation details
298
		 Offset to deferred tax assets (non-current assets)(298)
			 Total—
2) Non-current liabilities
		 Other102
		 Offset to deferred tax assets (non-current assets)(102)
Total deferred tax liabilities—
Balance: Net deferred tax assets¥10,573

Tax Effect Accounting• FY2006 (April 1, 2006 to March 31, 2007)
1.	Significant components of deferred tax assets and l­iabilities are
summarized as follows:
Millions of yen

Deferred tax assets
		 1) Current assets
			 Enterprise taxes payable¥ 114
			 Business office tax payable
50			 Reserve for bonuses
760
			 Advances paid
36
			 Accrued expenses
588
			 Allowance for sales returns
536			 Non-deductible portion of allowance for			 doubtful accounts
119			 Loss on write-offs of content production account158
			 Loss on inventory revaluation
176
			 Loss on disposal of assets associated with			 business restructuring
919
			 Non-deductible amortization of goodwill
110			 Loss carried forward
4,059
			 Other173
			 Valuation allowance(1,871)			 Offset to deferred tax liabilities (current)(298)
			 Total
5,634		 2) Non-current assets
			 Non-deductible portion of allowance for			 employees’ retirement benefits
500			 Allowance for directors’ retirement benefits
64			 Non-deductible depreciation expense of property
			 and equipment
577
			 Loss on investments in securities
763
			 Non-deductible portion of allowance for			 doubtful accounts
902
			 Allowance for closing of game arcades
1,201
			 Loss carried forward
5,891			 Other362
			 Valuation allowance(5,220)			 Offset to deferred tax assets (non-current assets)(102)
			 Total
4,939
Net deferred tax assets
10,573

2.	A reconciliation of the statutory tax rate and the effective tax
rate is as follows:
		
		
		
		
		
		
		
		
		
		
		
		
		
		

43

Statutory tax rate
Permanent differences relating to entertainment
expenses, etc., excluded from non-taxable expenses
Taxation on per capita basis for inhabitants’ taxes
Foreign taxes
Amortization of goodwill
Valuation allowance
Refunded income taxes
Adjustments to deferred tax assets
Adjustments for unrecognized losses
Differences in tax rates fromthe parent company’s statutory tax rate
Other
Effective tax rate

40.70%
0.45
0.63
0.23
7.13
(6.95)(0.62)(1.86)(1.52)(0.77)(0.79)
36.63%

• FY2007 (April 1, 2007 to March 31, 2008)
1. Significant components of deferred tax assets and liabilities are
summarized as follows:

2. A reconciliation of the statutory tax rate and the effective tax
rate is as follows:
		 Statutory tax rate
40.70%
		 Permanent differences relating to entertainment		 expenses, etc., excluded from non-taxable expenses
0.47
		 Permanent differences relating to		 dividends received, etc., excluded from		 non-taxable expenses(0.01)		 Taxation on a per capita basis for inhabitants’ taxes 0.38
		 Deduction for foreign taxes paid
1.82
		 Amortization of goodwill
3.33
		 Valuation allowance(5.87)		 Tax effect from sale of stock of affiliated companies 5.03
		 Adjustments for unrecognized losses(0.03)
		 Differences in tax rates from		 the parent company’s statutory tax rate
(1.35)
		 Other
0.84
		 Effective tax rate
45.31%

Millions of yen

Deferred tax assets
		 1) Current assets
			 Enterprise taxes payable¥ 79
			 Business office tax payable55
			 Reserve for bonuses
731
			 Advances paid
36
			 Accrued expenses
361
			 Allowance for sales returns
199
			 Non-deductible portion of allowance for			 doubtful accounts
239
			 Tax credit294
			 Loss on write-offs of content production account
1,884			 Loss carried forward
1,639
			 Loss on inventory revaluation
123			 Loss on disposal of assets associated with			 business restructuring
347
			 Other
130
			 Valuation allowance(1,485)			 Offset to deferred tax liabilities (current)(480)
			 Total
4,158		 2) Non-current assets
			 Non-deductible portion of allowance for			 employees’ retirement benefits
1,086			 Allowance for directors’ retirement benefits
77			 Non-deductible depreciation expense of property
			 and equipment537
			 Loss on investments in securities
379
			 Non-deductible portion of allowance for			 doubtful accounts
780
			 Tax effect from sale of stock of			 affiliated companies
1,965			 Allowance for closing of game arcades
413
			 Loss carried forward
4,816
			 Other179
			 Valuation allowance(9,382)
			 Total
852
Net deferred tax assets
5,010
Deferred tax liabilities
		 Current liabilities
		 Accrued expenses and other cost calculation details
480
		 Offset to deferred tax assets (non-current assets)(480)
			 Total—
Total deferred tax liabilities—
Balance: Net deferred tax assets¥5,01044

Segment Information[Consolidated Business Segment Information]• FY2006 (April 1, 2006 to March 31, 2007)
Millions of yen
Games(Offline)

I Sales and operating income
Net sales(1) Sales to external customers(2) Intersegment sales
		 Total
Operating expenses
Operating income (loss)
II Total assets, depreciation andamortization, impairment loss
and capital expenditures
Total assets
Depreciation and amortization
Impairment loss
Capital expenditures

Games Mobile Phone 					 Eliminations or Consolidated(Online)Content
Publication Amusement
OthersTotalunallocatedtotal¥51,316—
51,31634,968¥16,348¥13,660—
13,6606,893¥ 6,767¥7,759
7
7,767
4,753
¥3,013¥11,208—
11,208
7,604¥ 3,603¥75,610 ¥3,915
9162
75,702 3,97876,054 2,666¥ (351) ¥1,311¥163,472
161
163,634
132,941¥ 30,693¥¥60,153402—
428¥18,062593—
411¥8,695
246—
79¥ 9,54412—
22¥74,491 ¥7,865
9,134
82
368
—
9,477
108

¥178,812
10,471
368
10,528¥36,866
643—
832

Notes:— ¥163,472(161)—(161) 163,472
4,614
137,555¥ (4,776) ¥ 25,916¥215,679
11,115368
11,3601. The classification of business segments is made based on the types of products and services.
2. Major products offered by business segment are summarized as follows:
			 Segment
Major Products
			 Games (Offline)
Games			 Games (Online)
Online games
			 Mobile Phone Content
Content for mobile phones
			 Publication
Magazine comics, serial comics, game-related books
			 Amusement
All businesses of the Taito Group including Amusement Operations and Rental,
				Sales of Goods and Merchandise and Content Services
			 Others
Derivative products such as character merchandise, school for game designers
3. Unallocated operating expenses included in “Eliminations or unallocated” totaled ¥4,614 million. These expenses were related to administrative departments of theCompany which provide services and operational support that cannot be allocated to specific business segments.
4. Unallocated assets included in “Eliminations or unallocated” totaled ¥36,866 million. These assets mainly consisted of cash and deposits, deferred tax assets andbuildings and structures of administrative departments of the Company.

45

• FY2007 (April 1, 2007 to March 31, 2008)
Millions of yen
Games(Offline)

I Sales and operating income
Net sales(1) Sales to external customers(2) Intersegment sales
		 Total
Operating expenses
Operating income (loss)
II Total assets, depreciation andamortization, impairment loss
and capital expenditures
Total assets
Depreciation and amortization
Impairment loss
Capital expenditures

Games Mobile Phone 					 Eliminations or Consolidated(Online)Content
Publication Amusement
OthersTotalunallocatedtotal¥41,588—
41,58832,705¥ 8,882¥12,098—
12,0986,218¥ 5,880¥6,474
104
6,579
4,820
¥1,758¥11,158—
11,158
7,532¥ 3,626¥67,632 ¥ 8,564
1,471
440
69,104
9,005
65,974
5,681¥ 3,129 ¥ 3,324¥147,516
2,017
149,533
122,931¥ 26,602— ¥147,516(2,017)—(2,017) 147,516
3,064 125,996¥ (5,082) ¥ 21,520¥64,345375—
426¥18,118428—
234¥7,69743—
10¥10,5885—
1¥68,380 ¥13,266
7,544
730
9
—
4,768
1,142

¥182,397
9,127
9
6,584

¥29,736 ¥212,134
805
9,933
—
9
368
6,952

Notes:¥

1. The classification of business segments is made based on the types of products and services.
2. Major products offered by business segment are summarized as follows:
			 Segment
Major Products
			 Games (Offline)
Games			 Games (Online)
Online games
			 Mobile Phone Content
Content for mobile phones
			 Publication
Magazine comics, serial comics, game-related books
			 Amusement
All businesses of the Taito Group including Amusement Operations and Rental,
				Sales of Goods and Merchandise and Content Services
			 Others
Derivative products such as character merchandise, school for game designers
3. Unallocated operating expenses included in “Eliminations or unallocated” totaled ¥5,082 million. These expenses were related to administrative departments of theCompany which provide services and operational support that cannot be allocated to specific business segments.
4. Unallocated assets included in “Eliminations or unallocated” totaled ¥30,558 million. These assets mainly consisted of cash and deposits, deferred tax assets andbuildings and structures of administrative departments of the Company.
5. Change in accounting policy
		 As noted in “Important matters relating to the presentation of the consolidated financial statements,” Section 4. (2) (A), pursuant to the revision of the Corporation
Tax Law, effective this fiscal year, for tangible fixed assets acquired on or after April 1, 2007, the Company and its domestic consolidated subsidiaries havechanged their method of accounting for depreciation to that provided under the revised Corporation Tax Law.
			 As a result of this change, operating expenses increased for “Games (Offline)” by ¥33 million, for “Games (Online)” by ¥13 million, for “Amusement” by ¥537
million, for “Others” by ¥224 million and for “Eliminations or unallocated” by ¥19 million over the corresponding amounts which would have been recorded under
the previous method. At the same time, operating income (loss) for each segment decreased (increased) by the same amount as that of the corresponding increasein operating expenses as a result of this change from the amount which would have been recorded under the previous method. The impact of this change on theremaining segments were immaterial.
6. Additional information
		 As noted in “Important matters relating to the presentation of the consolidated financial statements,” Section 4. (2) (A), pursuant to the revision of the Corporation
Tax Law, effective this fiscal year, for assets acquired on or before March 31, 2007, the Company and its domestic consolidated subsidiaries apply the method of
accounting for depreciation provided for in the Corporation Tax Law prior to the revision and depreciate the difference between 5% of an asset’s acquisition costand its memorandum value using the straight-line method over a period of five years, from the fiscal year following the fiscal year in which the net book value ofthe asset reaches 5% of its acquisition cost. Such depreciation is recorded in depreciation expense.
			 As a result of this change, operating expenses increased for “Amusement” by ¥137 million and for “Eliminations or unallocated” by ¥9 million over the corresponding amounts which would have been recorded under the previous method. At the same time, operating income (loss) for each segment decreased (increased)by the same amount as that of the corresponding increase in operating expenses as a result of this change from the amount which would have been recorded
under the previous method. The impact of this change on the remaining segments were immaterial.

46

[Consolidated Geographic Segment Information]• FY2006 (April 1, 2006 to March 31, 2007)
Millions of yen
		
Japan

I Sales and operating income
Net sales(1) Sales to external customers(2) Intersegment sales
		 Total
Operating expenses
Operating income (loss)
II Total assets¥128,665
9,776
138,441
119,465¥ 18,976¥203,303

North 				 Eliminations orAmerica
EuropeAsia
Total
unallocated¥22,341833
23,174
17,552¥ 5,621¥11,881¥11,409457
11,867
9,901¥1,965¥7,585¥1,056
11
1,067
1,713
¥ (645)¥2,747¥163,472
11,078
174,551
148,633¥ 25,917¥225,517¥—(11,078)(11,078)(11,077)¥(0)¥(9,838)

Consolidated
total¥163,472—
163,472
137,555¥ 25,916¥215,679

Notes:

1. The classification of geographic segments is made based on geographical distance.
2. Main countries included in each segment:		 (1) North America.. ......................... the United States of America
		 (2) Europe.. ................................... the United Kingdom
		 (3) Asia........................................ the People’s Republic of China, Republic of Korea
3. There were no unallocated operating expenses included in “Eliminations or unallocated.”
4. There were no unallocated assets included in “Eliminations or unallocated.”• FY2007 (April 1, 2007 to March 31, 2008)
Millions of yen
		
Japan

North 				 Eliminations orAmerica
EuropeAsia
Total
unallocatedConsolidated
total

I Sales and operating income
Net sales(1) Sales to external customers(2) Intersegment sales
		

Total

¥127,643¥12,035¥7,217¥ 620¥147,516—¥147,516

5,738

552

457

7

6,756

¥

(6,756)—
147,516

133,381

12,588

7,674

628

154,273(6,756)

Operating expenses

115,069

9,836

6,592

1,222

132,721(6,725)125,996

Operating income (loss)¥ 18,312¥ 2,751¥1,081¥ (594)¥ 21,551¥(31)¥ 21,520¥202,922¥12,387¥4,804¥1,825¥221,939¥(9,804)¥212,134

II Total assets
Notes:

1. The classification of geographic segments is made based on geographical distance.
2. Main countries included in each segment:		 (1) North America.. ......................... the United States of America
		 (2) Europe.. ................................... the United Kingdom
		 (3) Asia........................................ the People’s Republic of China, Republic of Korea
3. There were no unallocated operating expenses included in “Eliminations or unallocated.”
4. There were no unallocated assets included in “Eliminations or unallocated.”
5. Change in accounting policy
		 As noted in “Important matters relating to the presentation of the consolidated financial statements,” Section 4. (2) (A), pursuant to the revision of the Corporation
Tax Law, effective this fiscal year, for tangible fixed assets acquired on or after April 1, 2007, the Company and its domestic consolidated subsidiaries havechanged their method of accounting for depreciation to that provided under the revised Corporation Tax Law.
			 The impact of this change was an ¥828 million increase in operating expenses and a decrease in operating income of the same amount in Japan as comparedto the corresponding amounts which would have been recorded under the previous method.
6. Additional information
		 As noted in “Important matters relating to the presentation of the consolidated financial statements,” Section 4. (2) (A), pursuant to the revision of the Corporation
Tax Law, effective this fiscal year, for assets acquired on or before March 31, 2007, the Company and its domestic consolidated subsidiaries apply the method of
accounting for depreciation provided for in the Corporation Tax Law prior to the revision and depreciate the difference between 5% of an asset’s acquisition costand its memorandum value using the straight-line method over a period of five years, from the fiscal year following the fiscal year in which the net book value ofthe asset reaches 5% of its acquisition cost. Such depreciation is recorded in depreciation expense.
			 The impact of this change was a ¥149 million increase in operating expenses and a decrease in operating income of the same amount in Japan as compared tothe corresponding amounts which would have been recorded under the previous method.

47

[Consolidated Overseas Sales]• FY2006 (April 1, 2006 to March 31, 2007)
Millions of yen

I Overseas sales
II Consolidated sales
III Overseas sales as a percentage of consolidated sales

North America

Europe

Asia

Total

¥23,801—
14.6%¥12,271—
7.5%¥1,551—
1.0%¥ 37,624
163,472
23.0%

Notes:

1. The classification of geographic segments is made based on geographical distance.
2. Main countries included in each segment:		 (1) North America.. ......................... the United States of America, Canada
		 (2) Europe.. ................................... the United Kingdom, France, Germany, others		 (3) Asia........................................ the People’s Republic of China, Republic of Korea, others
3. Overseas sales represent sales of the Company and its consolidated subsidiaries to countries and areas outside Japan.

• FY2007 (April 1, 2007 to March 31, 2008)
Millions of yen

I Overseas sales
II Consolidated sales
III Overseas sales as a percentage of consolidated sales

North America

Europe

Asia

Total

¥13,358—
9.1%¥7,896—
5.4%¥1,118—0.8%¥ 22,373
147,516
15.2%

Notes:

1. The classification of geographic segments is made based on geographical distance.
2. Main countries included in each segment:		 (1) North America.. ......................... the United States of America, Canada
		 (2) Europe.. ................................... the United Kingdom, France, Germany, others		 (3) Asia........................................ the People’s Republic of China, Republic of Korea, others
3. Overseas sales represent sales of the Company and its consolidated subsidiaries to countries and areas outside Japan.

Business separations• FY2006 (April 1, 2006 to March 31, 2007)
During the year, the Company transferred the commercial k­ araoke-ondemand business of TAITO CORPORATION, a c­ onsolidated subsidiary.
1. Name of the recipient company
XING INC.
2. Details of the business separation
The commercial karaoke-on-demand business of TAITOCORPORATION, a consolidated subsidiary.
3. Reasons for the business separation
Since TAITO CORPORATION was included in consolidation in
September 2005, the Company has considered medium- to longterm growth strategies for the entire Group. One of the conclusions
reached through this process was that the sale of TAITOCORPORATION’s commercial karaoke-on-demand business to XING
INC., would contribute to raising the corporate value of the Group.
4. Date of business separation
July 3, 2006

5. Overview of business separation
At a meeting of its Board of Directors held on April 27, 2006,
TAITO CORPORATION approved a resolution to transfer its commercial karaoke-on-demand business to XING INC. This business was
spun off as a new company, and all shares of the new company
were sold to XING INC.
6. Change in equity of affiliated companies and method of
accounting
		 Not applicable
7. Name of separated business
AM (Amusement) and Others
8. Overview of losses recorded in the consolidated financial statements for the year ended March 31, 2007 as a result of the business separation:
Net sales¥1,248 million
Operating loss
¥97 million
Recurring loss
¥217 million• FY2007 (April 1, 2007 to March 31, 2008)
In this fiscal year, there were no material items relating to businessseparations.

48

[Related Party Transactions]• FY2006 (April 1, 2006 to March 31, 2007)(1) Major Director and Individual Shareholders											Capital or investment
Details of business
Voting rights (%)
Attribute
Name
Location(Millions of yen)or occupation(Millions of yen)

					
					
Director Makoto Naruke
—
—
					
					

Concurrent			
Transaction		Director
Business
Transaction
amount		positionsrelationshipdetails(Millions of yen) Category

Director of the							Company, President				Consulting fees			
and Representative———
to ASPIRE¥4—
Director of ASPIRE				CORPORATION			CORPORATION							Balance atthe end of year
(Millions of yen)—

Note: 1. The terms of the transaction and method of determining the terms and prices of the transaction were determined after receiving individual estimates used to determine
market rates.

• FY2007 (April 1, 2007 to March 31, 2008)
Not applicable
Per Share Information• FY2006 (April 1, 2006 to March 31, 2007)
Net assets per share (yen)Net income per share (yen)Diluted net income per share (yen)Summary of residual securities that do not dilute the Company’s
earnings per share:
The issuance of stock options was approved at the Company’s
annual general meeting of shareholders held on June 18, 2005,
and bonds with warrants were issued based on a resolution
approved by the Board of Directors on November 9, 2005.
An overview of the stock option plan is provided in “4. Status of
Parent Company, 1. Status of Shares, etc., (2) Status of stock
options, etc.”¥1,168.91
105.06104.71

Note: T he basis for calculating net income per share and diluted net income
per share is provided below:• FY2007 (April 1, 2007 to March 31, 2008)
Net assets per share (yen)Net income per share (yen)Diluted net income per share (yen)¥1,280.50
81.85
81.41

• FY2007 (April 1, 2007 to March 31, 2008)
Net income per share:
Net income (millions of yen)
¥9,196
Income not available to commonshareholders (millions of yen)—
Income available to commonshareholders (millions of yen)
9,196
Average number of shares of common stock
outstanding during the fiscal year
(thousands of shares)
112,357
Adjustments to net income used to calculate
diluted net income per share:
Adjustments to net income (millions of yen)—
Increase in the number of shares of common
stock (thousands of shares)605
		 (number of shares reserved for the purpose
		 of new share issuances for exercise of share		 subscription rights)(605)
Summary of residual securities that do not dilute the Company’s
earnings per share:
The issuance of stock options was approved by the Board of
Directors on November 19, 2007, and bonds with warrants were
issued based on a resolution approved by the Board of Directors
on November 9, 2005.
An overview of the stock option plan is provided in “4. Status of
Parent Company, 1. Status of Shares, etc., (2) Status of stock
options, etc.”

Note: T he basis for calculating net income per share and diluted net income
per share is provided below:• FY2006 (April 1, 2006 to March 31, 2007)
Net income per share:
Net income (millions of yen)
Income not available to commonshareholders (millions of yen)
Income available to commonshareholders (millions of yen)
Average number of shares of common stock
outstanding during the fiscal year
(thousands of shares)
Adjustments to net income used to calculate
diluted net income per share:
Adjustments to net income (millions of yen)
Increase in the number of shares of common
stock (thousands of shares)
		 (number of shares reserved for the purpose
		 of new share issuances for exercise of share		 subscription rights)¥ 11,619—
11,619110,600

—
366

(366)

49

Significant Subsequent Events• FY2006 (April 1, 2006 to March 31, 2007)
Granting of Stock Options
At the 27th Annual General Meeting of Shareholders, convened
on June 23, 2007, a resolution was passed to grant stockacquisition rights to directors as a part of their remuneration inaccordance with Articles 236 and 238 of Corporation Law.
		 The details are outlined below.
(1) Reason for issuing stock acquisition rights to directors
		 The objectives of issuing stock acquisition rights as stock
options are to provide an incentive to the Company’s directors
in consideration of the execution of their duties, to improve
operating performance and corporate value and to heighten
their managerial awareness from a shareholder’s perspective.
(2) Overview of stock options
1. Recipients of stock acquisition rights allocation
Directors of the Company
2. Type and number of shares reserved for the purpose of stockacquisition rights
		 A maximum of 450,000 shares of common stock in a oneyear period. In the event that the Company conducts a stock
split or a reverse stock split, the Company shall adjust thisnumber in the manner it deems fit.
3. Amount payable upon delivery of stock acquisition rights
		 No cash need be paid in exchange for these stock acquisitionrights.
4. Value of assets subscribed upon exercise of each stock acquisition right		 The value of assets subscribed upon exercise of stock acquisition rights shall be the per-share payment that may be paid
upon accepting delivery (hereinafter, “the Exercise Price”) multiplied by the number of shares granted that corresponds to thesestock acquisition rights.
		 The Exercise Price shall be the average of the closing priceon the Tokyo Stock Exchange during the six-month period preceding the month in which the allocation date falls (an exception applies in the event trading is not conducted on that day),multiplied by 1.05 with amounts less than one yen truncated. If
the Exercise Price is less than the closing price of the day preceding the allocation date, the closing price of the day preceding the ­a llocation date shall be used. (If the closing price is notavailable on the day preceding the allocation date, the mostrecent closing price shall be used.)
		 In the event the Company carries out a stock split or a reverse
stock split and a revaluation of the Company’s shares of common
stock become nesessary, the Company may apply any appropriate
measures it deems necessary to justify the price per share.
		 No cash need be paid in exchange for these stock options.

• FY2007 (April 1, 2007 to March 31, 2008)
Implementation of a Pure Holding Company Structure by Means of aCompany Split
On May 23, 2008, a meeting of the Board of Directors approved aresolution under which the Company will move to a pure holding
company structure by means of an incorporation-type company split
effective October 1, 2008. Under this plan, a newly establishedwholly-owned subsidiary will assume the operations of theCompany’s business effective October 1, 2008. Accompanying thismove to a holding company structure, effective October 1, 2008, theCompany’s Articles of Incorporation will be partially revised and thecompany’s name is planned to be changed to SQUARE ENIXHOLDINGS CO., LTD. The Board of Directors’ resolution referred toabove also determined that the Company’s purpose will be changed
to that of a pure holding company. The Company plans to maintainthe listing of its stock on the First Section of the Tokyo Stock
Exchange as a holding company.
(1) Purpose of the company split
The Company believes that it is crucial to maintain profitability andachieve medium- to long-term growth through the provision of highquality, sophisticated content and services. However, in recent
years, as information technology (IT) and telecommunications technology and infrastructure have rapidly developed and seen widespread adoption, customer preferences have become greatly
diversified and the speed of technical innovation has accelerated. Insuch a business environment, the Company has determined to pursue a strategy of moving to a pure holding company structure. As
well as aiming to clarify the profitability of each business and theaccountability structure, this move is seen as crucial to facilitatingGroup management that can flexibly engage in strategic businessalliances, including capital alliances with other companies.
(2) Outline of the company split
1. Schedule for the split
Record date for the Ordinary General Meeting of Shareholders
		 March 31, 2008
Meeting of the Board of Directors to pass a resolution for themove to a pure holding company structure		 April 25, 2008
Meeting of the Board of Directors to pass a resolution for­implementation of the company split
		 May 23, 2008
Annual General Meeting of Shareholders in which a resolution
for the company split is to be approved
		 June 21, 2008
Effective date of the company split		 October 1, 2008 (scheduled)50

2. Method of the split
The Company, as the transferor, will newly establish SQUAREENIX CO., LTD. as the succeeding company through a singleincorporation split.

5. Rights and obligations of the succeeding company
In accordance with the terms of the company split plan, thesucceeding company will, as of the effective date of the company split, acquire all assets, and assume all liabilities, employment contracts and all other rights and obligations relating to
the businesses being transferred. With regard to all liabilities
assumed by the succeeding company, the Company will retain
joint liability.

3. Reduction of capital through the split
Not applicable
4. Stock options and bonds with warrants
The terms of certain stock options, which had been issued by
the Company and subscribed to by employees of the Company,
were amended by approval of the Annual General Meeting of
Shareholders held on June 21, 2008. Based on this amendment, employees to be transferred to the succeeding company
will be able to exercise the relevant stock options after suchtransfer. Other stock options and bonds with warrants issued by
the Company remain unchanged.

6. Fulfillment of obligations
With regard to all liabilities assumed by the transferor and thesucceeding company as of the effective date of the split, assets
are expected to exceed liabilities for both companies, and theCompany anticipates that no problems will arise with respect tothe fulfillment of these obligations.

(3) Outline of the parties to the split					Transferor		(as of March 31, 2008)(1) Company name				(2) Principle businesses		(3) Date of incorporation(4) Address of head office(5) Name and title of representative		(6) Common stock(7) Outstanding shares(8) Net assets(9) Total assets(10) Fiscal year end(11) Major shareholders andpercentage of shares held
		
		
		

Succeeding company(new company established through the split)
planned post-split status

SQUARE ENIX CO., LTD. (SQUARE ENIX CO., LTD. is to be
SQUARE ENIX CO., LTD.
changed to SQUARE ENIX HOLDINGS CO., LTD. as of
October 1, 2008)
Planning, development and marketing ofPlanning, development and marketing ofgames and other content and services
games and other content and services
September 22, 1975
October 1, 2008
3-22-7, Yoyogi, Shibuya-ku, Tokyo
3-22-7, Yoyogi, Shibuya-ku, Tokyo
Yoichi Wada,
Yoichi Wada,
President and Representative Director
President and Representative Director¥14,928 million¥1,500 million
115,117,896 shares
30,000 shares¥149,407 million¥37,388 million¥195,534 million¥46,140 million
March 31
March 31
Yasuhiro Fukushima 20.57%
The Company 100%
The Master Trust Bank of Japan, Ltd. (Trust Account) 8.83%
Fukushima Planning Co., Ltd. 8.50%
Sony Computer Entertainment Inc. 8.29%
Masashi Miyamoto 6.86%

Note: Treasury stock is not included in the percentage of shares held.

51

(4) Outline of the business divisions to be split
1. Business activities of the divisions to be split
		 Games (Offline), Games (Online), Mobile Phone Content, Publication, Others.
2. Operating results of the divisions to be split
Millions of yen
		Business divisions to be split (a)Actual results in the fiscal year ended March 31, 2008 (b)(a) as a percentage of (b) (%)¥65,719¥65,719

100.0

Sales
3. Assets and liabilities to be split

Millions of yen
Item

Book value

Item

Current assets
Non-current assets
Total¥35,498
10,642¥46,140

Current liabilities
Non-current liabilities
Total

Book value¥6,1772,575¥8,752

Note: Since the figures shown in the table above are calculated based on the balance sheet as of March 31, 2008, the actual amounts of assets and liabilities to be split
will differ from those shown above.

(5) Post-split status of the Company as a listed company
1. Company name
SQUARE ENIX HOLDINGS CO., LTD. (scheduled)
2. Principle business
Management of corporate group as a pure holding company
3. Address of head office
3-22-7, Yoyogi, Shibuya-ku, Tokyo
4. Name and title of representative
Yoichi Wada, President and Representative Director
5. Common stock¥14,928 million
6. Fiscal year end
March 31
7. Forecast
The Company plans to remain as a listed company subsequent to the move to a pure holding-­
company structure. In addition, the Company plans to undertake a range of functions, including
unified and flexible Group strategic planning, optimal allocation of business resources among Group
companies, and monitoring of the execution of business operations by subsidiaries. The Company
plans to develop a strategically sound and transparent management structure to maximize theGroup’s corporate value.

52

Additional Information[Corporate Bonds Issued]
			Outstanding balance			 at end of FY2005
Company
Bond typeIssuance date(Millions of yen)

Outstanding balanceat end of FY2006(Millions of yen)

Coupon(%)

Security

Maturity dateFive-year yen-denominatedNovember					25, 2005¥50,000¥37,000—
None
SQUARE ENIX CO., LTD.
bonds with warrants* 1
		(UK time)					Total			¥50,000¥37,000

November25, 2010(UK time)*1[Bonds with Warrants Issued](As of March 31, 2008)

Issuance priceAggregate amount of issuance
Warrants applicable to
Exercise price (yen)* 2
Period for exercise of warrants
Issuance price of shares upon exercise of
warrants and amount capitalized (yen)		 Issuance price		 Amount capitalized
Conditions for exercise of warrants

100% of face value¥50.0 billion
Common shares¥3,439.8
November 28, 2005 to November 11, 2010 (local time where funds are deposited)¥3,439.8¥1,720Warrants cannot be exercised partially*2

The related convertible debenture indenture stipulates provisions for the adjustment of the exercise price, and the exercise price was updated on November 16, 2007. The
exercise price prior to the adjustment was ¥3,400.

3

Amount scheduled to be repaid within five years from March 31, 2008 are summarized as follows.
Millions of yen

Within one year
		
		
¥—

Over one year but
within two years¥—

Over two years but
within three years¥37,000[Borrowings]

Short-term borrowings
Long-term borrowings due for repayment within one year
Lease obligations due for repayment within one year
Long-term borrowings (excluding the amount due for repayment within one year)
Lease obligations (excluding the amount due for repayment within one year)
Other interest-bearing liabilities
Total

Over three years but
within four years¥—

Balance as ofMarch 31, 2007
(Millions of yen)

Balance as ofMarch 31, 2008
(Millions of yen)

Averageinterest rate(%)

Repayment
date

¥—
—
—
—
—
—
¥—

¥26
—
—
—
—
—
¥26

1.5
—
—
—
—
—
—

—
—
—
—
—
—
—

Note: The average interest rate shown is the weighted average interest rate on the balance of borrowings at the end of the fiscal year.

[Other]Not applicable

53

Over four years but
within five years¥—

Corporate Data
(As of March 31, 2008)

Company Profile
Headquarters:

Shinjuku Bunka Quint Bldg.
3-22-7 Yoyogi, Shibuya-ku
Tokyo 151-8544, Japan.
TEL.+81-3-5333-1555
Established:
September 22,1975
Common stock:¥14,928,584,900
Number of employees: 2,973 (Consolidated)
1,932 (SQUARE ENIX)
Note: Number of part-time
employees is notincluded in the numberof employees.

SQUARE ENIX Group
Company Name
Established Fiscal Year End
Common Stock
Major Consolidated Subsidiaries				

Percent of
Voting Rights

Japan
TAITO CORPORATION
August 1953
March
¥4,524 million
100.0%
					
					
					
SG Lab Inc.
May 2006
March¥10 million
80.0%
DIGITAL ENTERTAINMENT ACADEMY CO., LTD.
October 1991
March
¥72 million
72.2%
				
(1.4)
Community Engine Inc.
May 2000March¥25 million
58.8%
North America
SQUARE ENIX OF AMERICA HOLDINGS, INC.
November 2006
March
US$1
100.0%
					
SQUARE ENIX, INC.
March 1989
March
US$10 million
100.0%
				(100.0%)SQUARE PICTURES, INC.
November 1997
December
US$0.1 million
100.0%
				(100.0%)EuropeSQUARE ENIX LTD.

Management and operation of arcade facilities; planning,development, production, sale and rental of coin-operated gamemachines; planning, development and sale of game software; planning,development and provision of mobile phone content
Planning, development and sale of serious games
School for computer game engineers
Network application, development, sale of middleware
Holding of shares in and business management of Square Enix
Group companies located in North America
Sale of games, sale and management of online games inNorth America
Management of overseas film revenues

MarchGB£3 million

100.0%

Sale of games, sale and management of online games in Europe

Asia
SQUARE ENIX (China) CO., LTD.
January 2005
December
HUANG LONG CO., LTD.
August 2005
December			
BEIJING TAIXIN CULTURAL ENTERTAINMENT
July 1996
DecemberCO., LTD.			
TAITO KOREA CORPORATION
May 2004
March			

US$12 million
10 million
yuan RMB
16,617 thousand
yuan RMB
3,300 million
won

100.0%—[100.0%]80.0%(80.0%)
100.0%(100.0%)Development, sale, and management of online games in Asia
Sale and operation of online games in Asia

—

93.6%

Partnership
FF . FILM . PARTNERS

December 1998

Principal Lines of Business

March 1998

DecemberManagement of arcade facilities and rental of game machines
Management and operation of arcade facilities

Licensing and management of movies and derivative products

Notes: 1. In the Percentage of Voting Rights column, numbers in parentheses ( ) represent the percentage of indirect holdings and are including in the total percentage of voting rights heldby the Company. Numbers in brackets [ ] represent the percentage of holdings of closely related parties of parties of the same interest and are excluded from the total percentage
of voting rights held by the Company.
2. On March 31, 2006, TAITO CORPORATION (the former SQEX, Inc., name changed on March 31, 2006) absorbed the former TAITO CORPORATION. To make the de facto surviving
company of this merger—the former TAITO CORPORATION—a wholly-owned subsidiary of the Company, the former TAITO CORPORATION was absorbed by TAITO CORPORATION(the former SQEX, Inc.) on a pro forma basis. Consequently, the date of establishment is recorded as that of the de facto surviving company, the former TAITO CORPORATION.

54

Investor Information(As of March 31, 2008)

Share Information

Shareholders’ Memo

Number of shares issued: 115,117,896

N

Fiscal year:
April 1 to March 31

Number of shareholders: 27,349

Record dates for dividends from retained earnings:
September 30 (Record date for interim dividend)
March 31 (Record date for year-end dividend)N

Principal Shareholders
Investment in SQUARE ENIX

Rank Shareholder(Thousands of Shares)(%)

1 Yasuhiro Fukushima

23,626

20.52

2 The Master Trust Bank of Japan, Ltd. (Trust Account)

10,1448.81

3 Fukushima Planning Co., Ltd.

9,763

8.48

4 Sony Computer Entertainment Inc.

9,520

8.26

5 Masashi Miyamoto

7,882

6.84

6 Japan Trustee Services Bank, Ltd. (Trust Account)

7,092

6.16

7 Trust & Custody Services Bank, Ltd. (Trust Account)

6,351

5.51

8 JP Morgan Chase Oppenheimer Funds JASDEC Account

3,314

2.87

9 The Chase Manhattan Bank, NA, London SL Omnibus Account

3,158

2.74

10 S System Co., Ltd.

2,045

1.77

Annual general meeting of shareholders:June

N

Administrator of the Register of Shareholders:
Mitsubishi UFJ Trust and Banking Corporation

N

Shareholder registration agent:
Securities Agency Department Mitsubishi UFJ Trust andBanking Corporation 7-10-11 Higashi-suna, Koto-ku,
Tokyo 137-8081 TEL: +81-120-232-711

NTransfer agent offices:
Mitsubishi UFJ Trust and Banking Corporation (domestic
branches)N

Listed on:
The First Section of the Tokyo Stock ExchangeN

Note: 1. The above investment of Japan Trustee Services Bank, Ltd. (Trust Account), includes 977,000 shares held in
the name of Japan Trustee Services Bank, Ltd. (Trust Account 4).
2. The breakdown of shares held by Trust & Custody Services Bank, Ltd. (trust accounts) is as follows. Trust & Custody
Services Bank, Ltd. (Trust Account Y): 3,804 thousand shares; Trust & Custody Services Bank, Ltd. (Pension Specified
Money Trust Account): 1,066 thousand shares; Trust & Custody Services Bank, Ltd. (Securities Investment Trust
Account): 754 thousand shares; Trust & Custody Services Bank, Ltd. (Pension Trust Account): 228 thousand shares;
Trust & Custody Services Bank, Ltd. (Money Trust Account): 205 thousand shares; Trust & Custody Services Bank, Ltd.
(Trust Account A): 164 thousand shares; Trust & Custody Services Bank, Ltd. (Trust Account B): 128 thousand shares.

Securities code:
9684

N

Trading unit:
100 shares

N

Public notices:
URL:http://www.aspir.co.jp/koukoku/9684/9684.html(Japanese)

Number of Shares Owned (Thousands of shares)

N

100
80

(Public notices will be announced in the Nihon Keizai Shimbun, aJapanese-language newspaper, in case an electronic notice is notpossible due to an accident or any other unavoidable reasons

60
40
20
0
2004

2005

2006

2007

2008

2004
Financial Institutions
Financial Instruments Company

19,225 (17.46%)486(0.44%)

2005

2006

2007

2008

19,475(17.64%)9,456(8.54%)

13,756 (12.40%)

27,760 (24.12%)374(0.34%)

822(0.74%)

1,843

2,678

(1.66%)(2.33%)

Other Companies

25,023 (22.72%)

23,117(20.94%)

23,178 (20.94%)

22,553 (20.33%)

22,148 (19.24%)

Foreign Companies and Individuals

4,914

13,252(12.01%)

21,761 (19.65%)

26,801 (24.16%)

19,620 (17.04%)

60,481 (54.92%)

54,164(49.07%)55,510 (50.13%)

45,992 (41.45%)

42,909 (37.27%)

110,130 (100.00%)

110,385 (100.00%)

110,729 (100.00%)

110,947 (100.00%)

115,117 (100.00%)

Individuals and Other
Total(4.46%)

55

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ANNUAL REPORT 2008

ANNUAL REPORT 2008

This annual Report is printed on recycled paper.