**U.S.
        SECURITIES AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 **FORM
        10-KSB**
 
 **[X]**  **ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(d)** **OF
        THE SECURITIES AND EXCHANGE ACT OF 1934**
 **FOR
        THE FISCAL YEAR ENDED MAY 31, 2006**
  **[  
        ]**  **TRANSITION
        REPORT UNDER SECTION 13 OR 15(d) OF** **THE
        SECURITIES EXCHANGE ACT OF 1934**
 **FOR
        THE TRANSITION PERIOD FROM _____ TO ______**
  **COMMISSION
        FILE NUMBER: 000-26442**
  **PACHINKO
        WORLD, INC.**
 (Name
        Of
        Small Business Issuer In Its Charter)
 
 **Nevada**
                
                (State
                  or other jurisdiction of
                incorporation
                  or organization)
              **88-0271810**
                (I.R.S.
                  Employer
                Identification
                  No.)
 
 **5912
        Bolsa Avenue, Suite 108, Huntington Beach, California
        92649**
 
 (Address
        Of Principal Executive Offices)
  ISSUER’S
        TELEPHONE NUMBER: **(714)
        895-7772**
  SECURITIES
        REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
  **TITLE
                  OF****EACH
                  CLASS**
              **NAME
                  OF EACH EXCHANGE****ON
                  WHICH REGISTERED**N/A
              N/A
 
 SECURITIES
        REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
 **COMMON
        STOCK, PAR VALUE $0.01**
  Check
        whether the issuer is not required to file reports pursuant to Section 13
        or
        15(d) of the Exchange Act. o
  Check
        whether the issuer: (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to such filing requirements for the past 90 days.  Yes  ý  No  . o
  Check
        if
        there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B contained in this form, and no disclosure will be contained,
        to
        the best of registrant’s knowledge, in definitive proxy or information
        statements incorporated by reference in Part III of this Form 10-KSB or any
        amendment to this Form 10-KSB. ý
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes  o  No  . ý
  State
        issuer’s revenues for its most recent fiscal year: $29,373,466.
  State
        the
        aggregate market value of voting and non-voting common equity held by
        non-affiliates computed by reference to the price at which the common equity
        was
        sold, or the average bid and asked price of such common equity, as of a
        specified date within the past 60 days: August 30, 2006,  Common
        stock, $0.01 par value: $1,518,476.
  State
        the
        number of shares outstanding of each of the issuer’s classes of common equity,
        as of the latest practicable date: 20,000,148 Shares as of voting common
        stock
        as of August 30, 2006.
  DOCUMENTS
        INCORPORATED BY REFERENCE
 None
 Transitional
        Small Business Disclosure Format: Yes  o  No  . ý
  
 
 **PACHINKO
          WORLD, INC.**
 **ANNUAL
          REPORT ON FORM 10-KSB**
 **FOR
          THE FISCAL YEAR ENDED MAY 31, 2006**
 
  **TABLE
          OF CONTENTS**
  Page
                    Number**PART
                    I**Item
                    1.
                Description
                    of Business
                1Item
                    2.
                Description
                    of Property
                8Item
                    3.
                Legal
                    Proceedings
                9Item
                    4.
                Submission
                    of Matters to a Vote of Security
                    Holders
                9**PART
                    II**Item
                    5.
                Market
                    for Common Equity, Related Stockholder Matters
                  and
                    Small Business Issuer Purchases of Equity
                    Securities
                10Item
                    6.
                Management’s
                    Discussion and Analysis or Plan of
                    Operation
                12Item
                    7
                Financial
                    Statements
                16Item
                    8.
                Changes
                    in and Disagreements with Accountants
                  on
                    Accounting and Financial Disclosure
                17Item
                    8A
                Controls
                    and Procedures
                17Item
                    8B
                Other
                    Information
                19**PART
                    III**Item
                    9.
                Directors,
                    Executive Officers, Promoters and Control
                    Persons;
                  Compliance
                    with Section 16(a) of the Exchange
                    Act
                19Item
                    10.
                Executive
                    Compensation
                20Item
                    11.
                Security
                    Ownership of Certain Beneficial
                    Owners
                  and
                      Management and Related Stockholder
                      Matters
                21Item
                    12.
                Certain
                    Relationships and Related
                    Transactions
                22Item
                    13.
                Exhibits
                22Item
                    14.
                Principal
                    Accountant Fees and
                    Services
                22Signatures
                23
 i
  **PART
        1**
  **Forward
        Looking Statements**
 
 This
        Annual Report on Form 10-KSB of Pachinko World, Inc. (“PWI” or “we”) contains
        forward-looking statements that are not based on historical facts and are
        based
        on current expectations that are subject to various risks and uncertainties,
        as
        well as assumptions that, if they do not materialize or prove incorrect,
        could
        cause our future results to differ materially from those expressed or implied
        in
        such forward looking statements. All statements other than historical facts
        are
        statements that are or could be deemed forward-looking statements, including,
        without limitation any future results of operations, plans or strategies
        or
        relating to future economic or industry conditions. Factors that might cause
        such differences include, but are not limited to, those discussed in the
        subsection entitled “Risk Factors” under Part I, page 8 or that are otherwise
        described from time to time in our reports filed with the Securities and
        Exchange Commission after this Annual Report. PWI assumes no obligation to
        update any forward looking statements to reflect events that occur or
        circumstances that may arise after the date as of which they are
        made.
 
 **ITEM
        1. DESCRIPTION OF BUSINESS**
 
 **The
        Company; Corporate History**
 
 We
        were
        originally incorporated in Nevada on May 21, 1987, under the name Olympic
        Entertainment Group, Inc. We were formed to finance, produce, co-produce
        and
        distribute motion pictures and television shows. We pursued various
        opportunities through 1993, at which time our management decided to focus
        upon
        the development of a cable television network for the distribution of nonviolent
        children’s television programming. From 1993 through 1995 we developed this
        concept and in 1995, we launched the Children’s Cable Network. Although we had
        some early success through 1997, we ceased operating in June 1998. We were
        a
        non-operating company from that time until June 2004.
 
 On
        June
        3, 2004, we entered into a Stock Exchange Agreement (the “Agreement”) with Exam
        USA, Inc., a Delaware corporation (“Exam Delaware”), which provided for a
        tax-free share exchange under Section 368(a)(1)(B) of the Internal Revenue
        Code.
        Such transaction was accounted for as a reorganization. Pursuant to the
        agreement, all of the 10,300 shares of outstanding common stock of Exam Delaware
        were acquired in exchange for 1,800,000 shares of Olympic Series E Convertible
        Preferred Stock. The shares of Series E Convertible Preferred Stock were
        convertible into 18,000,000 shares of our common stock, representing
        approximately 95% of our outstanding voting power. Effective August 9, 2003,
        we
        changed our name to Exam USA, Inc., and on March 30, 2006 we changed our
        name to
        Pachinko World, Inc. We have a wholly-owned subsidiary, Exam Co. Ltd, a
        corporation formed and existing under the laws of Japan. Our subsidiary is
        an
        operating entity, which presently owns and runs seven (7) pachinko stores.
        We
        also operate two (2) small restaurants one of which includes karaoke
        entertainment.
 
 At
        various places in this report, we may make reference to “PWI” or the “company”
or “us” or “we.”  When we use those terms, unless the context otherwise
        requires, we mean Pachinko World, Inc. and its operating subsidiary, Exam
        Co.
        Ltd.
 
 We
        are
        traded on the NASD Over-the-Counter Bulletin Board under the ticker symbol
        PCHW.OB.
 
 We
        also
        own a 50% equity interest in Daichi
        Co., Ltd., an entity whose sole business is to procure tobacco products for
        us.
        The remaining 50% ownership is held by three (3) of our shareholders and
        directors as follows:
  Yoneji
                    Hirabayashi
                10%
                    equity ownershipShininchi
                    Hirabayashi
                20%
                    equity ownershipAkinori
                    Hirabayashi
                20%
                    equity ownership
 Our
        domestic headquarters are located in Huntington Beach, California. Our mailing
        address is 5912 Bolsa Avenue, Suite 108, Huntington Beach, California 92649.
        Our
        telephone number is (714) 895-7772. Our Annual Report on Form 10-KSB,
        quarterly reports on Form 10-QSB, current reports on Form 8-K, and all
        amendments to those reports filed with or furnished to the SEC are available,
        free of charge, through our website at www.pachinko-world-inc.com as soon
        as reasonably practicable after such reports are electronically filed with
        or
        furnished to the Securities and Exchange Commission. The information available
        from our website is not incorporated into or to be deemed a part of this
        Form
        10-KSB.
 
 1
  **Our
        Pachinko Business**
 
 Originally
        founded in 1956 by Mr. Yoneji Hirabayashi as a dining room to which was later
        added a hotel, we were first incorporated as Kisorin Inc. in 1969 and renamed
        “Exam” in 1999. We opened our first pachinko store called “Komaki Jambo Kaikan”
in 1973. Pachinko’s popularity has been on the rise since then and we have
        opened six (6) additional stores to date. Four stores are located in the
        Aichi prefecture in Mid-Japan and two (2) stores are located in the Tochigi
        prefecture just north of the Greater Kanto Area in Japan. Seeking to expand
        our
        business operations, we have also established one karaoke store. Our stores
        are
        strategically located in areas that are convenient and accessible to local
        residents. Our stores are known by our customers to be clean, attractive
        and
        comfortable. Our growth has been driven by the successful addition of new
        stores
        and enhancements to the operational efficiency of existing locations. We
        are led
        by a seasoned executive management team with decades of experience and
        accumulated industry knowledge.
 
 Unlike
        small stores operated by smaller “mom-and-pop” operators, PWI’s facilities are
        upper scale, featuring a selection of the latest pachinko and pachislo machines
        at each center.
 **PWI’s
          Existing Pachinko Store Statistics**
 ·Average
                    gross wagers per sq. m: $1,780
                  ·Average
                    gross wagers per machine: $67,438
                  ·Average
                    number of machines per store: 485 machines
                  ·Average
                    annual revenue per machine: $8,381
                  ·Average
                    age of stores: 12 years
                  ·Average
                    number of employes per store: 28
  **The
          Industry**
 
 **Introduction
        to Pachinko**
 
 *Pachinko* is
        believed to have originated in Japan in the 1920s based on a vertical
        pinball-like device called the Corinthian Game that was imported into Japan
        from
        the U.S. Pachinko is a game in which players shoot steel metal balls about
        3/8”
in diameter into a vertical machine that resembles a Western slot machine.
        The
        machine features pins that guide the direction of the balls into one of several
        slots in the machine. Certain slots release more balls while other slots
        capture
        the ball. The machines also have an automatic ball feeder that allows the
        player
        to quickly release balls into the machine. The player uses a round knob at
        the
        bottom of the machine, thereby adding an element of skill to the game, to
        control the speed and force of the balls as they are released into the machine.
        Pachinko machines today also feature digital displays in the background that
        resemble slot machines. The digital display is activated when the balls touch
        certain areas within the machine and allow the player to win extra balls.
        Upon
        completion of play, patrons can exchange balls for prizes, such as cigarettes,
        candy, and other merchandise, or a ‘special prize’ which can be exchanged for
        money.
 
 *Pachislo* machines,
        similar to Western slot machines, are also typically found in pachinko stores.
        The key difference between a pachislo machine and a Western slot machine
        is that
        the player controls when each individual reel stops, thereby requiring a
        certain
        degree of skill as well as chance. Another difference is that pachislo machines
        do not offer the big “jackpot” payouts paid by Western slot machines. Similar to
        the machine’s low token retention (“hold”) rate, payouts are also kept modest,
        to conform to Japan’s strict regulations regarding speculative entertainment
        activities.
  2
 
 **The
        Gaming Experience**
 
 A
        customer entering a modern Japanese electronic gaming store who wishes to
        play
        Pachinko or Pachislo would either approach a machine and insert cash directly
        into a computer monitored bill reader or purchase a prepaid magnetic card
        from
        one of several vending machines located around the gaming floor which is
        then
        inserted into the machine’s reader. In either instance the machine dispenses a
        specified number of balls into the machine’s loading tray or payout tray at a
        posted price per ball. The player then plays the game and, if successful,
        collects his or her winnings in plastic bins provided by the store by manually
        releasing a trap at the base of the machine’s collection tray. When he or she is
        finished gaming, the customer transfers the filled bins to ball or token
        counting machines which automatically supply the customer with a magnetic
        or
        paper receipt for the number of balls or tokens collected. The customer then
        presents the receipt at the redemption counter which offers the customer
        a
        choice of credit towards retail goods sold by the store or a ‘special prize’
that can be sold for money at a special prize exchange station located within
        close proximity to the pachinko store (see “ *The
        Tri-Party Transaction* ”
        below).
 
 **Ball/Token
        Redemption**
 
 The
        redemption price of balls or tokens is at a lower price per ball/token than
        the
        buy-in price. On average, the buy-in price for pachinko balls is 4 yen per
        ball
        while the redemption rate ranges from 2.75 to 3.75 yen per ball among some
        of
        our main competitors. Our redemption rate is about 3.45 yen per ball for
        our
        established stores. Our competitors’ rates allow their stores to profit while
        giving their players a typical payout ratio of between 120% and 130%, which
        gives the player the feeling that he or she has had a winning session. As
        a
        result, the store’s net revenues on total gross wagers are determined by a
        combination of the *hold
        percentages* set on
        the machines and the ball/token *redemption
        ratio* .
        As in
        Western style casinos, a “looser” machine (one with a lower hold percentage)
        will increase the amount of time that a player will play without losing all
        of
        his or her investment, and result in a lower player velocity for the casino.
        In
        order to remain profitable under such a scenario, the store must modify its
        ball/token redemption ratio to offset the low hold percentage on the machines.
        Smaller stores typically employ this business model. In contrast, better
        established, dominant properties with significant customer traffic offer
        the
        player higher redemption rates on “tighter” machines (higher hold percentages).
        Under this configuration, player velocity is increased as players either
        lose
        more quickly or increase their level of wagers in order to fill the same
        amount
        of playing time. Adjusting this all-important mix correctly is of critical
        importance in maximizing profitability and is the hallmark of an experienced
        operator. The advancements in IT infrastructure for pachinko operations allow
        pachinko operators to monitor the profitability of each machine in accurate
        detail and in real-time.
 
 While
        balls and tokens can be redeemed for various prizes such as candy, cigarettes,
        consumer electronics and certain luxury items, the vast majority of the
        redemptions are for a ‘special prize’. The concept of the ‘special prize’ has
        existed for decades in the Pachinko business, although in later years it
        has
        become significantly more refined. Under Japanese law it is not permissible
        to
        exchange pachinko balls or slot machine tokens for currency, gold, or
        securities. As a result, the Japanese pachinko industry has established the *tri-party
        transaction* system
        whereby customers can exchange balls/tokens for certain objects of nominal
        value
        which acts as a mode of exchange between the store, the customer, and a
        completely unrelated business entity that will accept the object from the
        customer in exchange for cash.
 
 **The
        Tri-Party Transaction**
 
 The
        three
        parties involved in the tri-party transaction are (i) the casino/store, (ii)
        the
        prize buyer (“Kaitori-Gyosha”), and (iii) the prize wholesaler (“Nonyu-Gyosha”).
        Each of the parties must be completely unrelated to the others, both legally
        and
        economically, in order to avoid a violation of the law.
 
 **Diagram
        of the Tri-Party Transaction**
  
  3
 Each
        pachinko store maintains an arms-length ad hoc relationship with a prize
        wholesaler, pursuant to which the prize wholesaler agrees to cause the ‘special
        prizes’ to be manufactured and sold to the store and the store agrees to
        purchase ‘special prizes’ from the prize wholesaler each day in order to
        maintain sufficient inventory. The prize wholesaler and buyer have a similar
        ad
        hoc relationship to which the store is not a party. The third component of
        the
        tri-party transaction is the relationship between the store customer and
        the
        prize buyer. The buyer maintains a freestanding or leased facility nearby
        the
        store consisting of a manned window. A customer possessing ‘special prizes’ will
        exit the store and exchange them for a like amount of cash at the prize buyer’s
        window.
 
 All
        receipts from the store are removed daily from the prepaid card vending machines
        and pachinko/pachislo machines and deposited, either directly on a normal
        business day or by lock-box if banks are closed, at the store’s bank. At the
        opening of each business day, the store wires from its account to the account
        of
        the prize wholesaler, an amount roughly aggregating the value of the ‘special
        prizes’ that the wholesaler has acquired from the prize buyer representing trade
        during the previous day plus a commission. The wholesaler uses the proceeds
        to
        purchase the ‘special prizes’ from the buyer, also with a commission agreement.
        Thus the special prizes make the triangular, and legally permissible trip
        from
        the store, to the prize buyer, to the wholesaler, who then sells an inventory
        of
        special prizes back to the store.
 
 The
        tri-party transaction is explicitly designed and regulated to be in compliance
        with Japan’s *Law
        Concerning Regulation and Rationalization of Businesses Affecting Public
        Morals* .
        Insofar
        as the store operator has no contractual relationship with the prize buyer,
        and
        is economically and legally indifferent to the buyer’s business activities, the
        store operator is effectively removed from two (2) of the three (3) prize
        exchange transactions and the store operator is involved only in the purchase
        of
        special prize inventory from the prize wholesaler. Thus, given the form of
        the
        prize exchange system and assuming the independence of the three (3) parties,
        as
        both a legal and economic matter, the tri-party transaction has been designed
        by
        the industry and the regulators specifically to preclude a violation of the
        law.
 
 **The
        Japanese Pachinko Industry**
 
 Pachinko,
        along with public lotteries and horse, motorboat, and cycle racing, is one
        of
        the key segments of the Japanese gaming industry. Pachinko and its variants,
        including pachislo, account for more than two-thirds of total wager volume
        in
        Japan. Generating an estimated $277 billion in gross wagers per annum and
        employing over 319,000 employees, the Japanese pachinko industry is larger
        than
        even the country’s automobile industry, and is, by far, the largest service
        industry sector in Japan. Pachinko is the most popular source of leisure
        and
        entertainment, (including dining), in Japan and a regular component of the
        Japanese lifestyle. In a country with a population of 127 million, an estimated
        40 to 50 million Japanese play pachinko while an estimated 25 million people
        play on a regular basis. While pachinko was traditionally played primarily
        by
        males of legal gambling age (18 and over), pachinko has grown to appeal to
        Japanese women as well. To cater to the significant number of female players,
        many stores now feature refrigerators in which housewives can temporarily
        place
        their purchased groceries while they play and feature prizes, like brand-name
        purses, that appeal to women.
 
 Some
        key
        statistics pertaining to the Japanese pachinko industry are listed
        below:
 
 ·
              A
                  total of approximately 6,100 operators operate approximately 16,100
                  stores
                  housing an estimated 4.9 million pachinko and pachislo machines.
                  The
                  industry generates annual gross wagers of approximately $277 billion,
                  or
                  an average of $17.2 million per store. (Source:*Tokyo-based
                  Yano Research Institute, Ltd.*)
 
 ·
              The
                  industry employs an estimated 319,000 people compared to 350,000
                  employed
                  by the entire U.S. casino industry. (Source:*Tokyo-based
                  Yano Research Institute, Ltd.*)
 
 ·
              Approximately
                  26% of adults (approximately 25 million people) in Japan are regular
                  customers of the Japanese electronic gaming industry. (Source:*The
                  Leisure and Development Center*)
  ·
              The
                  Japanese pachinko industry represents over one-third of all spending
                  on
                  entertainment making it one of the largest in international gaming
                  markets
                  and one of the largest sectors of the Japanese economy. (Source:*Japanese
                  Ministry of Economy, Trade and Industry*)
 
 ·
              Pachinko
                  is enjoyed by a growing number of women, who currently represent
                  over 20%
                  of all players. On average, women frequent pachinko stores three
                  (3) times
                  a week and spend 29,000 yen per visit, about 2,000 yen more than
                  men.
                  (Source:*Tokyo-based
                  Yano Research Institute Ltd.*)
  Due
        to
        the importance of pachinko to Japan’s economy both as a source of employment for
        over 319,000 people and a significant contributor to the country’s annual tax
        revenues, the government of Japan has made a conscious effort to establish
        and
        enforce laws to protect consumers, rid criminal elements and raise the public
        image of the pachinko industry.
  4
  Another
        characteristic of the Japanese pachinko industry that makes its attractive
        to
        both operators and investors is its relative imperviousness to economic trends.
        In fact, pachinko stores have actually been known to perform better during
        economic recessions as individuals seek ways to supplement their
        incomes.
  Further **** evidence
        of the magnitude of the Japanese pachinko industry are the leading Japanese
        pachinko/pachislo machine manufacturers, including Sankyo Co., Sammy
        Corporation, Heiwa Corporation, Sigma Gaming, and Konami Co., who have grown
        to
        become some of the largest publicly listed companies in Japan.
 
 **Pachinko
        Operator Landscape**
 
 The
        Japanese pachinko industry is highly fragmented, with an estimated 6,100
        operators and 16,100 stores housing an aggregate 4.9 million pachinko and
        pachislo machines throughout the country. The largest operator is Dynam Co.,
        Ltd., which has approximately 240 stores throughout Japan, with the next
        largest
        operator being Maruhan Co., Ltd., which has 165 stores. Smaller stores average
        100 to 200 machines while larger stores, such as three (3) of the stores
        belonging to PWI, have 500 or more machines. The pachinko industry has been
        revolutionized over the last several years with enhancements to pachinko
        and
        pachislo machines and information technology that allow operators to capture
        comprehensive, real-time data on the performance and usage of each individual
        machine. Pachinko machines have largely been converted to a digital format
        that
        features a digital slot machine-like screen in the background that enhances
        the
        playing experience and winnings potential for the customer. These enhancements
        to machines and IT infrastructure have increased the capital expenditures
        required to establish and maintain a modern pachinko facility. As a result,
        the
        yet highly fragmented pachinko industry is experiencing a consolidation trend
        as
        smaller stores, who lack the financial resources to make such enhancements,
        are
        being put out of business by larger competitors, such as PWI, with
        greater financial, staff and other necessary resources and operational
        experience.
 
 **Regulatory
        Matters**
 
 The
        criminal law of Japan essentially prohibits gambling organized by private
        entities. However, pachinko is considered part of the leisure industry, which
        is
        exempt from the prohibition against gambling. Pachinko is regulated by the
        Japanese National Police Agency (“NPA”), through the prefectural police
        departments, which has taken the stance that pachinko is not gambling but
        simply
        a “reasonably speculative form of pastime.” Pachinko regulations fall under the *Entertainment
        Establishment Control Law* and
        the
        ministerial ordinances and regulations thereunder. Customers must be at least
        eighteen (18) years of age. Pachinko stores are open seven (7) days a week;
        however, they are not permitted to operate between the hours of 11 p.m. and
        9
        a.m. Also, customers are forbidden from taking pachinko balls from the stores
        and therefore ‘rent’ the balls with which they play.
 
 Most
        important of the regulations is the law forbidding pachinko stores from giving
        cash or securities as a prize or repurchasing prizes for cash or securities.
        In
        addition, there exist a number of other regulations such as requirements
        regarding qualifications to obtain pachinko store operating licenses, machine
        designs and payout ratios and regulations pertaining to the pachinko store
        facilities themselves. Although law in Japan prohibits casino gambling, a
        statutory system of laws has been established that allows pachinko operators
        to
        provide gaming services to its customers. (See “ *The
        Tri-party Transaction* ”
        above)
 
 In
        previous years, questionable business practices, tax evasion, and crime
        associated with the electronic gaming industry gave the industry a negative
        public image. However, over the last fifteen (15) years, the growing magnitude
        and importance of pachinko to the Japanese economy spurred the government
        and
        industry associations to step in to establish strict regulations, remove
        criminal elements and improve the public image of the pachinko industry.
        The
        regulation effort has been highly successful and has been one of  the
        principal catalysts for the growth of large operators in the industry as
        well as
        the involvement of major companies from such traditional industries as trading,
        supermarkets and railroads. In addition, foreign corporations and investors
        have
        taken interest in Japanese pachinko operations due to the profitability and
        financial stability of their operations. For instance, in 2001, BS Group,
        a UK
        corporation, purchased a stake in a leading pachinko operator, Tokyo Plaza,
        who
        runs about twenty (20) stores in Japan, and established its own pachinko
        stores
        in the United Kingdom. Due to the success of these reform efforts during
        the
        last two (2) decades, the Japanese pachinko industry has evolved to become
        an
        integral part of the entertainment sector of the Japanese economy and an
        important contributor to the Japanese economy.
  Police
        involvement is especially important in the tri-party transaction system of
        the
        Japanese pachinko industry. To better regulate pachinko operators and provide
        greater protection from criminal influences, many police union retirees have
        been hired to work in the prize buying and wholesaling operations. Due to
        the
        importance of regulating this critical aspect of the Japanese electronic
        gaming
        industry as well as the significance of the commission income from these
        operations to economic well-being of such police retirees, the NPA issued
        a
        report in October 1994 officially endorsing the existing prize exchange
        mechanism and required that a portion of the proceeds from such systems be
        dedicated to social welfare programs.
  5
 
 **Regulatory
        Bodies Overseeing the Japanese Pachinko Industry**
 
 **Regulatory
                  Body**
              **Regulatory
                  Function performed****National
                  Public Safety Commission**(NPSC)**&**
                **Prefectural
                  Governments**
              Granting
                  licenses and permits required to operate pachinko storesThe
                  NPSC regulations contain technical standards for pachinko games.
                  These
                  standards describe attributes of a pachinko game that are deemed
                  to stir
                  up the gambling spirit. Thus, they define the outer limits for
                  how
                  pachinko machines may legally operate.Supervises
                  the National Police Agency (NPA) which implements the policies
                  set by the
                  NPSC and oversees the prefectural police agencies**Prefectural
                  Public Safety Commission**(PSC)
              Hearing
                  disciplinary actions against licensees and taking action against
                  the
                  licensees by revoking the license or suspending the pachinko license
                  for
                  up to six monthsInvestigating
                  the suitability of applicants for pachinko licenses or other permits
                  that
                  may be required for a person or business entity to be associated
                  with the
                  pachinko industryLocal
                  (prefectural) police are included in the PSC and are responsible
                  for
                  enforcing the laws related to pachinko operations**Prefectural
                  Police & Metropolitan Police Department**(MPD)
              Enforcement
                  of the pachinko operating laws and regulations through observation
                  and
                  investigation**NPSC
                  & Security**
                **Electronics
                  and Communications**
                **Technology
                  Association**(SECTA)
              Examination
                  and approval of electronic gaming devices**Ministry
                  of Justice**
                **Law
                  Department in MPD**
              Legal
                  advice and services.
 
 **Our
        Employees and Consultants**
 
 As
        of May 31, 2006, we had 59  full-time
        employees and
        136 part -time
        employees. Our employees are not represented by a collective bargaining
        organization .
        We believe our relationship with our employees is good.
  6
  **Risk
        Factors**
 
 ***Our
        industry is subject to intense competition from a number of other store
        operators.***
 
 There
        are a total of approximately 16,100 pachinko stores in Japan, which are run
        by
        approximately 6,100 operators. We have
        several established competitors in each of our current and target geographic
        markets. Some of these competitors have comparable or greater financial and
        other resources than we do and, therefore, they may be better able to attract
        customers by updating their stores and pachinko machines, and through increased
        marketing efforts.
 
 ***Changes
        in the government regulations pertaining to the gaming and pachinko industries
        could adversely affect our business.***
 
 The
        Japanese pachinko industry is regulated by a system of laws created and enforced
        by various national and prefectural government entities. Although casino
        gambling is legally forbidden in Japan, pachinko has been designated as a
        non-gambling form of adult entertainment. The tri-party exchange system,
        established as an indirect mechanism for providing cash prizes without
        transgressing anti-gambling regulations, is permitted but highly regulated.
        However, changing government regulations regarding the definition of pachinko
        as
        a ‘non-gambling’ activity and/or restrictions regarding the indirect awarding of
        cash or similar prizes may have a significant impact on pachinko operators
        in
        continuing normal business operations.
 
 ***We
        may not be able to obtain the capital required for us to maintain our existing
        facilities and achieve our expansion goals.***
 
 Our
        expansion plans to open additional stores will require substantial capital
        commitments and outlays to acquire land rights, construct new buildings,
        purchase machines and related equipment, hire operational personnel and procure
        other resources associated with establishing new pachinko stores. We have
        received most of our financing to date from paid in capital from founders
        and
        existing shareholders, bank loans and cash flow from the operation of our
        existing business. As we expand, our capital requirements will increase.
        If for
        any reason we are unable to meet ours capital requirements, we will be unable
        to
        attain our expansion plans, which could adversely affect our ability to compete
        and our financial results.
 
 ***We
        need to enhance our internal controls in order in ensure the accuracy of
        our
        financial reporting.***
 
 Our
        auditors have advised us of certain significant internal control deficiencies
        that they consider to be, in the aggregate, a material weakness, including:
        inadequate staffing and supervision leading to the untimely identification
        and
        resolution of certain accounting matters; failure to perform timely reviews,
        substantiation and evaluation of certain general ledger account balances;
        lack
        of procedures or expertise needed to prepare all required disclosures; and
        evidence that employees lack the qualifications and training to fulfill their
        assigned functions. Our auditors indicated that they considered these
        deficiencies to be a material weakness as that term is defined under standards
        established by the American Institute of Certified Public Accountants. We
        considered these matters in connection with the year-end closing of accounts
        and
        preparation of financial statements as and for the year ended May 31, 2005
        and
        determined that such matters did not materially affect any prior period
        financial statements.
 
 In
        response to the observations made by our auditors we will proceed more
        expeditiously with our existing plan to enhance our internal controls and
        procedures, which we believe addresses each of the matters raised by our
        auditors.
 
 We
        enhanced our internal control procedures in January 2004 by adding a part-time
        dedicated Chief Accounting Officer (“CAO”) to our principal executive offices in
        Huntington Beach, California. We are evaluating the need to supplement our
        CAO
        with additional assistance. Our CAO is responsible for preparing a disclosure
        control and reporting package. We need to establish a written policies and
        procedures manual over internal controls of accounting and financial reporting.
        We also need to incorporate preparation of an annual budget and report
        budget-to-actual analyses on an annual and quarterly basis.
 ***We
          have a working capital deficit and successive years of losses which raises
          doubts about our ability to continue as a going
          concern.***
  At
          May 31, 2006 we had a working capital deficit of approximately $4,200,000.
          In addition, we have incurred net losses in each of our last two fiscal
          years.
          The report of our Independent Registered Public Accountants for the year
          ended
          May 31, 2006, includes an explanatory paragraph to their audit opinion
          stating
          that our working capital deficiency raises substantial doubt about our
          ability
          to continue as a going concern. While management has implemented a series
          of
          cost reduction measures to reduce costs, there can be no assurance that
          our
          plans will be sufficient to enable us to sustain our operations without
          raising
          additional debt or equity financing, which we may not be able to do on
          terms
          favorable to us or at all.
  7
 
 ***An
        active trading market may not develop for our common stock, which would make
        it
        difficult for shareholders to sell their shares of our
        stock.***
 
 Our
        shares of common stock are publicly quoted on the NASD over-the-counter bulletin
        board system. Securities listed on the OTC bulletin board generally have
        less
        trading volume and institutional market support and therefore may be susceptible
        to greater fluctuations in price and have a lower degree of liquidity than
        shares listed on a larger exchange, such as the NASDAQ or NYSE. Ownership
        of our
        common stock is highly concentrated and the daily trading volume does not
        yet
        provide significant liquidity. Trading may be difficult due to the limited
        public float, narrow base of shareholders and the lack of an institutional
        market maker to provide liquidity and pricing support for the Company’s
        stock.
 
 ***Our
        common stock is subject to penny stock regulation, which may affect its
        liquidity.***
 
 Our
        common stock is subject to regulations of the Securities and Exchange Commission
        (the “Commission”) relating to the market for penny stocks. Penny stock, as
        defined by the Penny Stock Reform Act, is any equity security not traded
        on a
        national securities exchange or quoted on the NASDAQ National or Small Cap
        Market that has a market price of less than $5.00 per share. The penny stock
        regulations generally require that a disclosure schedule explaining the penny
        stock market and the risks associated therewith be delivered to purchasers
        of
        penny stocks and impose various sales practice requirements on broker-dealers
        who sell penny stocks to persons other than established customers and accredited
        investors. The broker-dealer must make a suitability determination for each
        purchaser and receive the purchaser’s written agreement prior to the sale. In
        addition, the broker-dealer must make certain mandated disclosures, including
        the actual sale or purchase price and actual bid offer quotations, as well
        as
        the compensation to be received by the broker-dealer and certain associated
        persons. The regulations applicable to penny stocks may severely affect the
        market liquidity for our common stock and could limit your ability to sell
        your
        securities in the secondary market.
 
 ***Our
        common stock may experience extreme price and volume
        fluctuations.***
 
 Due
        to
        the limited trading volume and public float, the concentration of share
        ownership, and the lack of market makers in the Company’s stock, attempts to buy
        or sell a substantial number of shares could result in significant market
        price
        fluctuations.
 
 ***Our
        management controls a substantial percentage of our outstanding voting
        securities.***
 
 Our
        management, together with family members, control approximately 90% of the
        outstanding voting control of our company. Consequently, it would be almost
        impossible for a third party to obtain control of our company, or influence
        our
        day-to-day operations.
 
 **ITEM
        2. DESCRIPTION OF PROPERTY**
 
 We
        sublease approximately 500 square feet in Huntington Beach, California, for
        our
        domestic executive offices. The lease requires monthly rental payments of
        $2,000, and has a term that expires on June 30, 2007. Subject
        to the sublessor’s ability to keep the underlying lease in effect, we have an
        option for an additional year at a price to be mutually agreed upon. Our
        lessor
        under this lease is a corporation that is controlled by Mr. Miyano, a director
        of our company.
 
 During
        the fiscal year ended May 31, 2005, our operating subsidiary in Japan leased
        its
        head office from two (2) individuals under separate leases, one of whom is
        Mr.
        Yoneji Hirabayashi. Pursuant to the lease Mr. Hirabayashi was paid $1,402.
        per
        month. The lease expired in fiscal year 2005.
  8
  With
        respect to our 7 pachinko stores, we own the buildings; and land upon which
        they
        are built is a combination of owned and leased. The following is a summary
        of
        our pachinko store locations:
 
 **J’s
                  Club**
              **Inuyama**
              **K’sClub**
              **Kaminokawa**
              **Jimokuji**
              **Oyama**
              **Okazaki****Opening
                  date**
              1973
              1974
              1996
              2001
              2003
              2005
              2006**Address**
              426-1
                  Jisaimae, Komakibarashinden
                Komaki-shi,
                Aichi-Ken
              1300-1
                  Maekawada,
                Uenoada,
                  Inuyama,
                Aichi-ken
              8
                  Kogita, Oguchi-cho, Niwa-gun,
                Aichi-ken
              2542-4
                  Kitahara,
                Kaminokawa-cho,
                Kawachi-gun,
                Tochigi-ken
              Aichi-ken36-2
                  Chanokida Jinmokaza Jimokujicho OoazaAmagun
                  Aichi-ken
              297-1
                  Senoazuka
                Oyamashi
                Tochigi-Ken
              57
                  Hashime-cho
                A29
                  Okoyanishii
                Okazaki
                  City
                Aichi
                  Prefecture**Land
                  status**
              Leased
              Leased
                  and owned
              Leased
                  and owned
              Leased
              Leased
              Leased
              Leased
                  and owned**Building
                  status**
              Owned
              Owned
              Owned
              Owned
              Owned
              Owned
              Owned**Parking
                  lot status**
              Leased
              Leased
              Leased
              Leased
              Leased
              Leased
              Leased**Size**(sq. m)
              2,501
              7,700
              10,712
              18,481
              18,182
              Leased
              10,897**Parking
                  Spaces**
              230
              250
              400
              620
              640
              430
              520**No.
                  Machines**
                (pachinko
                  / pachislo)
              224/84
              278/100
              252/106
              336/252
              400/240
              280/200
              400/240
 
 We
        lease
        the land and parking lots for each store identified above pursuant to numerous
        leases, most of which are not in writing and do not have a specified term.
        The
        aggregate of the monthly payments under all leases for each store is as follows:
        J’s Club is $14,955; Shop Inuyama is $14,389; K’s Club is $4,804; Kamikawa is
        $28,338; Jimokuji is $57,749; Oyama is $19,827; and Okazaki is $34,381. The
        leases for Okazaki, which commenced in December 2005, are for a period of
        twenty
        (20) years.
 
 The
        land
        that we own, together with all of our buildings, serve as collateral for
        two
        loans from Gifu Shinyo Kinko Bank and Nagoya Bank. As of May 31, 2006, the
        outstanding principal balance of each loan was approximately $16,886,000
        and
        $1,860,000, respectively. The loan from Gifu Shinyo Kinko is comprised of
        several advances bearing interest at rates ranging from 2.6% to 2.75% per
        annum,
        and with maturity dates from May 2007 to beyond May 2011. The loan
        from Nagoya Bank is comprised of several advances all bearing interest at
        the
        rate of 2.275% per annum, and with maturity dates ranging from May
        2007 to May 2010.
 
 **ITEM
        3. LEGAL PROCEEDINGS**
 
 We
        are
        not currently a party to any legal proceedings.
 
 **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
        HOLDERS**
 
 None.
 
 9
  **PART
        II**
 
 **ITEM
        5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON
        EQUITY AND OTHER STOCKHOLDER MATTERS**
 
 **Market
        Price**
 
 Our
        common stock is traded on the NASD Electronic Bulletin Board over-the-counter
        market, and is quoted under the symbol PCHW. The table below gives the range
        of
        high and low bid prices of our common stock for the fiscal years ended May
        31,
        2006 and May 31, 2005 based on information provided by the OTC Bulletin Board.
        Such over-the-counter market quotations reflect inter-dealer prices, without
        mark-up, mark-down or commissions and may not necessarily represent actual
        transactions or a liquid trading market. The following prices have been adjusted
        to reflect our 15 to 1 reverse stock split which was effective June 11,
        2004.
 
 May
                  31, 2006:
              High
              Low1stQuarter
              $0.48
              $0.252ndQuarter
              $0.39
              $0.203rdQuarter
              $0.70
              $0.204thQuarter
              $0.70
              $0.15May
                  31, 2005:
              High
              Low1stQuarter
              $3.50
              $0.072ndQuarter
              $2.50
              $0.513rdQuarter
              $0.95
              $0.254thQuarter
              $0.39
              $0.19
 
 When
        the
        trading price of our common stock is below $5.00 per share, our common stock
        is
        considered to be “penny stocks” that are subject to rules promulgated by the
        Securities and Exchange Commission (Rule 15-1 through 15g-9) under the
        Securities Exchange Act of 1934. These rules impose significant requirements
        on
        brokers under these circumstances, including: (a) delivering to customers
        the
        Commission’s standardized risk disclosure document; (b) providing customers with
        current bid and ask prices; (c) disclosing to customers the brokers-dealer’s and
        sales representative's compensation; and (d) providing to customers monthly
        account statements.
 
 The
        number of shareholders of record of our common stock as of August 25, 2006
        was
        142.
 
 **Preferred
        Stock**
 
 Our
        board
        of directors has the authority, without further action by the stockholders,
        to
        issue up to 5,000,000 shares of preferred stock in one or more series and
        to fix
        the rights, preferences, privileges and restrictions of these shares of
        preferred stock without any further vote or action by stockholders. These
        rights
        and preferences include dividend rights, conversion rights, voting rights,
        terms
        of redemption, liquidation preferences, sinking fund terms and the number
        of
        shares constituting any series or the designation of the series. The issuance
        of
        preferred stock could adversely affect the voting power of holders of common
        stock and the likelihood that the holders will receive dividend payments
        and
        payments upon liquidation and could have the effect of delaying, deferring
        or
        preventing a change in control.
 
 **Common
        Stock**
 
 Our
        Articles of Incorporation authorize 100,000,000 shares of common stock, $0.01
        par value per share. As of August 25, 2006, we had 20,000,148 shares of common
        stock issued and outstanding that were held by approximately 142 stockholders
        of
        record.
  10
 
 **Options**
 
 On
        September 20, 2005, our Board of Directors adopted the 2005 Stock Incentive
        Plan (the “Plan”). The total number of shares of common stock available under
        the Plan shall be 3,000,000, subject to adjustment as provided in the Plan.
        The
        exercise price per share shall be fixed by the Plan administrator at a price
        not
        less than 85% of the fair market value per share of common stock on the option
        grant date. The Plan terminates in ten (10) years. Options may be fully and
        immediately vested upon issuance or may vest in one (1) or more installments
        over the participant’s period of service or upon attainment of specified
        performance objectives. In no event will options vest less than 20% per year
        from the date of the option grant or share issuance. No grants of stock options
        have been made.
 
 **Registrar
        and Transfer Agent**
 
 Our
        registrar and transfer agent is Interwest Transfer Co., Inc., 1981 Murray
        Road,
        Suite 100, Halliday, Utah 84117-5148; telephone (801) 272-9294.
 
 **Dividend
        Policy**
 
 We
        have
        not adopted any policy regarding the payment of dividends on our common stock.
        We do not intend to pay any cash dividends on our common stock in the
        foreseeable future. We intend to invest all of our cash resources in developing
        our business.
 
 **Recent
        Sales of Unregistered Securities**
 
 None.
 
 11
  **ITEM
        6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION**
 This
          annual report includes forward-looking statements made based on current
          management expectations. These statements are not guarantees of future
          p erformance
          and actual outcomes may differ materially from what is expressed. Factors
          that
          could cause future results to differ from PWI’s expectations include the factors
          described under Risk Factors beginning on page 7 or that are otherwise
          described from time to time in our reports filed with the Securities Exchange
          Commission after this Annual Report. We assume no obligation to update
          any
          forward looking statements to reflect events that occur or circumstances
          that
          arise after the date as of which they are made.
  **Overview**
 
 Through
          our subsidiaries, we own and operate seven pachinko stores, which is our
          primary
          operating business. We opened our seventh store in December 2005, which
          is a
          large size store with 640 machines. We operate a total of 3,392 Pachinko
          and
          Pachislo machines. We plan to leverage our expertise and capitalize on
          new
          development opportunities, and we are expanding our operations in Japan.
          Our
          revenue base has grown consistently in the past three years and, by streamlining
          organization with cost savings, as well as adopting new marketing strategies,
          we
          are able to improve our net profitability. Overall performance improvement
          is
          attributable to having the larger, up-to-date design of our newer Kaminokawa,
          Jimokuji, Oyama and Okazaki locations, which opened at the rate of one
          store per
          year during each of the past four years. Oyama suffered higher than expected
          losses in the first 12 months after opening due to competition with a store
          run
          by a larger pachinko chain . We have reversed this trend and Oyama is now
          generating profitable operations. We recognized net income in the fourth
          quarter
          of fiscal 2006 of $594,735 and we expect to enjoy a positive net income
          during
          the first quarter of the 2007 fiscal year while we investigate another
          store
          opening opportunity late in the 2007 fiscal year.
  We
          have
          three older stores, which have suffered declining wagers and revenues.
          These
          stores will require remodeling, closing or alternative use.
 
 **Results
          of Operations**
 
 **Year
          Ended May 31, 2006 Compared to Year Ended May 31,
          2005**
 
 ***Operating
          Revenues and Costs***
 
 A
          summary
          of the gaming revenues for the years ended May 31, 2006 and 2005 are as
          follows:
 
 2006
                
                2005Amount
                
                Percentage
                
                Amount
                
                PercentagePatron
                    wagers (pay-ins)
                
                
                $
                    228,749,971
                
                
                100.0
                %
                
                $
                    219,425,163
                
                
                100.0
                %Patron
                    payouts
                
                
                (200,321,143
                )
                
                (87.6
                )
                
                (194,575,733
                )
                
                (88.7
                )Gaming
                    revenues
                
                
                28,428,828
                
                
                12.4
                %
                
                $ 
                    24,849,430
                
                
                11.3
                %
  12
 Consistent
          with the gaming industry, we report our revenues as the net of wagers less
          payouts. Our gaming revenues increased by $3,579,398 from 2005 to $28,428,828
          in
          2006, an increase of 14.4%. Approximately $2,525,227 was related to the
          opening
          of the new store in December 2005. After excluding such new store effects,
          our
          same-store revenues (stores that have been opened for at least one year)
          increased by $1,054,171 or 4.2%, which is largely attributable to increases
          at
          our Jimokuji store which we opened in December 2003 and which operates
          640 machines. Other revenues, consisting of food, limited beverages and
          sundry
          items, increased by $186,920 to $944,638 or 24.7% due to new vending machine
          contract and general increase in the number of customers.
 
 Our
          gross
          wagers increased $9,324,808 or 4.2% from fiscal 2005 to $228,749,971 in
          fiscal
          2006. Our new store which opened in December 2005 contributed to $32,882,340
          of
          such increase in wagers. Other than our Jimokugi store, wagers were down
          at all
          stores in fiscal 2006 vesus fiscal 2005 for various reasons. Our payouts
          increased by $5,745,410 or 3.0 % from fiscal 2005 to $200,321,143 in fiscal
          2006. Our payouts as a percentage of wagers decreased from 88.7% to 87.6%.
          For
          the new store that opened in December 2005, we paid out 92.3% of wagers to
          attract new customers through May 31, 2006; the other stores had an aggregate
          payout rate of 86.8%. We generally increase our payouts for six (6) months
          after
          opening a new store, following which time we decrease payouts to customers
          to our normal rates. All stores realized a lower payout ratio from the
          prior
          year period. The payout ratio at our older stores was as low as 80.5% for
          2006.
          We lowered payouts across all stores in fiscal 2006 versus fiscal 2005
          to
          improve our results of operations.
 
 ***Cost
          of Revenues***
 
 Costs
          of
          revenues as a percentage of total revenues for the years ended May 31,
          2006 and
          2005 are as follows:
 
 2006
                
                
                2005Salaries
                    and wages
                
                
                15.0
                %
                
                15.8
                %Depreciation
                
                
                26.1
                %
                
                27.4
                %Facilities
                    and other
                
                
                26.3
                %
                
                26.8
                %Impairment
                    of property and
                  equipment
                
                
                11.7
                %
                
                16.7
                %Total
                    cost of revenues
                
                
                79.1
                %
                
                86.7
                %
 
 Cost
          of
          revenues for 2006 increased by $1,036,636 or 46.7% from $22,192,770 to
          $23,229,406 compared to the year ended May 31, 2005. As a percentage of
          revenues, our costs in 2006 decreased to 79.1% from 86.7% in 2005. Overall
          cost
          to revenues decreased. Although we did incur higher costs due to the new
          store
          which opened in December 2005 and the full-year operations of the store
          opened
          in December 2004, we did not have any major impairment involving one of
          the
          stores in 2005. In fiscal 2005, we impaired J’s store totaling $2,213,312. We
          also implemented a new procurement policy for pachinko machines and slot
          machines to enable us to purchase the machines at lower cost, as well as
          procure
          used or less expensive machines. Depreciation expense is accelerated in
          the year
          of acquisition for machines acquired. Facility costs include certain start-up
          costs consisting of supplies, pachinko balls and signage associated with
          the new
          store opening in December 2005, which exceeded $600,000.
  13
 
 We
          evaluate our long-term assets to be held and used for impairment when events
          or
          changes in economic circumstances indicate the carrying amount of such
          assets
          may not be recoverable. In 2006, we did not have an impairment of buildings
          and
          improvements, because our estimates of future undiscounted cash flows are
          sufficient to recover the carrying values of long-lived assets.
 
 The
          total
          impairment expense recorded at the 2006 year-end was approximately $3,430,844,
          and relates to pachinko and Pachislo machines, because these machines did
          not
          reach their depreciable lives of two to three years. We disposed of more
          machines in 2006 than 2005 due to a prospective industry regulatory change
          effective June 1, 2006, which causes us to use the pachislot machines with
          different specification while the regulatory agency no longer allows us
          to
          extend the period of use of the existing machines. We are implementing
          certain
          strategies, such as store machine mix at each store and establishing variety
          corners by using lower cost pachinko machines to reduce the cost of machines
          throughout the fiscal 2007.
 
 ***Marketing
          and Advertising Expenses***
 
 Marketing
          and advertising expenses increased by $329,254 from $1,987,605 in 2005
          to
          $2,316,859 in 2006. The increase is attributable to the new store which
          opened
          in December 2005. As a percentage of revenues, we spent 7.9% and 7.8%,
          in fiscal
          2006 and 2005, respectively. We primarily use flyers through local newspapers
          to
          reach area customers. Advertising
          continues to be an important element to attracting customers.
 
 ***General
          and Administrative Expenses***
 
 General
          and administrative expenses for the year ended May 31, 2006 decreased by
          $707,493, or 21.1% from $3,352,754 in 2005 to $2,645,261 in 2006. General
          and
          administrative expenses for 2006 constituted 8.7% of revenues in comparison
          to
          13.1% for 2005. The decrease in general and administrative expenses is
          primarily
          related to stock-based compensation to two directors in fiscal 2005 totaling
          $943,693. We continue to monitor our administrative expenses
          carefully.
  ***Other
          Income and Expenses***
 
 Interest
          expense increased by $216,457 to $1,248,062 in 2006, from $1,031,605 in
          2005, an
          increase of 21.0%. This increase is due to the issuance of debt and capital
          lease financing arrangements, net of repayments, of $6,091,385.
  ***Income
          Taxes***
 
 Income
          taxes expense increased by $930,860 to $618,299 for the year ended May
          31, 2006,
          from a benefit of $(312,561) in the prior year. We have incurred expenses
          in the
          United States of America totaling approximately $2,322,441 in 2005 and
          $1,074,641 in 2006. We have no income in the United States, thus such expenses
          will result in net operating losses to be carried forward, for which a
          valuation
          allowance is deemed required for the related deferred tax assets. The federal
          income tax rate in Japan is 30% and the state and local taxes, net of federal
          benefit, is 13.3%. We increased our valuation allowance by $332,813 in
          2006 for
          certain expenses paid in the United States that will not be deductible
          in Japan.
          We currently do not expect to use such deferred tax asset to offset by
          generating income in the United States. In 2006 we adjusted US stock based
          compensation related valuation allowance, since we did not take such deduction
          for income tax reporting purposes.
 
 14
  ***Net
          Loss***
 
 We
          incurred a net loss for fiscal 2006 of $109,175 versus net loss of $2,761,030
          in
          fiscal 2005. Although we have opened our seventh store with 640 machines,
          which
          caused to increase regular operational costs and expenses related to
          depreciation, store start-up costs, we did not incur stock-based compensation
          expenses related to the reverse merger of $1,303,693 and one store impairment
          charge in fiscal year 2005 totaling $2,213,312. We
          have
          implemented certain strategies to improve profitability in the fourth quarter,
          which is continuing into the first quarter of fiscal 2007.
 
 **Liquidity
          and Sources of Capital**
 
 ***Cash
          Flows***
 
 During
          the years ended May 31, 2006 and 2005, we generated $11,081,923 and $10,378,208,
          respectively, of cash flows from operating activities. Our cash provided
          by
          operating activities in fiscal 2006 and 2005, included non-cash depreciation
          and
          impairment losses of $11,193,641 and $11,366,611, respectively. Our increase
          in
          cash generated in 2006 relates primarily to revenue increases in our three
          largest stores. During the years ended May 31, 2006 and 2005, we used cash
          of $15,045,547 and $14,612,408, respectively on investing activities. We
          spent
          approximately $13,777,002 and $13,385,503, respectively, for capital additions
          (including $1,916,221and $1,793,527, respectively, for capital leases).
          The 2006
          expenditures included $4,229,838 to construct a building, $1,988,232 to
          supply
          640 new machines, and $2,399,838 for computer systems and equipment at
          the new
          store which opened in December 2005. in fiscal 2005, we incurred $3,809,352to
          construct a building, $2,339,474 to supply 480 new machines, and $1,776,775
          for
          computer systems and equipment at the new store which opened in December
          2004.
          During the fiscal year ended May 31, 2006, we financed a new store and
          expansion in the aggregated amount of $12,829,075 from two banks. In fiscal
          2006, we used cash in our financing activities in the amount of $5,661,562.
          We
          repaid notes payable and long-term debt in the amounts of
          $6,091,385.
 
 ***Liquidity***
 
 During
          the years ended May 31, 2006 and 2005, we have experienced net losses totaling
          $109,175 and $2,761,030, respectively, which includes non-cash impairments
          of
          store assets of $3,430,844 and $4,273,178, respectively. As of May 31,
          2006, the
          Company has a working capital deficit totaling $4,494,825. We had one obligation
          with a bank that requires us to reduce the principal balance in 2006 by
          approximately $3.6 million. We have good relations with our banks in Japan
          and
          we have implemented a series of coat reduction measures to reduce controllable
          expenses in our operations. By implementing such measurres through the
          fiscal
          year, we have generated net income of approximately $595,000 in the fourth
          quarter of fiscal 2006. We believe PWI will continue its growth and generate
          positive cash flows from operations to fund its daily operations and service
          its
          debt obligations. There are no assurances that we will be successful in
          our
          plans. No adjustments have been made to the carrying value of assets or
          liabilities as a result of the uncertainty about obtaining cash required
          to pay
          obligations as they become due. Our independent registered public accounting
          firm has included an explanatory paragraph in their report regarding substantial
          doubt about our ability to continue as a going concern because of these
          matters
          as required by auditing standards generally accepted in the United States
          of
          America.
  15
 
 Our
          level
          of indebtedness presents other risks to investors, including the possibility
          that we may be unable to generate cash sufficient to pay the principal
          of and
          interest on our indebtedness when due; and that we may not be able to meet
          tests
          and covenants of such debt agreements and achieve satisfactory resolution of
          such non-compliance with the lenders. In such an event, the holders of
          our
          indebtedness may be able to declare all indebtedness owing to them to be
          due and
          payable immediately, and proceed against any collateral securing such
          indebtedness. These actions could limit our
          ability to borrow additional funds and would likely have a material adverse
          effect on our business and results of operations.
 
 **Critical
          Accounting Policies**
 
 Our
          significant accounting policies are included in Note 2 of the Consolidated
          Financial Statements included elsewhere in this Report. These policies,
          along
          with the underlying assumptions and judgments made by our management in
          their
          application, have a significant impact on our consolidated financial
          statements.
 
 ***Impairment
          of Long-Lived Assets and Intangibles***
 
 We
          review
          the carrying value of our long-lived assets whenever events or changes
          in
          circumstances indicate that such carrying values may not be recoverable
          annually. Unforeseen events and changes in circumstances and market conditions
          and material differences in estimates of future cash flows could negatively
          affect the fair value of our assets and result in an impairment charge.
          Fair
          value is the amount at which the asset could be bought or sold in a current
          transaction between willing parties. Fair value can be estimated utilizing
          a
          number of techniques including quoted market prices, prices for comparable
          assets, or other valuation processes involving estimates of cash flows,
          multiples of earnings or revenues.
 
 ***Income
          Taxes***
 
 We
          account for income taxes in accordance with *Statement
          of Financial Accounting Standards No. 109, Accounting for Income
          Taxes* (SFAS
          No. 109) which requires that deferred tax assets and liabilities be
          recognized using enacted tax rates for the effect of temporary differences
          between the bases used for financial reporting and income tax reporting
          of
          recorded assets and liabilities. SFAS No. 109 also requires that deferred
          tax assets be reduced by a valuation allowance if it is more likely than
          not
          that some portion or all of the deferred tax asset will not be realized.
          We have
          provided a valuation allowance at May 31, 2006 because we feel that certain
          deferred tax assets generated in the United States will not be recovered
          from
          future operations. Since we are not able to deduct any net operating loss
          realized or recognized in the U.S.A, our effective tax rate becomes much
          higher
          than the actual tax rate under generally accepted accounting principles
          in the
          United States.
  ***Foreign
            Currency***
 
 Our
            functional currency of EXAM and Daichi Co., Ltd. is the Japanese Yen.
            Our
            financial statements of EXAM and Daichi Co., Ltd. are translated into
            United
            States Dollars at year-end exchange rates for assets and liabilities,
            and
            weighted-average exchange rate for revenues and expenses. The resulting
            translation adjustments are recorded as a component of other comprehensive
            income reflected on the consolidated statements of income and comprehensive
            income (loss) and the consolidated statements of shareholders’ equity.
            Transaction gains and losses, if any, in foreign currencies are reflected
            in
            operations. The year-end exchange rate was ¥112.17
            yen
            to 1US dollar and the average rate was ¥114.46
            to 1US
            dollar yen for fiscal 2006; the year-end exchange rate was ¥108.00
            yen to 1US
            dollar and the average rate was ¥106.99
            to 1US
            dollar for 2005. Even when we experience increase or decrease in our
            financial
            operational results, the results in US dollar may not reflect the correlational
            results due to fluctuation of the currency rate in the market.
 **ITEM
            7. FINANCIAL STATEMENTS**
 
 The
            consolidated financial statements of Pachinko World, Inc.,  for its fiscal
            year ended May 31, 2006 are provided with this Form 10-KSB and are incorporated
            herein by reference.
 16


**ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
      AND FINANCIAL DISCLOSURE**





On
      September 2, 2004, our Board of Directors of Exam USA, Inc. approved a change
      in
      auditors.  The Board of Directors approved the dismissal of Malone &
Bailey PLLC (“Malone & Bailey”) as our independent registered public
      accounting firm and the selection of McKennon, Wilson & Morgan, LLP as their
      replacement.





Malone
      & Bailey’s report on our financial statements for the fiscal year ended
      December 31, 2003 did not contain any adverse opinion or disclaimer of
      opinion, nor was it qualified or modified as to audit scope, procedure or
      accounting.  Our financial statements for the fiscal year ended
      December 31, 2002, were audited by Scheifley & Associates, P.C., whose
      report for such fiscal year did not contain any adverse opinion or disclaimer
      of
      opinion, nor was it qualified or modified as to audit scope, procedure or
      accounting.




During
      the two (2) fiscal years ended December 31, 2003 and 2002 and the
      subsequent interim periods through September 2, 2004, there were no
      disagreements between us and either Malone & Bailey (as to the fiscal year
      ended December 31, 2003 and the subsequent interim periods through
      September 2, 2004) or Scheifley & Associates on any matter of
      accounting principles or practices, financial statement disclosure, or auditing
      scope or procedure, which disagreements, if not resolved to Malone &
Bailey’s or Scheifley’s satisfaction, would have caused either of them to make
      reference to the subject matter of the disagreement in connection with their
      respective reports on our financial statements for such years; respectively,
      and
      there were no reportable events as described in Item 304(a)(1)(v) of Regulation
      S-K.




In
      addition, during the two (2) fiscal years ended December 31, 2003 and 2002
      and the subsequent interim periods through September 2, 2004, we did not
      consult with McKennon, Wilson & Morgan, LLP with respect to the application
      of accounting principles to a specified transaction, either completed or
      proposed, or the type of audit opinion that might be rendered on our financial
      statements, or any other matters or reportable events as set forth in Items
      304(a)(2)(i) and (ii) of Regulation S-K.





**ITEM
      8A. CONTROLS AND PROCEDURES**





Our
      principal executive officer and principal financial officer have evaluated
      the
      effectiveness of the design and operation of our disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
      Exchange Act of 1934, as amended) as of the end of the period covered by this
      annual report on Form 10-KSB. Based on this evaluation, our principal executive
      officer and principal financial officer concluded that these disclosure controls
      and procedures need improvement to ensure that the information required to
      be
      disclosed in our reports filed or submitted under the Securities Exchange Act
      of
      1934, as amended, is recorded, processed, summarized and reported within the
      requisite time periods.




In
      connection with its review of the our consolidated financial statements for
      the
      year ended May 31, 2005, McKennon, Wilson & Morgan LLP, the Company’s
      independent accountants, advised management of certain significant internal
      control deficiencies that they considered to be, in the aggregate, a material
      weakness, including, inadequate staffing and supervision leading to the untimely
      identification and resolution of certain accounting matters; failure to perform
      timely reviews, substantiation and evaluation of certain general ledger account
      balances; lack of procedures or expertise needed to prepare all required
      disclosures; and evidence that employees lack the qualifications and training
      to
      fulfill their assigned functions.  McKennon, Wilson & Morgan LLP
      indicated that they considered these deficiencies to be a material weakness
      as
      that term is defined under standards established by the American Institute
      of
      Certified Public Accountants. A material weakness is a significant deficiency
      in
      one or more of the internal control components that alone or in the aggregate
      precludes our internal control from reducing to an appropriately low level
      the
      risk that material misstatements in our financial statements will not be
      prevented or detected on a timely basis. We considered these matters in
      connection with the year-end closing of accounts and preparation of financial
      statements as and for the year ended May 31, 2006 and determined that no prior
      period financial statements were materially affected by such
      matters.




In
      response to the observations made by McKennon, Wilson & Morgan LLP, we have
      taken and continue to take the steps to remedy the existing material weakness
      items. They are as follows:




a)
            Inadequate
                staffing and supervision leading to an ineffective control environment
                which have caused or causes the untimely identification and resolution
                of
                certain accounting matters.





We
      have
      observed the current staffing needs to improve the quality of effective control
      environment and hired additional staff level employees so that the overall
      volume of work assignment is completed on a timely manner with improved accuracy
      and adequate substantiation. The managerial level accounting staff is now able
      to have adequate time to train the staff level employees, as well as to review
      the work completed by them. We intend to retain a part-time financial expert
      to
      review our filings for compliance with accounting principles generally accepted
      in the United States (“US GAAP”) by the next fiscal year.




b)
            A
                policies and procedures manual in English manual in English should
                be
                completed.





17




Basic
      accounting policy and store operation related accounting manuals have been
      prepared in Japanese, as well as in English. We recently completed and
      implemented policies for material accounting areas. We continue to improve
      work
      flow and intend to continue to update and modify such procedures and manuals.
      Once completed, an English version will be prepared. Additional policies and
      procedures will be developed as necessary to further improve the control
      environment in the next fiscal period.




c)
            Management
                should document all key controls in Japan to prepare for the future
                audit
                of these controls and documentation for current compliance with Section
                302 and future compliance of Section 404 of the Sarbanes-Oxley
                Act.





We
      have
      created an internal audit department in our organization and hired one staff
      to
      monitor and help to develop the improved control environment. We prepared
      documentation in a limited scope for the accounting area. We are currently
      planning the procedures for our investigation of the operation of controls
      at
      the store level. We expect the investigation to take several months to
      complete.




d)
            Management
                should consider hiring an independent accountant to assist in preparing
                documentation to comply with Section 302 and Section 404 of the
                Sarbanes-Oxley Act in the future.





We
      have
      evaluated the need to hire such an independent consultant/accountant and
      determined that we will hire such accountant when we finish the preliminary
      documentation of our internal control related area so that such accountant
      may
      focus on more core issues of our control environment. We plan to complete this
      step before the end of 3 rd quarter
      in 2007.




e)
            Management
                does not have a written policy for impairment of property, plant
                and
                equipment. Management needs to establish a written policy to periodically
                review property, plant and equipment to properly account for the
                property,
                plant and equipment during each reporting period in accordance with
                SFAS
                144.





Management
      is working on a written policy on impairment in connection with the property
      and
      equipment in accordance with SFAS 144. Draft policy and procedure is expected
      before the end of the current fiscal period. We plan to implement the formal
      policy and procedure in the during the fiscal year starting June 1, 2006.




f)
            Management
                should establish a policy for identifying and recording stock-based
                compensation. Management is required to evaluate the fair value of
                options, and shares of common or preferred stock for service rendered
                to
                the Company.





Management
      plans to establish a policy in accordance with the stock option plans adopted
      in
      November 2005 in accordance with SFAS 128R. While we initially expected to
      complete and implement the policy on or before May 31, 2006, since we have
      yet
      to grant stock options, the policy has not been implemented. We expect to
      implement such policy during the fiscal year in which we first grant stock
      options.


g)
              Management should consider the adoption of certain
                US
                GAAP practices on its financial statements in Japan to reduce the
                number
                of adjustments at period-end closings.


Management
      recognizes the importance of having a complete set of books with US GAAP based
      practices. However, our operating subsidiaries operating in Japan are subject
      to
      local accounting as well as tax regulations. It would be a tremendous burden
      in
      time, effort and cost to apply US GAAP practices on their local accounting
      records. In the alternative, we plan to develop a separate policy and procedure
      for consolidated financial statement preparation for period-end
      closing.




18




As
      of May
      31, 2006, such policy and procedure had not yet been fully implemented. We
      expect such implementation to occur during the fiscal year ended May 31,
      2007.


h)
              The Company does not have a policy in place for
                wire
                transfer confirmation after the wire has been initiated with the
                banks. An
                officer should approve through call back or approval of detail of
                wire
                drafts after the initiation of wire transfers.


Management
      adopted the policy of the wire transfer confirmation and its written procedure
      will be completed before the end of the next fiscal year.




We
      will
      proceed more expeditiously with our existing plan to enhance our internal
      controls and procedures, which we believe addresses each of the matters raised
      by, McKennon, Wilson & Morgan LLP.




**Changes
      in Internal Controls**





We
      have
      noted above the changes that occurred during this fiscal year. We are continuing
      to establish written policies and procedures over internal controls of
      accounting and financial reporting. We also need to incorporate preparation
      of
      an annual budget and report budget-to-actual analyses on an annual and quarterly
      basis.




ITEM
      8B. OTHER
      INFORMATION




None




**PART
      III**


**ITEM
        9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
        COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
        ACT**
  **Executive
      Officers and Directors**





Our
      executive officers and directors are as follows:





Name(1)(2)
            Age
            PositionYoneji
                Hirabayashi
            75
            Chief
                Financial Officer and DirectorShinichi
                Hirabayashi
            45
            Chief
                Executive Officer and DirectorAkinori
                Hirabayashi
            43
            Chief
                Operating Officer and DirectorHaruo
                Miyano
            64
            Secretary
                and Director





(1)  We
      presently have no executive committee, nominating committee or audit committee
      of the Board of Directors.


(2)  Our
      officers and directors hold office until their successors are elected and
      qualified, or until their death, resignation or removal.





The
      background and principal occupations of each director and officer of Exam are
      as
      follows:





**Yoneji
      Hirabayashi.** Mr.
      Hirabayashi had worked for the Ministry of Agriculture before operating the
      Accounts Division of the Aichi Prefecture Owari Office. Possessing an
      entrepreneurial spirit, he opened up a restaurant, followed by a hotel and
      then
      a slew of successful Pachinko and Karaoke stores in the mid 1950’s. He founded
      Kisorin in 1956, and later became its President from 1969 to 1999, which was
      later renamed Exam, Inc. Mr. Yoneji Hirabayashi is the father of Shinichi
      Hirabayashi and Akinori Hirabayashi. Mr. Hirabayashi oversees Exam, Inc. as
      its
      Chairman.




**Shinichi
      Hirabayashi.** Mr.
      Shinichi Hirabayashi is the son of Mr. Yoneji Hirabayashi. Mr. Shinichi
      Hirabayashi has been the President of Exam, Inc. since 1999. Following in his
      father’s footsteps, Mr. Hirabayashi joined Exam, Inc. in 1983 after working for
      Toyoshima Inc. He is a graduate of Keio University and he holds a Bachelor
      of
      Commerce.




**Akinori
      Hirabayashi.** Mr.
      Akinori Hirabayashi is the son of Mr. Yoneji Hirabayashi. Mr. Akinori
      Hirabayashi is the Vice President of Exam, Inc. Mr. Hirabayashi became a
      Director of one of Exam, Inc.’s Pachinko stores in 1985. He has served in his
      current capacity since 1999. Since then, he has directly overseen four (4)
      Karaoke stores, with the most recent one being assigned to him in 2001 (Exam
      Kamikawa Branch). He graduated from Nagoya University where he majored in
      Mathematics.





**Haruo
      Miyano.** Mr.
      Miyano has been the Secretary and a Director of the Company and its Delaware
      subsidiary since June 2004 and its’ inception, respectively. Mr. Miyano has over
      30 years of experience in trade between the
      United States and Japan. Prior to joining the Company and its affiliates, Mr.
      Miyano served as the Vice Chairman of Pulp Mold Packaging Global, Inc., a
      company he founded in April 1998. He served as PMP’s President from April 1998
      to August 1999. Prior to PMP, Mr. Miyano worked
      for Kasumi Sports World, Inc. He served as Kasumi’s Vice President of Sales and
      Marketing and was a Director, and was responsible for handling the sale of
      sporting goods to 375 franchises throughout the United States.




19





**Financial
      Expert**





The
      Company has no audit committee financial expert, as defined under Section
      228.401, serving on its audit committee because it has no audit committee and
      is
      not required to have an audit committee because it is not a listed security
      as
      defined in Section 240.10A-3.





**Section
      16 Compliance**





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires our
      directors and executive officers, and persons who beneficially own more
      than 10% of a registered class   of
      our equity securities, to file reports of beneficial
      ownership and changes in beneficial ownership of our securities with the
      SEC on Forms 3 (Initial Statement of Beneficial Ownership), 4 (Statement of
      Changes of Beneficial Ownership   of Securities) and 5
 (Annual Statement   of Beneficial Ownership of Securities).
 Directors, executive officers and beneficial owners of
      more than 10% of our Common Stock are required by SEC regulations to
      furnish us with copies of all Section 16(a) forms
      that they file. Based solely on review of the copies of such
      forms furnished to us, or written representations that no reports were
      required, we believe that for the fiscal year ended May 31, 2006 beneficial
      owners complied
      with Section 16(a) filing requirements.





**Code
      of Business Conduct and Ethics**




Our
      Board
      of Directors has approved a Code of Business Conduct and Ethics, which applies
      to all of our employees, directors and officers, including our principal
      executive officer, principal financial officer, principal accounting officer
      and
      controller . 
      The Code of Business Conduct and Ethics addresses such topics as protection
      and
      proper use of our assets, compliance with applicable laws and regulations,
      accuracy and preservation of records, accounting and financial reporting,
      conflicts of interest and insider trading.  The Code of Business Conduct
      and Ethics is available
      free of charge to any shareholder who sends a request for a paper copy to
      Pachinko World, Inc., 5912 Bolsa Avenue, Suite 108, Huntington Beach, California
      92649.





**ITEM
      10. EXECUTIVE COMPENSATION**





The
      following table sets forth the total cash compensation, paid to or earned during
      each of our last three (3) fiscal years by (i) our Chief Executive Officer
      and (ii) our two (2) most highly compensated executive officers whose
      salary and bonus exceeded $100,000 for the fiscal year ended May 31, 2005
      (collectively referred to herein as the “Named Executive
      Officers”).





SUMMARY
                COMPENSATION TABLEAnnual
                Compensation
            Long
                Term CompensationAwards
            PayoutsName
                &
              Principal
              Position
            Fiscal
              Year
            Salary
              ($)(1)
            Bonus
              ($)(1)
            Other
              Annual
              Compensation
              ($)(2)
            Restricted
              Stock
              Awards
              ($)
            Securities
              Underlying
              Options
              SARS
                (#)
            L/TIP
              Payouts
              ($)
            All
              Other
              Compensation
              ($)(3)Shinichi
                Hirabayashi
            5/31/2006
            $437,096
            $34,967
            0
            0
            0
            0
            0(President
                and CEO)
            5/31/2005
            $336,480
            $18,693
            0
            0
            0
            0
            05/31/2004
            $365,592
            $45,491
            0
            0
            0
            0
            0Yoneji
                Hirabayashi
            5/31/2006
            $353,835
            $17,473
            
            0
            0
            0
            0(CFO)
            5/31/2005
            $409,598
            $37,387
            0
            0
            0
            0
            05/31/2004
            $250,896
            $19,921
            $85,197
            0
            0
            0
            0Akinori
                Hirabayashi
            5/31/2006
            $386,773
            $34,967
            
            0
            0
            0
            0(COO)
            5/31/2005
            $355,547
            $37,387
            $98,822
            0
            0
            0
            05/31/2004
            $334,767
            $35,842
            0
            0
            0
            0
            0





(1)  The
      salary and bonus figures represent the compensation paid to the Named Officers
      by our wholly-owned operating subsidiary, Exam Co. Ltd. in their respective
      capacities as officers of such subsidiary.




20




(2)  Personal
      benefits received by our executive officers are valued below the levels, which
      would otherwise require disclosure under the rules of the U.S. Securities and
      Exchange Commission. Amounts shown represent the value of automobiles purchased
      by the company for the Named Officer.


(3)  We
      do not
      currently provide any contingent or deferred forms of compensation arrangements,
      annuities, pension or retirement benefits to its directors, officers or
      employees.





**Director
      Compensation**





Pursuant
      to an agreement we paid our non-employee director, Mr. Miyano, annual board
      fees
      of $100,000 during fiscal year 2006. Our agreement with Mr. Miyano expires
      in
      November 2006, but may be renewed upon the consent of us and Mr.
      Miyano.





Mr.
      Miyamoto, who serves as a member of our Delaware subsidiary, was paid an annual
      fee of $100,000, in consideration for his board services to such subsidiary
      during fiscal year 2006. This agreement ended at the end of the fiscal year
      2006. During the years ended May 31, 2006, 2005 and 2004, our operating company
      in Japan paid $41,936, $47,501, and $48,934, respectively, for consulting
      services to SIM International, which is controlled by Mr. Miyamoto. The services
      are provided pursuant to an agreement with the Company that is renewable
      annually upon the consent of both parties.




**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER MATTERS**





The
      following table sets forth, as of May 31, 2006, certain information with respect
      to the Company’s equity securities owned of record or beneficially by (i) each
      director and executive officer; (ii) each person who owns beneficially more
      than
      5% of each class of the Company’s outstanding equity securities; and (iii) all
      directors and executive officers as a group. The address for all of the
      following individuals is c/o Pachinko World, Inc., 5912 Bolsa Avenue, Suite
      108,
      Huntington Beach, California 92649.




**Title
                of Class**
            **Name
                of Beneficial Owner**
            **Amount
                and Nature of**
              **Beneficial
                Owner**
            **Percent
                of**
              **Class**Common
                Stock
            Yoneji
                Hirabayashi
            1,922,330
                shares (1)
              CFO
                and Director
            9.6%Common
                Stock
            Shinichi
                Hirabayashi
            2,097,090
                shares
              CEO
                and Director
            10.5%Common
                Stock
            Akinori
                Hirabayashi
            5,592,230
                shares (2)
              COO
                and Director
            28.0%Common
                Stock
            Haruo
                Miyano
            262,137
                shares
              Secretary
                and Director
            1.3%Common
                Stock
            Ai
                Hirabayashi
            1,048,540
                shares
              5%
                shareholder
            5.2%Common
                Stock
            Shiho
                Hirabayashi
            1,048,540
                shares
              5%
                shareholder
            5.2%Common
                Stock
            Yuka
                Hirabayashi
            1,048,540
                shares
              5%
                shareholder
            5.2%Common
                Stock
            Hirotaka
                Hirabayashi
            1,048,540
                shares
              5%
                shareholder
            5.2%Common
                Stock
            Misaki
                Hirabayashi
            1,048,540
                shares
              5%
                shareholder
            5.2%Common
                Stock
            Arisa
                Hirabayashi
            1,048,540
                shares
              5%
                shareholder
            5.2%Common
                Stock
            Mie
                Hata
            2,796,120
                shares (3)
              5%
                shareholder
            14.0%Common
                Stock
            All
                directors and named executive
              officers
                as a group (4 persons)
            9,611,650shares
            49.4%




21




(1)  Includes
      873,790 shares of Common Stock owned by Mr. Hirabayashi’s spouse, over which Mr.
      Hirabayashi disclaims beneficial ownership.


(2)  Includes
      a total of 2,970,870 shares of Common Stock owned by Mr. Hirabayashi’s spouse
      and minor children, over which Mr. Hirabayashi disclaims beneficial
      ownership.


(3)  Includes
      1,747,580 shares owned by Ms. Hata’s minor children, over which Ms. Hata
      disclaims beneficial ownership.




**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED PARTY
      TRANSACTIONS**





For
      the
      past several years Mr. Yoneji Hirabayashi leased a parcel of land to the Company
      in Japan. The lease was scheduled to expire on May 31, 2005; however, on
      February 21, 2005, we purchased the land from Mr. Hirabayashi for $620,804.
      Management believes that the purchase price was representative of the land’s
      fair market value at the time of the sale. Lease payments paid to Mr.
      Hirabayashi for each of the fiscal years ended May 31, 2005, 2004, and 2003
      with
      respect to such lease were $16,824, $43,011, and $39,920, respectively.





In
      addition, he received compensation from Daichi Co., Ltd. in the amount of
      $50,234, $50,939 and  $26,883,
      for the fiscal years ended May 31, 2006, 2005, and 2004,
      respectively.





**ITEM
      13. EXHIBITS**





31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.


31.2
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.


32
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.





**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND
      SERVICES**





The
      following summarizes aggregate fees for professional audit services rendered
      by
      McKennon, Wilson & Morgan LLP during fiscal years ended May 31, 2006 and
      2005:





2006
            
            2005Audit
                Fees
            
            $
            216,000
            
            $
            188,000Audit
                Related
            
            
            -
            
            
            -Tax
                Fees
            
            
            -
            
            
            -All
                Other Fees
            
            
            -
            
            
            -Total
                Fees
            
            $
            216,000
            
            $
            188,000





Audit
      Fees pertain to the audit of our annual consolidated financial statements for
      fiscal year 2006 and 2005 and reviews of our quarterly consolidated financial
      statements during such fiscal years.




22


PACHINKO
          WORLD, INC. (FORMERLY EXAM USA, INC.) AND SUBSIDIARIES
 **Report
                    of Independent Registered Public Accounting
                    Firm**
                
                F-2**Consolidated
                    Financial Statements**Consolidated
                    Balance Sheet as of May 31, 2006
                
                F-3Consolidated
                    Statements of Operations and Comprehensive Loss for each ofthe
                    two
                  years
                    in the period ended May 31, 2006
                
                F-4Consolidated
                    Statements of Shareholders' Equity for each of the
                    two years in the period
                  ended
                    May 31, 2006
                
                F-5Consolidated
                    Statements of Cash Flows for each of the two years
                    in the period ended
                  May
                    31, 2006
                
                F-6Notes
                    to Consolidated Financial Statements
                
                F-7
 F-1
 **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
          FIRM**
 
  Board
          of
          Directors
 Pachinko
          World, Inc. (formerly EXAM USA, Inc.)
 
 We
          have
          audited the accompanying consolidated balance sheet of Pachinko World,
          Inc.
          (formerly EXAM USA, Inc.) and its subsidiaries (the "Company") as of May
          31,
          2006, and the related consolidated statements of operations and comprehensive
          loss, shareholders' equity and cash flows for each of the two years in
          the
          period ended May 31, 2006. These consolidated financial statements are
          the
          responsibility of the Company's management. Our responsibility is to express
          an
          opinion on these consolidated financial statements based on our
          audits.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audits to obtain reasonable assurance about whether the
          financial statements are free of material misstatement. An audit includes
          examining, on a test basis, evidence supporting the amounts and disclosures
          in
          the financial statements. An audit also includes assessing the accounting
          principles used and significant estimates made by management, as well as
          evaluating the overall financial statement presentation. We believe that
          our
          audits provide a reasonable basis for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the consolidated financial position of Pachinko
          World,
          Inc. (formerly EXAM USA, Inc.) and its subsidiaries as of May 31, 2006,
          and the
          consolidated results of their operations and their cash flows for each
          of the
          two years in the period ended May 31, 2006, in conformity with accounting
          principles generally accepted in the United States of America.
 
 The
          accompanying consolidated financial statements have been prepared assuming
          the
          Company will continue as a going concern. As discussed in Note 2, the Company
          has a working capital deficiency which raises substantial doubt about its
          ability to continue as a going concern. Management’s plans as to theses matters
          are also described in Note 2. The accompanying consolidated financial statements
          do not include any adjustments that might result from the outcome of this
          uncertainty.
  /s/ McKennon,
                  Wilson & Morgan LLPIrvine,
                    California
                  September
                    13, 2006
 F-2
 **PACHINKO
        WORLD, INC. (FORMERLY EXAM USA, INC.) AND
        SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEET**
  May
                    31, 2006**ASSETS
                    (Note 8)**Current
                  assets:Cash
                
                $
                5,588,278Time
                    deposits (Note 2)
                
                
                2,090,707Restricted
                    time deposits (Note 2)
                
                
                2,505,465Marketable
                    securities (Note 4)
                
                
                1,647,309Prizes
                    (Note 2)
                
                
                701,091Prepaids
                    and other (Note 7)
                
                
                594,226Total
                    current assets
                
                
                13,127,076Property
                    and equipment, net (Note 6)
                
                
                33,388,669Deferred
                    income taxes (Note 11)
                
                
                662,339Deposits
                    and other assets (Note 7)
                
                
                2,446,503Total
                    assets
                
                $
                49,624,587**LIABILITIES
                    AND SHAREHOLDERS’ EQUITY**Current
                    liabilities:Accounts
                    payable
                
                $
                3,745,640Accrued
                    liabilities (Note 7)
                
                
                2,115,594Current
                    portion of long-term debt (Note 8)
                
                
                10,511,367Current
                    portion of capital lease obligations (Note 9)
                
                
                1,249,300Total
                    current liabilities
                
                
                17,621,901Long-term
                    debt, net of current portion (Notes 8 and 13)
                
                
                24,798,698Capital
                    lease obligations, net of current portion (Note 9)
                
                
                3,974,578Long-term
                    accrued expenses (Note 7)
                
                
                133,421Asset
                    retirement obligations (Note 6)
                
                
                867,434Minority
                    interest in related entity (Notes 1 and 2)
                
                
                187,689Total
                    liabilities
                
                
                47,583,721Commitments
                    and contingencies (Note 9)
                
                
                -Shareholders’
                    Equity (Notes 1,2 and 10):Preferred
                  stock, 5,000,000 shares authorized:Series
                    D convertible preferred stock, $0.01 par value, liquidation
                    value of $3.00 per share,
                
                
                -98,000
                    shares authorized, none issued and outstanding.Series
                    E convertible preferred stock, $0.01 par value, no
                    liquidation value,1,800,000
                    shares authorized, none issued and outstanding.
                
                
                -Common
                    stock, $0.01 par value, 100,000,000 shares authorized,20,000,148
                    issued and outstanding.
                
                
                200,001Additional
                    paid-in capital
                
                
                1,423,693Restricted
                    retained earnings
                
                
                41,122Unrestricted
                    retained earnings
                
                
                138,021Accumulated
                    other comprehensive income
                
                
                238,029Total
                    shareholders’ equity
                
                
                2,040,866Total
                    liabilities and shareholders’ equity
                
                $
                49,624,587
  See
        accompanying notes to these consolidated financial statements
  F-3
  **PACHINKO
          WORLD, INC. (FORMERLY EXAM USA, INC.) AND
          SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 **AND
          COMPREHENSIVE LOSS**
  Years
                    EndedMay
                    31, 2006
                
                May
                    31, 2005**REVENUES:**Gaming
                
                $
                28,428,828
                
                $
                24,849,430Food,
                    beverage and other
                
                
                944,638
                
                
                757,718Total
                    revenues
                
                
                29,373,466
                
                
                25,607,148**COST
                    OF REVENUES:**Salaries
                    and wages
                
                
                4,411,028
                
                
                4,051,178Depreciation
                
                
                7,676,074
                
                
                7,005,839Facilities
                    and other
                
                
                7,711,460
                
                
                6,862,575Impairment
                    of property and equipment (Note 6)
                
                
                3,430,844
                
                
                4,273,178Total
                    cost of revenues
                
                
                23,229,406
                
                
                22,192,770Gross
                    profit
                
                
                6,144,060
                
                
                3,414,378**OPERATING
                    EXPENSES:**Marketing
                    and advertising
                
                
                2,316,859
                
                
                1,987,605General
                    and administrative
                
                
                2,645,261
                
                
                3,352,754Total
                    operating expenses
                
                
                4,962,120
                
                
                5,340,359Operating
                    income (loss)
                
                
                1,181,940
                
                
                (1,925,981
                )**OTHER
                    INCOME (EXPENSE), NET:**Minority
                    interests in related party
                
                
                (9,891
                )
                
                (12,273
                )Interest
                    income
                
                
                1,385
                
                
                5,481Interest
                    expense
                
                
                (1,248,061
                )
                
                (1,031,605
                )Merger
                    fees (Note 9)
                
                
                -
                
                
                (360,000
                )Other
                    income
                
                
                284,095
                
                
                210,107Gains
                    on sales of marketable securities
                
                
                302,952
                
                
                83,578Other
                    expense
                
                
                (3,296
                )
                
                (42,898
                )Total
                    other expense, net
                
                
                (672,816
                )
                
                (1,147,611
                )Income
                    (loss) before provision (benefit) for income taxes
                
                
                509,124
                
                
                (3,073,591
                )Provision
                    (benefit) for income taxes (Note 11)
                
                
                618,299
                
                
                (312,561
                )**NET
                    LOSS**
                
                $
                (109,175
                )
                $
                (2,761,030
                )Change
                    in foreign currency translation
                
                
                (91,514
                )
                
                44,918Change
                    in unrealized gain (loss) on marketablesecurities
                
                
                6,527
                
                
                (4,150
                )**TOTAL
                    COMPREHENSIVE LOSS**
                
                $
                (194,162
                )
                $
                (2,720,262
                )Basic
                    and dilutive loss per common share:Weighted
                    average number of common sharesoutstanding
                
                
                20,000,148
                
                
                19,695,291Basic
                    and dilutive net loss per common share
                
                $
                (0.01
                )
                $
                (0.14
                )
  See
        accompanying notes to these consolidated financial
        statements
  F-4
  **PACHINKO
          WORLD, INC. (FORMERLY EXAM USA, INC.) AND
          SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF SHAREHOLDERS'
          EQUITY**
 Series
                    D Convertible Preferred Stock
                
                Series
                    E Convertible Preferred Stock
                
                Common
                    Stock
                
                Additional
                  Paid-in
                
                Restricted
                    Retained
                
                Unrestricted
                  Retained
                
                Accumulated
                    Other Comprehensive
                
                Shareholders’Shares
                
                Amount
                
                Shares
                
                Amount
                
                Shares
                
                Amount
                
                Capital
                
                Earnings
                
                Earnings
                
                Income
                
                EquityBalances,
                    June 1, 2004
                
                
                -
                
                
                -
                
                
                1,800,000
                
                $
                180,000
                
                
                -
                
                
                -
                
                
                -
                
                $
                41,122
                
                $
                3,229,186
                
                $
                259,081
                
                $
                3,709,389Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (2,761,030
                )
                
                -
                
                
                (2,761,030
                )Dividends
                    paid
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (90,959
                )
                
                -
                
                
                (90,959
                )Common
                    and D Preferred
                  stock
                    retained by Olympic
                  shareholders
                
                
                40,000
                
                
                120,000
                
                
                -
                
                
                -
                
                
                1,000,148
                
                
                10,001
                
                
                -
                
                
                -
                
                
                (130,001
                )
                
                -
                
                
                -Capital
                    contribution
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                
                
                
                10,000
                
                
                -
                
                
                -
                
                
                -
                
                
                10,000Value
                    of merger
                  related
                    expenses
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                360,000
                
                
                -
                
                
                -
                
                
                -
                
                
                360,000Fair
                    value of stock
                  transferred
                    from
                  shareholders
                    to directors
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                943,693
                
                
                -
                
                
                -
                
                
                -
                
                
                943,693Conversion
                    of D
                  preferred
                    stock
                
                
                (40,000
                )
                
                (120,000
                )
                
                -
                
                
                -
                
                
                1,000,000
                
                
                10,000
                
                
                110,000
                
                
                -
                
                
                -
                
                
                -
                
                
                -Conversion
                    of E
                  preferred
                    stock
                
                
                -
                
                
                -
                
                
                (1,800,000
                )
                
                (180,000
                )
                
                18,000,000
                
                
                180,000
                
                
                -
                
                
                --
                
                
                -
                
                
                --
                
                
                -Change
                    in unrealized gain on
                  marketable
                    securities
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (4,150
                )
                
                (4,150
                )Change
                    in foreign currency
                  translation
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                44,918
                
                
                44,918Balances,
                    May 31, 2005
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                20,000,148
                
                
                200,001
                
                
                1,423,693
                
                
                41,122
                
                
                247,196
                
                
                299,849
                
                
                2,211,861Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (109,175
                )
                
                -
                
                
                (109,175
                )Change
                    in unrealized gain on
                  marketable
                    securities
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                29,694
                
                
                29,694Change
                    in foreign currency
                  translation
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (91,514
                )
                
                (91,514
                )Balances,
                    May 31, 2006
                
                
                -
                
                $
                -
                
                
                -
                
                $
                -
                
                
                20,000,148
                
                $
                200,001
                
                $
                1,423,693
                
                $
                41,122
                
                $
                138,021
                
                $
                238,029
                
                $
                2,040,866
  See
        accompanying notes to these consolidated financial
        statements
  F-5
  **PACHINKO
          WORLD, INC. (FORMERLY EXAM USA, INC.) AND
          SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
 **Years
                    Ended****May
                    31, 2006**
                
                **May
                    31, 2005****Cash
                    flows from operating activities:**Net
                    loss
                
                $
                (109,175
                )
                $
                (2,761,030
                )Adjustments
                    to reconcile net loss to net cash provided by operating
                    activities:****Depreciation,
                    amortization, and accretion expense
                
                
                7,762,797
                
                
                7,093,433****Impairment
                    of property and equipment
                
                
                3,430,844
                
                
                4,273,178Gains
                    on marketable securities
                
                
                (302,952
                )
                
                (83,578
                )Fair
                    value of shares issued to directors andplacement
                    agent
                
                
                -
                
                
                1,303,693Minority
                    interest in related party
                
                
                9,891
                
                
                12,273Changes
                    in operating assets and liabilities:****Prizes
                
                
                (136,094
                )
                
                (126,962
                )****Deferred
                    income taxes
                
                
                433,778
                
                
                (626,297
                )Prepaids
                    and other
                
                
                (356,044
                )
                
                260,249****Accounts
                    payable
                
                
                59,347
                
                
                1,311,915****Accrued
                    liabilities
                
                
                289,531
                
                
                (278,666
                )Net
                    cash provided by operating activities
                
                
                11,081,923
                
                
                10,378,208**Cash
                    flows from investing activities:**Purchases
                    of property and equipment
                
                
                (13,777,002
                )
                
                (13,385,503
                )Proceeds
                    from sales of property and equipment
                
                
                22,595
                
                
                68,393Purchases
                    of marketable securities
                
                
                (2,031,629
                )
                
                (1,242,156
                )Proceeds
                    from sales of marketable securities
                
                
                1,744,848
                
                
                1,101,955Time
                    deposits, net
                
                
                (228,462
                )
                
                (1,013,761
                )Proceeds
                    from loan receivable
                
                
                -
                
                
                373,867Other
                    assets
                
                
                (775,897
                )
                
                (515,203
                )Net
                    cash used in investing activities
                
                
                (15,045,547
                )
                
                (14,612,408
                )**Cash
                    flows from financing activities:**Payments
                    on capital lease obligations
                
                
                (1,076,128
                )
                
                (1,268,360
                )Borrowings
                    of long-term debt
                
                
                12,829,075
                
                
                8,178,390Payments
                    on long-term debt
                
                
                (6,091,385
                )
                
                (4,987,569
                )Dividends
                    paid
                
                
                -
                
                
                (93,467
                )Net
                    cash provided by financing activities
                
                
                5,661,562
                
                
                1,828,994Foreign
                    currency effect on cash
                
                
                309,306
                
                
                (66,730
                )**Net
                    increase (decrease) in cash**
                
                
                2,007,244
                
                
                (2,471,936
                )Cash,
                    beginning of year
                
                
                3,581,034
                
                
                6,052,970Cash,
                    end of year
                
                $
                5,588,278
                
                $
                3,581,034**Supplemental
                    Disclosure of Cash Flow Information****Non-cash
                    investing and financing transactions:**Purchases
                    of equipment under capital leases
                
                $
                1,916,221
                
                $
                1,793,527Interest
                    swap liabilities
                
                
                -
                
                
                150,024Increase
                    in property and equipment from assetretirement
                    obligations
                
                $
                168,217
                
                $
                119,100**Cash
                    paid during the year for:**Interest
                
                $
                1,069,783
                
                $
                1,070,183Income
                    taxes
                
                $
                386,760
                
                $
                380,334
  See
        accompanying notes to these consolidated financial
        statements
  F-6
  **PACHINKO
        WORLD, INC. (FORMERLY EXAM USA, INC.) AND
        SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
        1 - ORGANIZATION AND BUSINESS**
 
 Pachinko
        World, Inc., (“PWI ”) previously known as Exam USA, Inc. (Exam Co. Ltd), a
        Japanese corporation, was incorporated in 1969. On June 10, 2003, Exam Co.
        Ltd.
        established EXAM USA, Inc. (“EXAM USA”), a Delaware corporation, to effect a
        share-exchange agreement with Exam Co., Ltd., whereby Exam Co., Ltd. became
        a
        wholly-owned subsidiary of PWI (collectively, the “Company”).
 
 On
        June
        3, 2004, the Company completed a reverse acquisition of Olympic Entertainment
        Group, Inc. (“Olympic”), a Nevada Corporation, pursuant to an agreement dated
        February 9, 2004, as amended June 3, 2004. At the time of acquisition, Olympic
        had no revenues and no significant assets. It was considered a blank-check
        company prior to the acquisition. In connection with the acquisition, Olympic
        issued the Company 1,800,000 shares of Olympic Series E preferred stock
        convertible into 18,000,000 newly issued, post-split shares of its common
        stock
        or 90% of the outstanding common stock of Olympic; Olympic shareholders retained
        1,000,000 post-split shares of common stock and 40,000 Series D convertible
        preferred, convertible into 1,000,000 shares of common stock. Merger expenses
        incurred by the Company primarily consisted of $360,000 which was a non-cash
        1%
        investment banking fee (Note 9), which was charged to expense in fiscal 2005.
        Effective August 9, 2004, the Company changed its name from Olympic
        Entertainment Group, Inc. to EXAM USA, Inc., and subsequently on March 30,
        2006,
        the Company changed its name from EXAM USA, Inc. to Pachinko World,
        Inc.
 
 The
        Company operated six (6) stores which offer Pachinko (Japanese pinball) gaming
        entertainment, four (4) stores are located in the Aichi prefecture and two
        (2)
        stores are in the Tochigi prefecture just north of Greater Kanto Area in
        Japan.
        In December 2005, the Company opened a new store in Okazaki, and now currently
        operates seven (7) stores. The Company receives income from cigarettes,
        non-alcoholic beverages and sundry items, as well as from two small restaurants
        which are not considered significant. Japanese law regulates Pachinko gaming
        and
        the local police enforce laws. Pachinko gaming is one of the largest business
        segments in Japan.
 
 The
        Company holds a 50% equity interest in Daichi
        Co., Ltd., an entity which procures tobacco products for PWI. The remaining
        50%
        ownership is held by parties affiliated with PWI. Total assets of Daichi
        Co.,
        Ltd were $402,306 as of May 31, 2006 and net income was $19,781 for the year
        ended May 31, 2006.
 
 **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 *Going
        Concern Considerations*
 
 The
        Company’s financial statements have been prepared on a going concern basis,
        which contemplates the realization of assets and the settlement of liabilities
        in the normal course of business. As of May 31, 2006, the Company has a working
        capital deficit totaling $4,494,825, and during the years ended May 31, 2006
        and
        2005, the Company incurred net losses. These factors raise substantial doubt
        about the Company’s ability to continue as a going concern, in the event
        management’s plans are not successful.
 
 To
        reduce
        the risk of not being able to continue as a going concern, management has
        implemented a series of cost reduction measures to reduce controllable labor
        and
        overhead costs in its operations, which has improved results of operations
        in
        2006. During the fourth quarter of fiscal 2006, the Company generated net
        income
        of approximately $595,000. The Company generated $11,083,835 of cash from
        operations and received approximately $6,000,000 of cash from financing
        activities during 2006 to fund construction of its new store and purchase
        certain equipment totaling $13,800,000. Management expects to generate net
        income for the full fiscal year 2007, as well as significant cash from
        operations. Uncertainty exists as to whether the Company will be able generate
        enough cash from operations to meet its obligations as they are scheduled
        to
        become due. In the event management is unable to meet its obligations as
        they
        become due, they will attempt to refinance or renegotiate
        the terms of the debt, which historically they have been successful. There
        are
        no assurances that management will be successful in achieving sufficient
        cash
        flows to fund its working capital deficit, or whether they will be able to
        refinance or renegotiate its obligations when they become due. No adjustments
        have been made to the carrying value of assets or liabilities as a result
        of the
        uncertainty.
  F-7
  *Reverse
        Acquisition*
 
 The
        assets and liabilities of PWI are reported at their historical cost. The
        assets
        and liabilities of Olympic were recorded at fair value on June 3, 2004, the
        date
        of close; no goodwill was recorded since there was no prior business. The
        financial statements reported herein have been retroactively restated for
        all
        periods presented to report the historical financial position, results of
        operations and cash flows of PWI. Since the shareholders of PWI retained
        1,800,000 shares of Series E convertible preferred stock in the connection
        with
        the reverse acquisition, which are yet to be converted into common stock,
        such
        shares of Series E preferred stock are reflected in the accompanying statements
        of stockholders’ equity as if these were outstanding for all periods presented.
        The Series D convertible preferred stock and the common stock retained by
        the
        Olympic shareholders were reported on the date of acquisition on June 3,
        2004.
 
 *Acquisition
        of Entity Under Common Control*
 
 The
        acquisition of EXAM by Pachinko
        World, Inc., was
        accounted for at historical cost because the entities are under common control.
        The consolidated results of operations for the periods reported herein include
        the historical results of operations of EXAM, and includes Pachinko World,
        Inc.,
        since incorporation on June 10, 2003.
 
 *Consolidation
        of Variable-Interest Entity*
 
 Under
        FASB Interpretation No. 46, certain
        special purpose entities are required to be consolidated if it is determined
        that an enterprise is the primary beneficiary of a subsidiary because it
        is
        deemed to have controlling financial interest in an entity. The Company has
        determined that it has a controlling financial interest in Daichi Co., Ltd.
        since the Company is required to absorb any expected losses, will receive
        the
        majority of expected residual returns and is the primary beneficiary.
  *Principles
        of Consolidation*
 
 The
        accompanying consolidated financial statements include the accounts of PWI,
        Exam
        Co. Ltd., and Daichi Co., Ltd. All significant inter-company transactions
        have
        been eliminated in consolidation.
 
 *Interest
        Rate Swap Agreements*
  Interest
        rate swap agreements (see Note 8) are considered ineffective hedges against
        changes in the fair value of the debt due to changes in the benchmark interest
        rates over their terms because the Company does not maintain a risk policy.
        As a
        result, Statement of Financial Accounting Standards “SFAS” No. 133, “Accounting
        for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 149,
        is applied and the Company periodically records to earnings the gain or loss
        from changes in fair value. The fair value of the swaps is carried as an
        asset
        or a liability in the consolidated balance sheet. The fair values of PWI’s
        interest rate swaps are the amounts it would receive or pay to terminate
        the
        agreements as of the reporting dates as quoted by the bank. Interest expense
        on
        the debt is adjusted to include net payments made or received under the swap
        agreements.
 
 *Use
        of Estimates*
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the amounts reported in the financial
        statements and accompanying notes. Actual results could differ from those
        estimates. Significant estimates made by management include the evaluation
        of
        impairment of property and equipment, as well as the valuation allowance
        for
        certain deferred tax assets. Management believes that the estimates are
        reasonable.
 F-8
  *Fair
        Value of Financial Instruments*
 
 Financial
        instruments consist of cash and cash equivalents, restricted and unrestricted
        time deposits, marketable securities, receivables, inventories, accounts
        payable, short-term notes payable and long-term debt. ** The fair
        value of financial instruments approximated their carrying values at May
        31,
        2006.
 
 *Cash
        Equivalents*
 
 The
        Company considers highly liquid investments with an original maturity of
        90 days
        or less from the purchase date to be cash equivalents. During the periods
        presented, there were no cash equivalents outstanding.
 
 The
        Company maintains cash deposits in the United States, which are federally
        insured, and Japanese banks, which are not federally insured, but the payoff
        of
        the entire deposits are guaranteed by the Japanese government.
 
 *Time
        Deposits*
 
 The
        Company invests in time deposits with maturities of one to three years. Time
        deposits maturing in excess of one year from the balance sheet date are
        classified as long-term time deposits. At May 31, 2006, interest rates on
        all
        certificates of deposits were 0.03%, per annum. Time deposits are carried
        at
        cost. Under short-term note agreements with two commercial banks, the Company
        is
        required to maintain certain amounts in time deposits as additional collateral
        on the notes with banks. These amounts have been classified as restricted
        time
        deposits and have been classified as a current asset consistent with the
        current
        portion of long-term debt with the banks.
 
 *Marketable
        Securities*
 
 Marketable
        securities are accounted for under the provisions of  SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities.” The
        Company's long-term investments consisted of marketable debt and equity
        securities, which were classified as “available-for-sale” in accordance with the
        provisions of SFAS No. 115. Such investments are presented as non-current
        assets
        since management does not intend to sell the securities within one year,
        and
        these are carried at their estimated fair values in the accompanying
        consolidated balance sheet. Fair value was determined based on quoted market
        prices. The specific identification method has been used to determine cost
        for
        each security. Unrealized gains and losses are excluded from net loss and
        reported as a separate component of shareholders' equity, net of the related
        tax
        effect and as a component of comprehensive loss, unless the decline is other
        than temporary (see below).
  The
        Company monitors and evaluates the realizable value of its marketable
        securities. When assessing marketable securities for other-than-temporary
        declines in value, the Company considers such factors as, among other things,
        how significant the decline in value is as a percentage of the original cost,
        how long the market value of the investment has been less than its original
        cost, the performance of the investee’s stock price in relation to the stock
        price of its competitors within the industry and the market in general, any
        news
        that has been released specific to the investee and the outlook for the overall
        industry in which the investee operates. If events and circumstances indicate
        that a decline in the value of these assets has occurred and is other than
        temporary, the Company records a charge to other income (expense).
 
 *Prizes*
 
 Prizes
        consist of gaming prizes, food and beverages and are stated of
        cost.
 
 *Property
        and Equipment*
 
 Property
        and equipment is stated at cost, less accumulated depreciation. Major
        operational enhancements and betterments are capitalized, while routine repairs
        and maintenance are charged to expense when incurred. Depreciation, which
        includes assets under capital leases, is computed using the straight-line
method
        or
        declining balance over the following estimated useful lives:
 
 F-9
  Buildings
                    and improvements
                  10
                    to 40 yearsPachinko
                    machines and equipment
                  2
                    to 20 yearsLeasehold
                    improvements
                  Term
                    of lease or useful life,whichever
                    is shorter
  Pachinko
        machines generally have a useful life of two (2) to three (3) years; however,
        technology changes and changes in patron playing habits may cause pachinko
        machines to become obsolete. Management evaluates utilization of machines
        daily.
        In the event certain machines become underutilized, management must sell
        or
        dispose of the assets.
 
 SFAS
        No.
        143 “Accounting for Asset Retirement Obligations,” requires that a liability for
        the fair value of an asset retirement obligation be recognized in the period
        which it is incurred, with the offsetting associated asset retirement cost
        capitalized as part of the carrying amount of the long-lived asset. Retirement
        obligations related to the Company's leased land are the requirements to
        demolish improvements and return the land to its original state.
  SFAS
        No.
        144, “Accounting for Impairment or Disposal of Long-Lived Assets,” requires that
        long-lived assets, such as property and equipment and purchased intangibles
        subject to amortization, be reviewed for impairment whenever events or changes
        in circumstances indicate that the carrying amount of an asset may not be
        recoverable, or at least annually. Recoverability of the asset is measured
        by
        comparison of its carrying amount to undiscounted future net cash flows the
        asset is expected to generate. Specifically, management projects undiscounted
        cash flows expected over the period to be benefited. If such assets are
        considered to be impaired, the impairment to be recognized is measured as
        the
        amount by which the carrying amount of the asset exceeds its fair market
        value.
        Estimates of expected future cash flows represent management’s best estimate
        based on currently available information and reasonable and supportable
        assumptions. Any impairment recognized in accordance with SFAS No. 144 is
        permanent and may not be restored. See Note 6 for discussion of impairments
        of
        property and equipment.
 *Lease
        Accounting*
 
 The
        Company leases land and certain equipment used in its operations. Some land
        leases have definite terms specified under the agreements, which are generally
        20 years, and some leases have no specified term or no written contract,
        whereby
        the lessee has rights to use the land indefinitely, so long as rental payments
        are made timely. All land leases are accounted for as operating leases as
        defined under SFAS No. 13 “Accounting for Leases”. Equipment leases generally
        have terms of five (5) to eight (8) years, which generally represent the
        life of the assets. Accordingly, all significant leases are accounted for
        as
        capital leases. Buildings and improvements on leased land are generally
        amortized over the term of lease of 20 years, unless the life of the assets
        is
        less. Buildings and improvements on leased land whereby there is no specified
        term are generally depreciated over the estimated life of the asset.
 
 *Revenue
        Recognition*
 
 Revenues
        from pachinko and pachislot games represent the gross pay-ins, less payouts
        to
        customers. Revenues are recorded when cash is received for game balls or
        game
        tokens are rented to the patrons. Payouts are recorded when the token prizes
        are
        purchased back from the exchangers. Other revenues for beverage are recognized
        at the time of sale. Deferred revenues consist of payments received by the
        Company related to the exclusive rights for beverage and food vending machines
        to third-party vendors, and unredeemed prizes as well as, unused prepaid
        cards.
        The revenues of the exclusive rights are recognized either over the term
        of the
        contract or based upon an agreed upon percentage of disbursements from the
        vending machines.
  F-10
 
 *Advertising*
 
 Advertising
        costs are expensed as incurred. Advertising expenses for the years ended
        May 31, 2006 and 2005 were $2,239,648 and $1,909,137,
        respectively.
 
 *Accounting
        for Stock-Based Compensation*
 
 The
        Company has not adopted a fair value-based method of accounting for stock-based
        compensation plans for employees and non-employee directors. The Company
        will
        use the intrinsic value-based approach, and supplement disclosure of the
        pro
        forma impact on operations and per share information using the fair value-based
        approach as required by SFAS No. 148 “Accounting for Stock-Based Compensation -
        Transition and Disclosure”. Stock-based compensation issued to non-employees and
        consultants are measured at fair value in accordance with SFAS No. 123. Common
        stock purchase options and warrants issued to non-employees and consultants
        will
        be measured at fair value using the Black-Scholes valuation model. As of
        May 31,
        2006, there were no options or warrants outstanding.
 
 *Per
        Share Information*
 
 The
        Company presents basic earnings per share (“EPS”) and diluted EPS on the face of
        all statements of operations. Basic EPS is computed as net loss divided by
        the
        weighted average number of common shares outstanding for the period, plus
        the
        Series E convertible preferred shares which were retained by the shareholders
        of
        PWI, which were automatically convertible into 18,000,000 shares of common
        stock
        during the periods presented. Diluted EPS reflects the potential dilution
        that
        could occur from common shares issuable through stock options, warrants,
        and
        other convertible securities.
  *Foreign
        Currency*
 
 The
        functional currency of PWI and Daichi Co., Ltd. is the Japanese Yen. The
        financial statements of PWI and Daichi Co., Ltd. are translated into United
        States Dollars at year-end exchange rates for assets and liabilities, and
        weighted-average exchange rate for revenues and expenses. The resulting
        translation adjustments are recorded as a component of other comprehensive
        reflected on the consolidated statements of operations and comprehensive
        loss
        and the consolidated statements of shareholders’ equity. Transaction gains and
        losses, if any, in foreign currencies are reflected in operations. During
        the
        years ended May 31, 2006 and 2005, no foreign currency transaction gains
        or
        losses were experienced.
 
 *Income
        Taxes*
 
 The
        Company accounts for its income taxes in accordance with SFAS No. 109,
“Accounting for Income Taxes”. Under SFAS No. 109, deferred tax assets and
        liabilities are determined based on temporary differences between bases used
        for
        financial reporting and income tax reporting purposes. Income taxes are provided
        based on the enacted tax rates in effect at the time such temporary differences
        are expected to reverse. A valuation allowance is provided for certain deferred
        tax assets if it is more likely than not that the Company will not realize
        tax
        assets through future operations. The Company and its subsidiaries file separate
        national and local income tax returns in Japan and the United States of
        America.
 
 *Comprehensive
        Loss*
 
 Comprehensive
        loss is defined as the change in equity of a business enterprise during a
        period
        from transactions and other events and circumstances from non-owner sources,
        including foreign currency translation adjustments and unrealized gains and
        losses on marketable securities.
  F-11
 
 *Recent
        Accounting Pronouncements*
 
 In
        December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which
        revises SFAS No. 123. SFAS No. 123(R) is effective for annual periods that
        begin
        after December 15, 2005 and requires that file as small business issuers
        to
        expense the fair value of employee stock options and other forms of stock-based
        compensation. This expense will be recognized over the period during which
        an
        employee is required to provide services in exchange for the award. Currently,
        the Company does not have any outstanding stock options, and as such the
        guidance under SFAS No. 123(R) did not have a material impact on the
        consolidated financial statements.
 
 **NOTE
        3 - RISKS AND UNCERTAINTIES**
 
 *Innovations
        in Technologies*
 
 The
        Company’s gaming machines are subject to new innovations and changes in
        entertainment experiences. Pachinko machines vary widely in price and expected
        life. Rapid changes in demand will render a machine under-producing and
        potentially obsolete.
 
 *Cyclical
        Nature of Business*
 
 The
        Company’s primary business involves gaming entertainment. During periods of
        recession or economic downturn, patrons may reduce or eliminate spending
        on
        gaming entertainment activities. In the event that any of the Company’s
        demographic markets suffer adverse economic conditions, the Company’s revenues
        may be materially adversely affected. In addition, the operations of some
        pachinko stores are typically seasonal in nature. The sales during the holiday
        seasons are usually higher than the regular months. The biggest holiday season
        in Japan lies in the end of December through the beginning of January.
        Additionally, revenues can fluctuate when a new type of pachinko machine
        is
        introduced at the stores.
 
 *Japanese
        Gaming Regulation*
 
 The
        Company’s business is regulated. The Entertainment Establishment Control Law
        (“EECL”) governs a variety of entertainment establishments, including pachinko
        and pachislot stores. The National Public Safety Commission (“NPSC”) sets out
        the general standard of the pachinko stores within the scope of EECL. The
        ability of the Company to remain in business and to operate profitably depends
        upon the Company’s ability to satisfy all applicable NPSC gaming laws and
        regulations governed by EECL
 
 *Political
        Climate*
 
 The
        Company’s ability to remain in the gaming business depends on the continued
        political acceptability of pachinko gaming activities to both the public
        and
        governmental officials. In addition, the gaming laws regulate payout rates
        which, if altered, may diminish the Company’s profitability. Management is aware
        of nothing to indicate that NPSC officials will change its policies toward
        gaming activities in general; however, there are no assurances that such
        policies will not be changed. Any substantial, unfavorable change in the
        enabling laws or tax rates on gaming revenues could make the Company’s business
        substantially more onerous, less profitable or illegal, which would have
        a
        material adverse effect on the Company’s business.
 
 *Competition*
 
 The
        Company faces substantial competition in each of the markets in which its
        gaming
        facilities are located. Some of the competitors have significantly greater
        name
        recognition and financial and marketing resources than the Company. Such
        competition results, in part, from the geographic concentration of competitors.
        All of the Company’s gaming operations primarily compete with other gaming
        operations in their geographic areas. New expansion and development activity
        is
        occurring in each of the relevant markets, which may be expected to intensify
        competitive pressures.
 
 F-12
 
 *Foreign
        Currency*
 
 Since
        the
        local currency is the Japanese Yen, the Company may experience significant
        fluctuations in the value of reported assets and liabilities in United States
        Dollars.  The
        average exchange rate used to translate the results of operations were ¥114.46
        and ¥106.99
        for the years ended May 31, 2006 and 2005, respectively. The exchange rate
        used
        to translate the balance sheet accounts at May 31, 2006 was ¥112.17. At August
        31, 2006, the exchange rate increased to ¥116.94.
 
 **NOTE
        4 - MARKETABLE SECURITIES**
  Cost,
        as
        adjusted for impairments, and fair market values of marketable securities,
        accounted for as available-for-sale securities, at May 31, 2006, are as
        follows:
  2006Securities
                  available for sale
              
              Adjusted
                Cost
                  Basis
              
              Unrealized
                Gains
              
              Unrealized
                Losses
              
              Fair
                  ValueEquity
                  Mutual Fund - Japan
              
              $
              18,989
              
              $
              4,022
              
              $
              -
              
              $
              23,011Common
                  stocks - Japan
              
              
              1,631,123
              
              
              -
              
              
              (7,174
              )
              
              1,623,949Government
                  securities - Japan
              
              
              349
              
              
              -
              
              
              -
              
              
              349Total
              
              $
              1,650,461
              
              $
              4,022
              
              $
              (7,174
              )
              $
              1,647,309
  No
        unrealized losses were charged to operations in 2006 and 2005. During the
        year
        ended May 31, 2006 and 2005, management recorded a temporary increase (decrease)
        in the value of the marketable securities in the amount of $20,862 and $12,785,
        respectively.
 
 **NOTE
        5 - RELATED PARTY TRANSACTIONS**
 
 *Land
        Purchase*
 
 On
        February 21, 2005, the Company purchased land previously rented from a
        shareholder for $620,804. Management believes the transfer price was
        representative of fair value at the date of transfer.
 
 *Consulting
        agreement*
 
 The
        Company uses a consulting firm, which is controlled by a director, for the
        purpose of assisting with strategic plan. In connection therewith, the Company
        paid approximately $3,900 (¥420,000) per month during the years ended May 31,
        2006 and, 2005.
 
 **NOTE
        6 - PROPERTY AND EQUIPMENT**
 
 At
        May 31, 2006, property and equipment consisted of the following:
 
 **2006**Land
              
              $
              3,933,003Buildings
                  and improvements
              
              
              4,478,645Leasehold
                  improvements
              
              
              25,357,333Pachinko
                  machines and computer equipment
              
              
              19,585,86553,354,846Less
                  accumulated depreciation
              
              
              (19,966,177
              )$
              33,388,669
 
 *Store
        impairment*
 
 One
        of
        the Company’s stores suffered losses in 2005 because of increased competition,
        and a deteriorating facility which in need of improvements. The store was
        profitable in 2004.
  F-13
 
 The
          store
          is on leased land, and the building and improvements have little residual
          value,
          if any. Management has evaluated the future cash flows of this store and
          determined that an impairment loss is required under SFAS No. 144. Accordingly,
          management recorded a charge to operations, which is included in cost of
          revenues in the amount of $2,213,312 in fiscal 2005.
 *Impairments
        of Idle Machines*
 
 During
        the years ended May 31, 2006 and 2005, the Company retired pachinko and
        pachislot machines prior to the end of their useful life resulting in losses
        in
        the amount of $3,430,844 and $2,059,866, respectively. The resulting impairments
        are largely due to lower than expected wagers after acquisition.
 
 *Asset
        Retirement Obligations*
 
 The
        Company adopted SFAS No. 143, during fiscal year 2003 and applied this change
        retroactively to all previous years effected. The statement requires that
        a
        liability for the fair value of an asset retirement obligation be recognized
        in
        the period which it is incurred with the offset associated asset retirement
        cost
        capitalized as part of the carrying amount of the long -lived asset. The
        asset
        retirement cost is subsequently allocated to expense using a systematic and
        rational method over the useful life of the related asset. Changes in the
        asset
        retirement obligation resulting from the passage of time are recognized as
        an
        increase in the carrying amount of the liability and as an accretion expense.
        Under certain lease agreements in which the Company leases land, while owning
        the building and/or parking lot located on that land, the Company is required
        to
        return the land to its original condition at the end of the land lease term.
        The
        lessor has the option to require the Company to return the land to its original
        condition. It has been determined that in all cases the lessors will require
        the
        Company to restore the land. At May 31, 2006, the Company increased their
        obligated long-lived assets under property and equipment by $168,217 due
        to the
        future estimated costs related to the new store. The Company used an average
        risk free rate of 2% to discount the estimated obligations and a 40-year
        useful
        life for their retired assets in computing the net retirement obligations
        as of
        May 31, 2006. Accretion expense for the years ended May 31, 2006 and 2005,
        was
        $18,851 and $16,029, respectively.
 
 The
        reconciliation of the asset retirement obligation is as follows:
  Balance,
                  June 1, 2005 - foreign currency rate effective
              
              $
              680,366Liabilities
                  incurred
              
              
              168,217Accretion
                  expense
              
              
              18,851Balance,
                  May 31, 2006
              
              $
              867,434
 
 *Capitalized
        Interest*
 
 The
        Company capitalizes interest costs of constructing new stores. Capitalized
        interest for the years ended May 31, 2006 and May 31, 2005, was $35,710 and
        $20,860, respectively.
 
 *Depreciation*
 
 Depreciation
        expense charged to operations related to property and equipment during the
        years
        ended May 31, 2006 and 2005 was $ 7,676,074 and $7,005,839, respectively.
        See Note 9 for equipment under capital leases.
 
 **NOTE
        7 - CERTAIN BALANCE SHEET ITEMS**
 
 *Prepaid
        and Other Current Assets*
  F-14
  At
          May
          31, 2006, prepaid and other current assets consisted of the
          following:
 Deferred
                  income taxes
              
              $
              146,762Prepaid
                  expenses
              
              
              126,200
 Prepaid
                  interest
              
              
              101,027Other
                  receivable
              
              
              79,730Prepaid
                  insurance
              
              
              79,096Other
              
              
              61,411Total
                  prepaid and other current assets
              
              $
              594,226
 
 At
        May
        31, 2006, deposits and other assets consisted of the following:
 
 Deposits
              
              $
              1,159,710Investment,
                  at cost
              
              
              267,451Long-term
                  time deposits
              
              
              248,730Bonds
                  issue costs
              
              
              239,887Long-term
                  prepaid expenses
              
              
              174,900Cash
                  surrender value of life insurance
              
              
              140,079Unamortized
                  interest swap costs
              
              
              105,902Other
              
              
              109,844Total
                  deposits and other assets
              
              $
              2,446,503
 
 On
        February, 28, 2005, the Company purchased an investment in a private company
        for
        $267,451 (¥30,000,000). The Company’s ownership represents 8.30% of voting stock
        outstanding. The investee company manufactures pachinko machines. The investment
        is accounted for using the cost method of accounting, whereby the Company
        records the initial investment at cost, and records distributions and income
        when received. Periodically, management will review the investment for
        impairment, based on actual investee-company results of operations and cash
        flows, as well as financial condition.
 
 At
        May
        31, 2006, accrued liabilities consisted of the following:
 
 Accrued
                  liabilities - current:Deferred
                  revenue
              
              $
              680,393Salaries
                  and related benefits
              
              
              522,561Professional
                  fees
              
              
              326,453Income
                  taxes payable
              
              
              215,812Sales
                  taxes payable
              
              
              181,750Payroll
                  taxes payable
              
              
              99,492Other
              
              
              89,133Total
                  accrued liabilities - current
              
              $
              2,115,594
 Accrued
                  liabilities - non-current:Deferred
                  revenue
              
              $
              90,427Swap
                  contract obligations
              
              
              42,994Total
                  accrued liabilities - Non-current
              
              $
              133,421
 
 F-15
  **NOTE
        8 - LONG-TERM DEBT**
 
 In
        July
        and September 2005, the Company entered into three additional long-term debt
        agreements with commercial banks totaling approximately $5,349,024. In addition,
        the Company issued bonds payable totaling $7,887,470. The loans were for
        the construction of the new store. The loans bear interest rates ranging
        from
        2.5% to 2.75% per annum. These loans are secured by substantially all of
        the
        Company’s assets including the restricted time deposits. Long-term debt at May
        31, 2006, consisted of the following:
  Loans
                  payable to commercial bank, payable monthly in principal and interest
                  installments ranging from $3,655 to $356,602, interest between
                  2.6%-2.75%
                  per annum, due 2006 through 2015, secured by substantially all
                  of the
                  Company’s assets including the restricted cash and restricted time
                  deposits.
              
              $
              16,885,798Loans
                  payable to commercial bank, payable monthly in principal and interest
                  installments ranging from $24,962 to $44,575, interest at 2.275%
                  per
                  annum, due 2006 through 2009, secured by substantially all of the
                  Company’s assets.
              
              
              1,859,677Two
                  Loans payable to commercial bank, payable monthly and quarterly
                  in
                  principal and interest installments at $48,587 and $111,438, interest
                  between approximately 1.75 % to 2.13% per annum, due 2006 through
                  2009,
                  unsecured.
              
              
              3,019,970Loan
                  payable to commercial bank, payable monthly in principal and interest
                  installments ranging at $31,827, interest at 2.5% per annum, due
                  2012
                  unsecured.
              
              
              2,356,245Loans
                  payable to commercial bank, lump sums in August 2006 to May 2007,
                  interest
                  only at 2.5% per annum, secured by substantially all of the Company’s
                  assets including the restricted cash and restricted time deposits.
              
              
              3,566,016Bond
                  payable to commercial bank, payable semiannually in principal of
                  $401,177,
                  coupon interest at 0.88% per annum, guarantee fee at 1.075%, due
                  2006
                  through 2012, unsecured.
              
              
              4,947,847Bond
                  payable to commercial bank, payable semiannually in principal of
                  $200,588,
                  coupon interest initially at 0.21% per annum, thereafter variable
                  (Nikkei
                  Quick DM131) + 0.1%, guarantee fee at 0.65%, due 2006 through 2012,
                  unsecured.
              
              
              2,674,512Total
                  long-term debt
              
              
              35,310,065Less
                  current portion of long-term debt
              
              
              (10,511,367
              )Long-term
                  debt, net of current portion
              
              $
              24,798,698
 
 The
        Company’s obligations are collateralized by substantially all of the Company’s
        assets. As a common practice in Japan, the Company’s collateral is not allocated
        to each commercial bank loan. Rather the commercial banks hold an interest
        in
        substantially all of the Company’s assets together; there are no first or second
        positions. Upon default of the loans, the Company’s assets would be liquidated
        and the proceeds from the liquidation would be distributed to the commercial
        banks based on liquidation preference. Interest expense related to long-term
        debt amounted to $731,265 and $751,739, during the years ended May 31, 2006
        and
        2005, respectively. Future annual minimum principal payments under long-term
        debt contracts as of May 31, 2006 are as follows:
 
 Years
                  ending May 31,2007
              
              $
              10,511,3672008
              
              
              5,562,6282009
              
              
              5,084,3362010
              
              
              3,940,9822011
              
              
              3,655,523Thereafter
              
              
              6,555,229
 Total
                    long-term debt
                
                $
                35,310,065
 F-16
  *Bonds
        Payable*
 
 On
        September 30, 2005, the Company issued a bond payable in the amount of
        approximately $5,000,000 (¥600,000,000), which bears a coupon rate of 0.88% and
        guarantee fee at 1.075% per annum and matures September 28, 2012. In addition,
        it was required to pay bond issue costs of $137,712. The effective interest
        rate
        is 4.02%. The bonds are unsecured.
 
 On
        December 28, 2005, the Company issued a bond payable in the amount of
        approximately $2,500,000 (¥300,000,000), which bears a coupon rate of 0.21%
        initially, thereafter variable (Nikkei Quick DM131) + 0.1%, and guarantee
        fee at
        0.65% per annum and matures on December 28, 2012. In addition, it was required
        to pay bond issue costs of $140,278. The effective interest rate is 5.66%.
        The
        bonds are unsecured.
 
 *Interest
        Swap Agreements*
 
 PWI
        entered into two interest rate swap agreements on November 28, 2003 and March
        24, 2004 with Mitsui Sumitomo Bank. First, PWI entered into an agreement
        whereby
        they obtained financing in the amount of ¥300,000,000 (approximately
        $2,900,000), which expires on November 28, 2008.  In connection therewith,
        PWI agreed to a contract to pay interest at 1.67%, per annum on ¥300,000,000,
        offset by the receipt of interest at the three-month TIBOR (“Tokyo Interbank
        Offered Rate”).  Interest payments start on February 29, 2004 and are
        payable at the end of every three months thereafter until expiration. The
        effect
        of the arrangement was to increase interest expense by approximately $40,000,
        during the year ended May 31, 2005. In addition, PWI was required to enter
        into
        an agreement for a ¥100,000,000 (approximately $900,000) interest swap contract,
        which expires on March 24, 2009.  In connection therewith, PWI agreed to
        pay interest at 1.89%, per annum on the face amount of the contract, offset
        by
        the receipt of interest at 3-month TIBOR.  Interest payments commenced on
        June 24, 2004 and are payable at the end of every three months thereafter
        until
        expiration. The effect of the arrangement was to increase interest expense
        by
        approximately $16,000 and $17,000 during the years ended May, 31, 2006 and
        2005,
        respectively.
 
 In
        addition, on December 27, 2004, the Company entered into an agreement whereby
        they obtained financing in the amount of ¥250,000,000 (approximately
        $2,400,000), which expires on November 30, 2009. In connection therewith,
        the
        Company agreed to a contract to pay interest at 1.11%, per annum on the face
        amount of the contract, offset by the receipt of interest at three-month
        TIBOR.
        Interest payments commenced starting in February 2005 and are payable at
        the end
        of every three months thereafter until expiration. The effect of the arrangement
        was to increase interest expense by approximately $18,000 and $11,000 during
        the
        years ended May 31, 2006 and 2005. The Company was induced to enter into
        the
        interest swap contracts to obtain financing. On the date the contracts were
        executed, the fair value of the contract liabilities aggregated approximately
        $160,000 (therefore a cost of the borrowings), and accordingly, such amounts
        were reported as an asset, and accreted to interest expense using the effective
        interest method. The fair values of PWI’s interest rate swaps are the estimated
        amounts it would receive or pay to terminate the agreements as of the reporting
        dates as determined by the bank.  As of May 31, 2006, the fair value of the
        outstanding swaps was $42,995. The change in fair value of the swap obligations
        was recorded as gain on interest rate swap agreements and included in other
        income totaling approximately $100,100 for fiscal 2006; amount was minor
        in
        fiscal 2005.
 
 **NOTE
        9 - COMMITMENTS AND CONTINGENCIES**
  *Investment
        Banking Agreement*
 On
          September 2, 2003, management entered into an agreement for services
          related to seeking a reverse merger partner, a strategic partner or strategic
          alliances, and, on a best efforts basis, raise additional equity capital.
          The
          Company paid $2,500 per month for seven (7) months, at which date the
          agreement was cancelled and the monthly fee ceased. In addition, the Company
          was
          required to pay a cash fee of 3.5% for equity financing, and issue common
          stock
          equal to 1.0% to 1.5% of the outstanding post-merger shares, upon the close
          of a
          transaction. On June 3, 2004, the transaction was closed with Olympic. The
          investment banker earned a fee of 1% of the post merger,
          post-reverse-stock-split common stock outstanding of Olympic, in accordance
          with
          the contract. The investment banker waived the fee payment from the Company,
          and
          they were paid out of Series D Preferred held by the selling shareholder.
          Since
          the services were agreed upon, provided and the reverse acquisition was
          closed,
          management estimated the estimated fair value of the underlying common
          stock of
          the D Preferred of $360,000, which was determined using the average closing
          stock price of Olympic near the transaction, and charged to operations
          in fiscal
          2005 with a corresponding credit to additional paid-in capital.
 F-17
 *Director
        Agreements*
  On
        June
        17, 2003, the Company’s retained two (2) outside directors. The agreements
        provide for annual payments of $150,000, plus reimbursement of reasonable
        expenses.  The agreements expired on June 16, 2004. In June, 2004, new
        agreements are provided for annual payments of $100,000, plus reimbursement
        of
        reasonable expenses. Each director was paid $100,000 for the years ended
        May 31,
        2006 and 2005.
 
 *Consulting
        Agreements*
 
 On
        August
        1, 2004, the Company entered an agreement with a consulting firm. The agreement
        is for consulting services of Company’s management and personal system. The
        agreement expires on July 31, 2007. The monthly consulting fee is approximately
        $10,500, plus reimbursement of reasonable expenses. In addition, the Company
        paid some additional fees for training sessions. The consulting firm was
        paid
        approximately $179,000 and $380,000 for the years ended May 31, 2006 and
        2005,
        respectively. In May 2006, the Company canceled the consulting agreement,
        and no
        cancellation expense was incurred.
 
 On
        December 1, 2005, the Company entered an agreement with a consulting firm.
        The
        agreement is to perform a program of investor relations activities on behalf
        of
        the Company. The agreement expired on May 1, 2006. The monthly consulting
        fee is
        $5,000, plus reimbursement of reasonable expenses. On March 2, 2006, the
        Company
        extended the agreement with the consulting firm. The agreement expires on
        September 2, 2006. The monthly consulting fee is $4,000, plus reimbursement
        of
        reasonable expenses.
 
 *Capital
        Leases*
 
 The
        Company leases pachinko machines and computer equipments under leases that
        qualify as capital leases. The pachinko machine leases were for two years
        and
        expired on December 24, 2005. The computer equipment leases
        are generally for a term of five years through eight years and
        expire on November 22, 2013.
 
 In
        connection with the opening of a new store in December 2005, the Company
        entered
        into an agreement to lease computer equipment at total cost of $1,916,221.
        The
        lease is for a period of 96 months and requires monthly lease payment of
        $22,714.
 
 During
        the year ended May 31, 2005, the Company entered into an agreement to lease
        computer equipment at total cost of $610,185. The lease is for a period of
        60
        months and requires monthly lease payment of $11,861. Additionally, the Company
        entered into an agreement to lease equipment for $1,166,569. The lease is
        for 96
        months and requires a monthly lease payment of $16,026
  These
          leases are accounted for as a capital leases. Future annual minimum lease
          payments for equipment account for as capital lease as of May 31, 2006
          are as
          follows:
 Years
                ending May 31,2007
              
              $
              1,430,7972008
              
              
              1,108,6492009
              
              
              1,079,3632010
              
              
              768,5472011
              
              
              457,731Thereafter
              
              
              959,167Total
                  minimum lease payments
              
              
              5,804,254Less
                  amounts representing interest
              
              
              (580,376
              )
 Present
                    value of future minimum lease payments
                
                5,223,878Less
                    current portion of capital lease obligations
                
                
                (1,249,300
                )Capital
                    lease obligations, net of current portion
                
                $
                3,974,578
 F-18
 Interest
        expense related to capital lease obligations amounted to $197,292 and $230,396
        during the years ended May 31, 2006 and 2005, respectively.
 
 Property
        and equipment at May 31, 2006, include the following amounts for
        capitalized leases:
 
 Equipment
                  under capital leases
              
              $
              8,744,018Less
                  accumulated depreciation
              
              
              (3,678,961
              )Equipment
                  under capital leases, net
              
              $
              5,065,057
  *Operating
        Leases*
 
 The
        Company leases land for certain of its gaming locations. Minimum monthly
        rental
        payments under these leases range from $4,902 to $58,928, aggregating total
        payments of $178,090 per month. In December, 2004, the Company has entered
        into
        written agreements for new leases which last twenty (20) years. The leases
        are
        for new store, and it started in December 2005.
 
 The
        Company has made significant modifications to the land through construction
        of
        buildings and parking lots. Thus, the terms of the land leases in most cases
        are
        infinite. For the years ended May 31, 2006 and 2005, total rental expense
        under
        all land leases was approximately $1,894,335 and $1,725,126,
        respectively.
 
 Future
        annual minimum payments under non-cancelable operating leases as of May 31,
        2006, are as follows:
 
 Years
                  ending May 31,2007
              
              $
              1,816,0472008
              
              
              1,781,4752009
              
              
              1,771,1222010
              
              
              1,722,8722011
              
              
              1,698,973Thereafter
              
              
              23,186,706Total
                  future annual minimum lease payments
              
              $
              31,977,195
 
 **NOTE
        10 - SHAREHOLDERS' EQUITY**
  *Preferred
        Stock*
  There
        are
        5,000,000 shares of preferred stock authorized to be issued. In connection
        with
        the reverse acquisition of Olympic, Exam shareholders received 1,800,000
        shares
        of Series E convertible preferred stock. Each share was convertible into
        ten
        (10) shares of common stock or a total of 18,000,000 shares and converted
        on May
        31, 2005. The 40,000 shares of Series D convertible preferred stock issued
        in
        connection with the reverse acquisition was convertible into 25 shares of
        common
        stock or an aggregate of 1,000,000 shares and converted in fiscal 2005.
  F-19
  *Stock
        Spilt*
 
 Olympic
        authorized a one for fifteen (1 for 15) reverse split on the Company's common
        stock thereby resulting in 1,000,148 shares issued and outstanding upon the
        date
        of the reverse acquisition on June 3, 2004.
  *Restricted
        Retained Earnings*
  As
        required under Japanese laws, the Company must accumulate 10% of dividends
        paid
        until restricted retained earnings amounts to 25% of common stock. As of
        May 31,
        2006, the Company was in satisfaction of this requirement.
 
 *Dividends*
 
 Prior
        to
        becoming a public company, the Company paid dividends of $90,959 for the
        year
        ended May 31, 2005.
 
 *Stock-Based
        Compensation*
 
 The
        shareholders of PWI contributed 26,100 shares, each, of Series E Convertible
        Preferred stock to two (2) directors for services rendered in connection
        with
        going public in the United States on June 3, 2004 and for services to be
        rendered in fiscal 2005.  The shares vest 25% on June 3, 2004, and 25%
        quarterly thereafter.  The shares were converted into an aggregate of
        522,000 shares of common stock.  PWI will recorded a non-cash charge of
        $943,693 as compensation expense in fiscal 2005, based on the average closing
        ask prices 15 days prior to, and after, the acquisition of $2.00 per share,
        less
        a 10% discount for restricted stock or $1.80 per share.
 
 *Stock
        Option Plan*
 
 On
        September 20, 2005, the Board of Directors adopted the 2005 Stock Incentive
        Plan (the “Plan”). The total number of shares of common stock available under
        the Plan is 3,000,000, subject to adjustment as provided in the Plan. The
        exercise price per share shall be fixed by the Plan administrator at a price
        not
        less than eighty-five percent (85%) of the fair market value per share of
        common
        stock on the option grant date. The Plan terminates in ten (10) years. Options
        may be fully and immediately vested upon issuance or may vest in one or more
        installments over the participant’s period of service or upon attainment of
        specified performance objectives. In no event will options vest less than
        20%
        per year from the date of the option grant or share issuance. No grants of
        stock
        options have been made.
 
 **NOTE
        11 - INCOME TAXES**
 
 The
        following summarizes the provision (benefit) for income taxes for the years
        ended May 31, 2006 and 2005:
 
 **2006**
              
              **2005**Current
                  -Foreign
              
              $
              371,329
              
              $
              375,128Deferred
                  -Foreign
              
              
              246,970
              
              
              (687,689
              )Provision
                  (benefit) for income taxes
              
              $
              618,299
              
              $
              (312,561
              )
 
 Income
        taxes in the United States of America were not material. A reconciliation
        of the
        expected statutory national income tax provision to the provision (benefit)
        for
        income taxes for the years ended May 31, 2006 and 2005 is as
        follows:
  F-20
 
 **2006**
              
              **2005**Provision
                  for income taxes, at Japan national rate
              
              
              30.0
              %
              
              (30.0
              )%Increase
                  in income taxes resulting from:Local
                  income taxes, net of national benefit
              
              
              13.3
              %
              
              (10.4
              )%Meals
              
              
              12.6
              %
              
              1.9
              %Other
              
              
              7.4
              %
              
              -Increase
                  in valuation allowance
              
              
              58.1
              %
              
              28.3
              %Provision
                  (benefit) for income taxes
              
              
              121.4
              %
              
              (10.2
              )%
 
 At
        May 31, 2006, significant components of the Company's net deferred taxes
        are as follows:
 
 **2006**Deferred
                  tax assets (liabilities)Current
                  assets:Accrued
                  liabilities
              
              $
              65,450Unrealized
                  losses on marketable securities
              
              
              81,312Less
                  - Valuation allowance
              
              
              -Total
                  current deferred tax assets
              
              
              146,762Noncurrent
                  assets:Impairment
                  charges
              
              
              922,356Net
                  operating loss carryforward - United States
              
              
              1,150,388Other
              
              
              43,583Depreciation
              
              
              (124,280
              )Less
                  - Valuation allowance
              
              
              (1,329,708
              )Total
                  noncurrent deferred tax assets
              
              
              662,339Total
                  deferred tax assets
              
              $
              809,101
  Management
        increased its valuation allowance by $332,813 and $883,009 during the years
        ended May 31, 2006 and 2005, respectively, for certain expenses paid in the
        United States that will not be deductible in Japan. At the present time,
        management cannot determine if there will be income in the United States
        to
        offset such expenses, which will be carried forward as net operating losses.
        The
        net operating losses expire in twenty years for United States federal tax
        purposes and five years for the State of California tax purposes beginning
        from
        fiscal 2004.
 
 During
        the year ended May 31, 2005, the Company recorded US stock-based compensation
        expense of approximately $1,300,000 for financial reporting
        purposes. Management did not report a deduction for income tax reporting
        purposes for that year.  At May 31, 2005, the Company
        reported deferred tax assets, consisting of US net operating loss
        carryforwards, totaling $546,000, as well as a 100% valuation allowance. 
At May 31, 2006, the Company reduced its gross deferred tax assets, and
        related 100% valuation allowance, by $546,000.  There was no impact on
        the consolidated financial statements as a result of this
        adjustment.
  During
        the year ended May 31, 2006, the Company deducted certain golf membership
        costs
        aggregating approximately $450,000, which were previously written off for
        financial reporting purposes.  Management provided a 100% valuation
        allowance the related deferred tax asset of approximately $190,000.
  **NOTE
        12 - GAMING OPERATIONS**
 
 The
        Company derives revenue from the operation of pachinko and pachislot games.
        The
        Company is subject to annual licensing requirements established by the
        Prefectural Public Safety Commission. The Company must renew this license
        yearly
        to operate. The Company pays sales taxes of 4% of net revenues.
 
 A
        summary
        of gross wagers, less winning patron payouts, for the years ended May 31,
        2006
        and May 31, 2005 are as follows:
  F-21
  **2006**
              
              **2005**Total
                  gross pay-ins
              
              $
              228,749,971
              
              $
              219,425,163Less
                  - winning patron pay outs
              
              $
              (200,321,143
              )
              $
              (194,575,733
              )Gaming
                  Revenues
              
              $
              28,428,828
              
              $
              24,849,430
 
 **NOTE
        13 - SUBSEQUENT EVENT**
 
 *New
        loans*
 
 On
        July
        28, 2006, the Company entered a new loan agreement with a commercial bank
        in the
        amount of approximately $862,440 (¥100,000,000), which bears an interest rate of
        2.5% per annum and matures on July 31, 2007.
  F-22


**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.




**PACHINKO
                WORLD, INC.**Date: September
              13, 2006
            By:
            /s/ Shinichi
                Hirabayashi**Shinichi
                Hirabayashi**
              **Chief
                Executive Officer**
              **(Principal
                Executive Officer)**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in their
      capacities and on the dates indicated.




**Signature**
              **Capacity**
              **Date**/s/ Shinichi
                  Hirabayashi
              Chief
                  Executive Officer and Director
              September
                  13,
                  2006**Shinichi
                  Hirabayashi**






/s/ Yoneji
                Hirabayashi
            Chief
                  Financial and Principal
            September
                13,
                2006**Yoneji
                Hirabayashi**
            Accounting
                Officer and Director






/s/ Akinori
                Hirabayashi
            Director
            September
                13,
                2006**Akinori
                Hirabayashi**




23