##### Table of Contents

As filed with the Securities and Exchange Commission on September 26, 2005

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



Form 20-F





(Mark One)

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



OR



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



Special Financial Report Pursuant to Rule 15d-2 of the Securities Exchange
Act of 1934, as Amended, reporting

Financial Statements for the Fiscal Year Ended March 31, 2005



OR



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



For the transition period from
             to



OR



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



Date of event requiring this shell company
report



Commission File Number:



---



Sankyo Kabushiki Kaisha

(Exact name of registrant as specified in its
charter)





|                                                |  |                                                
|----------------------------------------------- |  | -----------------------------------------------
|Sankyo Company, Limited                         |  | Japan                                          
|(Translation of registrants name into English) |  | (Jurisdiction of incorporation or organization)



---



5-1, Nihonbashi Honcho 3-chome

Chuo-ku, Tokyo 103-8426

Japan

(Address of principal executive offices)



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



|                     |  |                                           
|-------------------- |  | ------------------------------------------
|Title of each class: |  | Name of each exchange on which registered:
|None                 |  | None                                      



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

None



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

Common Stock of Daiichi Sankyo Company, Limited, without par value





Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the last full fiscal year covered by this Annual Report: None (approximately 439,498,765 shares of common stock
of Sankyo Company, Limited as of March 31, 2005 will be exchanged for approximately 439,498,765 shares of common stock of Daiichi Sankyo Company, Limited as of September 28, 2005).



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



Yes  x            No ̈



Indicate by check mark which financial statement item the registrant has
elected to follow:



Item 17 ̈Item 18  x



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



Yes ̈No  x



(APPLICABLE ONLY TO ISSUERS
INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PAST FIVE YEARS)



Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court.



Yes ̈No ̈



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TABLE OF CONTENTS



|                              |  |     
|----------------------------- |  | ----
|                              |  | Page
|Explanatory Note              |  | 1   
|Controls and Procedures       |  | 1   
|                              | 
|Index to Financial Statements |  | F-1 
|                              | 
|Exhibit Index                 |  | A-1 



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##### Table of Contents

EXPLANATORY NOTE



On June 29,
2005, the general meetings of shareholders of Daiichi Pharmaceutical Co., Ltd., or Daiichi, and Sankyo Company, Limited, or Sankyo, approved the terms of a joint share transfer between Daiichi and Sankyo through which each company will become a
wholly-owned subsidiary of a newly-formed holding company, Daiichi Sankyo Company, Limited, or Daiichi Sankyo, upon the consummation of the joint share transfer on September 28, 2005 and the resulting exchange of Daiichi Sankyo shares for Daiichi
shares and Sankyo shares held by shareholders of Daiichi and Sankyo, respectively.



A detailed description of the joint share transfer is included in the registration statement on Form F-4 (SEC No. 333-125430) jointly filed with the Securities and Exchange Commission, or the Commission, by Daiichi
and Sankyo on June 2, 2005.



Rule 15d-2 under the Securities
and Exchange Act of 1934 provides generally that if a foreign private issuer files a registration statement under the Securities Act of 1933 which does not contain certified financial statements for the companys last full fiscal year, then the
company must, within the later of 90 days after the effective date of the registration statement or six months following the end of the companys latest full fiscal year, file a special financial report furnishing certified financial statements
for the last full fiscal year.



The Form F-4 registration
statement that we filed jointly with Daiichi did not contain the certified financial statements for our last full fiscal year. Therefore, as required by Rule 15d-2, we are hereby filing such certified financial statements with the Commission under
cover of the facing page of an annual report on Form 20-F.



CONTROLS AND PROCEDURES



Our
Chief Executive Officer, Takashi Shoda, and our principal accounting and financial officer, Akihiko Ozawa, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2005, the date of the end of the period covered by this
report, and concluded that, as of such date, our disclosure controls and procedures were effective in alerting our management, including our Chief Executive Officer and our principal accounting and financial officer, on a timely basis to material
information we are required to disclose in the reports we are required to file under the Exchange Act. There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



For purposes of the Form F-4, we prepared financial statements in accordance with accounting principles generally accepted in the United States, or U.S.
GAAP, for the first time. In connection with its audit of our financial statements for the year ended March 31, 2005, Ernst & Young ShinNihon advised us that it has identified a material weakness in internal control over financial reporting
relating to our closing processes for the preparation of U.S. GAAP financial statements. Specifically, Ernst & Young ShinNihon noted that we lack an accounting policy and procedures manual that indicates with specificity how various transactions
are to be recorded for U.S. GAAP purposes, a comprehensive reporting package has not been prepared and distributed to all subsidiaries and unfamiliarity with U.S. GAAP on the part of our personnel can result in a failure to identify the appropriate
accounting basis for transactions in a timely manner, although we hired an outside service provider to support the financial statement closing process for U.S. GAAP consolidated financial statements. We currently intend to address these issues in
establishing internal control over financial reporting for our combined group following the joint share transfer. As a foreign private issuer, pursuant to Section 404(a) of the Sarbanes-Oxley Act our new holding company will be required
to conduct an annual management assessment of the effectiveness of internal control over financial reporting and provide a report by its independent auditors addressing those assessments beginning with the fiscal year ending March 31, 2007.



1



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##### Table of Contents

INDEX TO FINANCIAL STATEMENTS



|                                                                                                         |  |     
|-------------------------------------------------------------------------------------------------------- |  | ----
|Consolidated Financial Statements of Sankyo                                                              |  |     
|Report of Independent Registered Public Accounting Firm                                                  |  | F-2 
|Consolidated Balance Sheets as of March 31, 2004 and 2005                                                |  | F-3 
|Consolidated Statements of Income for the Fiscal Years ended March 31, 2003, 2004 and 2005               |  | F-5 
|Consolidated Statements of Shareholders Equity for the Fiscal Years ended March 31, 2003, 2004 and 2005 |  | F-7 
|Consolidated Statements of Cash Flows for the Fiscal Years ended March 31, 2003, 2004 and 2005           |  | F-9 
|Notes to the Consolidated Financial Statements                                                           |  | F-11



F-1



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##### Table of Contents

Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholders of Sankyo Company, Limited



We
have audited the accompanying consolidated balance sheets of Sankyo Company, Limited and subsidiaries as of March 31, 2004 and 2005, and the related consolidated statements of income, shareholders equity, and cash flows for each of the three
years in the period ended March 31, 2005. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the
financial statements of Luitpold Pharmaceuticals Inc., a wholly owned subsidiary, which statements reflect total assets constituting 4% as of March 31, 2004 and 2005, and net revenue constituting 5 % for the year ended March 31, 2003 and 6% in each
of the years ended March 31, 2004 and 2005, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for such wholly
owned subsidiary, is based solely on the report of other auditors.



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 audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.



In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Sankyo Company, Limited and subsidiaries at March 31, 2004 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2005, in
conformity with U.S. generally accepted accounting principles.



/s/ Ernst & Young ShinNihon



Tokyo, Japan

September 8, 2005



F-2



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##### Table of Contents

SANKYO COMPANY, LIMITED

CONSOLIDATED BALANCE SHEETS



As of March 31, 2004 and 2005



|                                                       |  |                 |          |   |      |   |           |  
|------------------------------------------------------ |  | --------------- | -------- | - | ---- | - | --------- | -
|                                                       |  | Yen in millions |         
|                                                       |  | 2004            |          |   | 2005 |  
|ASSETS                                                 |  |                 |          |   |      |   |           |  
|Current assets:                                        |  |                 |          |   |      |   |           |  
|Cash and cash equivalents                              |  | ¥               | 201,734  |   |      | ¥ | 268,488   |  
|Time deposits                                          |  |                 | 5,451    |   |      |   | 2,485     |  
|Marketable securities                                  |  |                 | 50,033   |   |      |   | 55,785    |  
|Notes receivable, trade                                |  |                 | 12,617   |   |      |   | 9,421     |  
|Accounts receivable, trade                             |  |                 | 141,714  |   |      |   | 141,880   |  
|Allowance for doubtful accounts                        |  |                 | (884     | ) |      |   | (224      | )
|Inventories                                            |  |                 | 97,525   |   |      |   | 94,955    |  
|Deferred income taxes                                  |  |                 | 25,900   |   |      |   | 29,784    |  
|Other current assets                                   |  |                 | 12,409   |   |      |   | 13,860    |  
|                                                       |  |                 |          |   |      |   |           |  
|Total current assets                                   |  |                 | 546,499  |   |      |   | 616,434   |  
|                                                       |  |                 |          |   |      |   |           |  
|Investments and advances:                              |  |                 |          |   |      |   |           |  
|Marketable securities and other securities investments |  |                 | 114,061  |   |      |   | 109,213   |  
|Affiliated companies                                   |  |                 | 1,985    |   |      |   | 2,947     |  
|Other                                                  |  |                 | 13,139   |   |      |   | 11,477    |  
|                                                       |  |                 |          |   |      |   |           |  
|                                                       |  |                 | 129,185  |   |      |   | 123,637   |  
|                                                       |  |                 |          |   |      |   |           |  
|Property, plant and equipment:                         |  |                 |          |   |      |   |           |  
|Land                                                   |  |                 | 38,810   |   |      |   | 40,614    |  
|Buildings                                              |  |                 | 218,354  |   |      |   | 228,068   |  
|Machinery and equipment                                |  |                 | 265,889  |   |      |   | 265,588   |  
|Construction in progress                               |  |                 | 8,477    |   |      |   | 9,723     |  
|                                                       |  |                 |          |   |      |   |           |  
|                                                       |  |                 | 531,530  |   |      |   | 543,993   |  
|Less  Accumulated depreciation                        |  |                 | (321,730 | ) |      |   | (330,587  | )
|                                                       |  |                 |          |   |      |   |           |  
|                                                       |  |                 | 209,800  |   |      |   | 213,406   |  
|                                                       |  |                 |          |   |      |   |           |  
|Other assets:                                          |  |                 |          |   |      |   |           |  
|Goodwill                                               |  |                 | 2,865    |   |      |   | 3,050     |  
|Intangibles, net                                       |  |                 | 29,699   |   |      |   | 27,095    |  
|Deferred income taxes                                  |  |                 | 21,119   |   |      |   | 16,944    |  
|Other                                                  |  |                 | 837      |   |      |   | 777       |  
|                                                       |  |                 |          |   |      |   |           |  
|                                                       |  |                 | 54,520   |   |      |   | 47,866    |  
|                                                       |  |                 |          |   |      |   |           |  
|                                                       |  | ¥               | 940,004  |   |      | ¥ | 1,001,343 |  
|                                                       |  |                 |          |   |      |   |           |  



The accompanying notes
are an integral part of these statements.



F-3



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##### Table of Contents

SANKYO COMPANY, LIMITED

CONSOLIDATED BALANCE SHEETS  (Continued)



As of March 31, 2004 and 2005



|                                                                                                  |  |                 |         |   |      |   |           |  
|------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | ---- | - | --------- | -
|                                                                                                  |  | Yen in millions |        
|                                                                                                  |  | 2004            |         |   | 2005 |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                              |  |                 |         |   |      |   |           |  
|Current liabilities:                                                                              |  |                 |         |   |      |   |           |  
|Short-term borrowings                                                                             |  | ¥               | 17,636  |   |      | ¥ | 19,308    |  
|Current portion of long-term debt                                                                 |  |                 | 3,650   |   |      |   | 2,866     |  
|Notes and accounts payable, trade                                                                 |  |                 | 50,743  |   |      |   | 54,434    |  
|Other payable and accrued expenses                                                                |  |                 | 58,299  |   |      |   | 67,183    |  
|Accrued compensation                                                                              |  |                 | 16,988  |   |      |   | 19,314    |  
|Accrued income taxes                                                                              |  |                 | 12,723  |   |      |   | 16,447    |  
|Other                                                                                             |  |                 | 13,598  |   |      |   | 13,555    |  
|                                                                                                  |  |                 |         |   |      |   |           |  
|Total current liabilities                                                                         |  |                 | 173,637 |   |      |   | 193,107   |  
|                                                                                                  |  |                 |         |   |      |   |           |  
|Long-term liabilities:                                                                            |  |                 |         |   |      |   |           |  
|Long-term debt                                                                                    |  |                 | 6,212   |   |      |   | 5,899     |  
|Accrued pension and severance costs                                                               |  |                 | 74,496  |   |      |   | 73,408    |  
|Other                                                                                             |  |                 | 8,615   |   |      |   | 9,054     |  
|                                                                                                  |  |                 |         |   |      |   |           |  
|                                                                                                  |  |                 | 89,323  |   |      |   | 88,361    |  
|                                                                                                  |  |                 |         |   |      |   |           |  
|Minority interest in consolidated subsidiaries                                                    |  |                 | 11,017  |   |      |   | 11,552    |  
|                                                                                                  |  |                 |         |   |      |   |           |  
|Commitments and contingent liabilities                                                            |  |                 |         |   |      |   |           |  
|                                                                                                  |  |                
|Shareholders equity:                                                                             |  |                 |         |   |      |   |           |  
|Common stock, no par value Authorized 1,168,099,000 shares issued            439,498,765 shares |  |                 | 68,793  |   |      |   | 68,793    |  
|Additional paid-in capital                                                                        |  |                 | 67,225  |   |      |   | 67,222    |  
|Retained earnings                                                                                 |  |                 | 535,488 |   |      |   | 578,029   |  
|Accumulated other comprehensive income                                                            |  |                 | 14,857  |   |      |   | 14,691    |  
|Treasury stock, at cost(2004  9,956,114 shares, 2005  9,990,256 shares)                         |  |                 | (20,336 | ) |      |   | (20,412   | )
|                                                                                                  |  |                 |         |   |      |   |           |  
|                                                                                                  |  |                 | 666,027 |   |      |   | 708,323   |  
|                                                                                                  |  |                 |         |   |      |   |           |  
|                                                                                                  |  | ¥               | 940,004 |   |      | ¥ | 1,001,343 |  
|                                                                                                  |  |                 |         |   |      |   |           |  



The accompanying notes
are an integral part of these statements.



F-4



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##### Table of Contents

SANKYO COMPANY, LIMITED

CONSOLIDATED STATEMENTS OF INCOME



For the Years Ended March 31, 2003, 2004 and 2005



|                                                           |  |                 |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------- |  | --------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                           |  | Yen in millions |        
|                                                           |  | 2003            |         |   | 2004 |   |         | 2005 | 
|Net revenue                                                |  | ¥               | 576,270 |   |      | ¥ | 601,273 |      |  | ¥ | 591,762 |  
|                                                           |  |                 |         |   |      |   |         |      |  |   |         |  
|Costs and expenses:                                        |  |                 |         |   |      |   |         |      |  |   |         |  
|Cost of sales                                              |  |                 | 233,067 |   |      |   | 228,839 |      |  |   | 223,937 |  
|Research and development                                   |  |                 | 84,453  |   |      |   | 93,597  |      |  |   | 85,242  |  
|Selling, general and administrative                        |  |                 | 178,432 |   |      |   | 194,004 |      |  |   | 196,660 |  
|                                                           |  |                 |         |   |      |   |         |      |  |   |         |  
|                                                           |  |                 | 495,952 |   |      |   | 516,440 |      |  |   | 505,839 |  
|                                                           |  |                 |         |   |      |   |         |      |  |   |         |  
|Operating income                                           |  |                 | 80,318  |   |      |   | 84,833  |      |  |   | 85,923  |  
|                                                           |  |                 |         |   |      |   |         |      |  |   |         |  
|Other income (expenses):                                   |  |                 |         |   |      |   |         |      |  |   |         |  
|Interest and dividend income                               |  |                 | 2,163   |   |      |   | 1,792   |      |  |   | 2,202   |  
|Interest expense                                           |  |                 | (616    | ) |      |   | (466    | )    |  |   | (484    | )
|Foreign exchange gain (loss), net                          |  |                 | (307    | ) |      |   | (45     | )    |  |   | 31      |  
|Gain (loss) on marketable securities, net                  |  |                 | (4,171  | ) |      |   | 743     |      |  |   | 974     |  
|Other income (expense), net                                |  |                 | 421     |   |      |   | (1,536  | )    |  |   | 1,060   |  
|                                                           |  |                 |         |   |      |   |         |      |  |   |         |  
|                                                           |  |                 | (2,510  | ) |      |   | 488     |      |  |   | 3,783   |  
|                                                           |  |                 |         |   |      |   |         |      |  |   |         |  
|Income before income taxes and minority interest           |  |                 | 77,808  |   |      |   | 85,321  |      |  |   | 89,706  |  
|                                                           |  |                 |        
|Income taxes:                                              |  |                 |         |   |      |   |         |      |  |   |         |  
|Current                                                    |  |                 | 44,621  |   |      |   | 38,447  |      |  |   | 32,579  |  
|Deferred                                                   |  |                 | (2,116  | ) |      |   | 1,950   |      |  |   | (77     | )
|                                                           |  |                 |         |   |      |   |         |      |  |   |         |  
|                                                           |  |                 | 42,505  |   |      |   | 40,397  |      |  |   | 32,502  |  
|                                                           |  |                 |         |   |      |   |         |      |  |   |         |  
|Income from continuing operations before minority interest |  |                 | 35,303  |   |      |   | 44,924  |      |  |   | 57,204  |  
|Minority interest in income of consolidated subsidiaries   |  |                 | 362     |   |      |   | 514     |      |  |   | 704     |  
|                                                           |  |                 |         |   |      |   |         |      |  |   |         |  
|Income from continuing operations                          |  |                 | 34,941  |   |      |   | 44,410  |      |  |   | 56,500  |  
|                                                           |  |                 |         |   |      |   |         |      |  |   |         |  
|Discontinued operations:                                   |  |                 |         |   |      |   |         |      |  |   |         |  
|Loss from operations of discontinued business              |  |                 | 149     |   |      |   | 10,332  |      |  |   |        |  
|Income tax benefit                                         |  |                 | (59     | ) |      |   | (4,133  | )    |  |   |        |  
|                                                           |  |                 |         |   |      |   |         |      |  |   |         |  
|Loss from discontinued operations                          |  |                 | 90      |   |      |   | 6,199   |      |  |   |        |  
|                                                           |  |                 |         |   |      |   |         |      |  |   |         |  
|Net income                                                 |  | ¥               | 34,851  |   |      | ¥ | 38,211  |      |  | ¥ | 56,500  |  
|                                                           |  |                 |         |   |      |   |         |      |  |   |         |  



The accompanying notes
are an integral part of these statements.



F-5



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##### Table of Contents

SANKYO COMPANY, LIMITED

CONSOLIDATED STATEMENTS OF INCOME (Continued)



For the Years Ended March 31, 2003, 2004 and 2005



|                                         |  |      |       |      |   |        |  |   |       
|---------------------------------------- |  | ---- | ----- | ---- | - | ------ |  | - | ------
|                                         |  | Yen 
|                                         |  | 2003 |       | 2004 |   | 2005  
|Per share amounts:                       |  |      |       |      |   |        |  |   |       
|Continuing operations per common share   |  |      |       |      |   |        |  |   |       
| Basic                                  |  | ¥    | 79.17 |      | ¥ | 101.61 |  | ¥ | 131.54
|                                         |  |      |       |      |   |        |  |   |       
| Diluted                                |  |      | 79.17 |      |   | 101.60 |  |   | 131.49
|                                         |  |      |       |      |   |        |  |   |       
|Discontinued operations per common share |  |      |       |      |   |        |  |   |       
| Basic                                  |  |      | 0.20  |      |   | 14.18  |  |   |      
|                                         |  |      |       |      |   |        |  |   |       
| Diluted                                |  |      | 0.20  |      |   | 14.18  |  |   |      
|                                         |  |      |       |      |   |        |  |   |       
|Net income per common share              |  |      |       |      |   |        |  |   |       
| Basic                                  |  |      | 78.97 |      |   | 87.43  |  |   | 131.54
|                                         |  |      |       |      |   |        |  |   |       
| Diluted                                |  |      | 78.97 |      |   | 87.42  |  |   | 131.49
|                                         |  |      |       |      |   |        |  |   |       
|Cash dividends                           |  |      | 25.00 |      |   | 25.00  |  |   | 32.50 
|                                         |  |      |       |      |   |        |  |   |       



The accompanying notes
are an integral part of these statements.



F-6



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##### Table of Contents

SANKYO COMPANY, LIMITED

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY



Year ended March 31



|                                                                   |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|------------------------------------------------------------------ |  | --------------- | ------ | -------------------------- | - | ----------------- |  | - | ----------------------------------- | - |  | ---------------------- | ------ | - | ----- | - | ------- | - |  | - | ------- | -
|                                                                   |  | Yen in millions |       
|                                                                   |  | Common stock    |        | Additional paid-in capital |   | Retained earnings |  |   | Accumulatedothercomprehensiveincome |   |  | Treasury stock,at cost |        |   | Total |  
|Balance at March 31, 2002                                          |  | ¥               | 68,793 |                            | ¥ | 66,862            |  | ¥ | 502,604                             |   |  | ¥                      | 11,890 |   |       | ¥ | (10,181 | ) |  | ¥ | 639,968 |  
|Comprehensive income:                                              |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|Net income                                                         |  |                 |        |                            |   |                   |  |   | 34,851                              |   |  |                        |        |   |       |   |         |   |  |   | 34,851  |  
|Other comprehensive income (loss), net of tax                     |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|Unrealized loss on securities, net of reclassification adjustment  |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        | (2,944 | ) |       |   |         |   |  |   | (2,944  | )
|Minimum pension liability adjustment                               |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        | (1,775 | ) |       |   |         |   |  |   | (1,775  | )
|Foreign currency translation adjustments                           |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        | (4,536 | ) |       |   |         |   |  |   | (4,536  | )
|                                                                   |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|Total comprehensive income                                         |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   | 25,596  |  
|                                                                   |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|Dividends paid                                                     |  |                 |        |                            |   |                   |  |   | (11,048                             | ) |  |                        |        |   |       |   |         |   |  |   | (11,048 | )
|Purchase of treasury stock                                         |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        |        |   |       |   | (8,282  | ) |  |   | (8,282  | )
|                                                                   |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|Balance at March 31, 2003                                          |  |                 | 68,793 |                            |   | 66,862            |  |   | 526,407                             |   |  |                        | 2,635  |   |       |   | (18,463 | ) |  |   | 646,234 |  
|                                                                   |  |                 |        |                            |   |                  
|Comprehensive income:                                              |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|Net income                                                         |  |                 |        |                            |   |                   |  |   | 38,211                              |   |  |                        |        |   |       |   |         |   |  |   | 38,211  |  
|Other comprehensive income (loss), net of tax                     |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|Unrealized gains on securities, net of reclassification adjustment |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        | 14,443 |   |       |   |         |   |  |   | 14,443  |  
|Minimum pension liability adjustment                               |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        | 1,238  |   |       |   |         |   |  |   | 1,238   |  
|Foreign currency translation adjustments                           |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        | (3,459 | ) |       |   |         |   |  |   | (3,459  | )
|                                                                   |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|Total comprehensive income                                         |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   | 50,433  |  
|                                                                   |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|Compensatory stock options                                         |  |                 |        |                            |   | 363               |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   | 363     |  
|Dividends paid                                                     |  |                 |        |                            |   |                   |  |   | (10,983                             | ) |  |                        |        |   |       |   |         |   |  |   | (10,983 | )
|Purchase of treasury stock                                         |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        |        |   |       |   | (20,020 | ) |  |   | (20,020 | )
|Retirement of treasury stock                                       |  |                 |        |                            |   |                   |  |   | (18,147                             | ) |  |                        |        |   |       |   | 18,147  |   |  |   |        |  
|                                                                   |  |                 |        |                            |   |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|Balance at March 31, 2004                                          |  | ¥               | 68,793 |                            | ¥ | 67,225            |  | ¥ | 535,488                             |   |  | ¥                      | 14,857 |   |       | ¥ | (20,336 | ) |  | ¥ | 666,027 |  



The accompanying notes
are an integral part of these statements.



F-7



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##### Table of Contents

SANKYO COMPANY, LIMITED

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (Continued)



Year ended March 31



|                                                                  |  |                 |        |                            |   |        |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|----------------------------------------------------------------- |  | --------------- | ------ | -------------------------- | - | ------ | ----------------- |  | - | ----------------------------------- | - |  | ---------------------- | ------ | - | ----- | - | ------- | - |  | - | ------- | -
|                                                                  |  | Yen in millions |       
|                                                                  |  | Common stock    |        | Additional paid-in capital |   |        | Retained earnings |  |   | Accumulatedothercomprehensiveincome |   |  | Treasury stock,at cost |        |   | Total |  
|Balance at March 31, 2004                                         |  | ¥               | 68,793 |                            | ¥ | 67,225 |                   |  | ¥ | 535,488                             |   |  | ¥                      | 14,857 |   |       | ¥ | (20,336 | ) |  | ¥ | 666,027 |  
|Comprehensive income:                                             |  |                 |        |                            |   |        |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|                                                                  |  |                 |        |                            |   |       
|Net income                                                        |  |                 |        |                            |   |        |                   |  |   | 56,500                              |   |  |                        |        |   |       |   |         |   |  |   | 56,500  |  
|Other comprehensive income (loss), net of tax                    |  |                 |        |                            |   |        |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|Unrealized loss on securities, net of reclassification adjustment |  |                 |        |                            |   |        |                   |  |   |                                     |   |  |                        | (204   | ) |       |   |         |   |  |   | (204    | )
|Minimum pension liability adjustment                              |  |                 |        |                            |   |        |                   |  |   |                                     |   |  |                        | (529   | ) |       |   |         |   |  |   | (529    | )
|Foreign currency translation adjustments                          |  |                 |        |                            |   |        |                   |  |   |                                     |   |  |                        | 567    |   |       |   |         |   |  |   | 567     |  
|                                                                  |  |                 |        |                            |   |        |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|Total comprehensive income                                        |  |                 |        |                            |   |        |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   | 56,334  |  
|                                                                  |  |                 |        |                            |   |        |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|Compensatory stock options                                        |  |                 |        |                            |   | (3     | )                 |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   | (3      | )
|Dividends paid                                                    |  |                 |        |                            |   |        |                   |  |   | (13,959                             | ) |  |                        |        |   |       |   |         |   |  |   | (13,959 | )
|Purchase of treasury stock                                        |  |                 |        |                            |   |        |                   |  |   |                                     |   |  |                        |        |   |       |   | (76     | ) |  |   | (76     | )
|                                                                  |  |                 |        |                            |   |        |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  
|Balance at March 31, 2005                                         |  | ¥               | 68,793 |                            | ¥ | 67,222 |                   |  | ¥ | 578,029                             |   |  | ¥                      | 14,691 |   |       | ¥ | (20,412 | ) |  | ¥ | 708,323 |  
|                                                                  |  |                 |        |                            |   |        |                   |  |   |                                     |   |  |                        |        |   |       |   |         |   |  |   |         |  



The accompanying notes
are an integral part of these statements



F-8



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##### Table of Contents

SANKYO COMPANY, LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS



For the Years Ended March 31, 2003, 2004 and 2005



|                                                                                       |  |                 |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------------------------- |  | --------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                       |  | Yen in millions |        
|                                                                                       |  | 2003            |         |   | 2004 |   |         | 2005 | 
|Cash flows from operating activities:                                                  |  |                 |         |   |      |   |         |      |  |   |         |  
|Net income                                                                             |  | ¥               | 34,851  |   |      | ¥ | 38,211  |      |  | ¥ | 56,500  |  
|Adjustments to reconcile net income to net cash provided by operating activities      |  |                 |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                          |  |                 | 26,130  |   |      |   | 26,760  |      |  |   | 31,101  |  
|Accrual for pension and severance costs, less payments                                 |  |                 | (1,744  | ) |      |   | (7,220  | )    |  |   | (1,816  | )
|(Gain) loss on sales of property, plant and equipment, net                             |  |                 | 71      |   |      |   | (2,647  | )    |  |   | (10,023 | )
|(Gain) loss in available-for-sale securities, net                                      |  |                 | 3,875   |   |      |   | (266    | )    |  |   | (717    | )
|Deferred income taxes                                                                  |  |                 | (2,116  | ) |      |   | 1,950   |      |  |   | (77     | )
|Changes in assets and liabilities:                                                     |  |                 |         |   |      |   |         |      |  |   |         |  
|Decrease in notes and accounts receivable, trade                                       |  |                 | 16,334  |   |      |   | 2,949   |      |  |   | 3,151   |  
|(Increase) decrease in inventories                                                     |  |                 | 5,353   |   |      |   | (2,259  | )    |  |   | 2,726   |  
|Increase (decrease) in notes and accounts payable, trade                               |  |                 | (8,494  | ) |      |   | (6,692  | )    |  |   | 3,637   |  
|Increase (decrease) in accrued income taxes                                            |  |                 | (2,298  | ) |      |   | (7,861  | )    |  |   | 2,757   |  
|(Increase) decrease in other current assets                                            |  |                 | 3,646   |   |      |   | 268     |      |  |   | (1,189  | )
|Increase (decrease) in other current liabilities                                       |  |                 | (5,962  | ) |      |   | 19,892  |      |  |   | 6,884   |  
|Other                                                                                  |  |                 | 1,281   |   |      |   | 2,321   |      |  |   | 469     |  
|                                                                                       |  |                 |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                              |  |                 | 70,927  |   |      |   | 65,406  |      |  |   | 93,403  |  
|                                                                                       |  |                 |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                                  |  |                 |         |   |      |   |         |      |  |   |         |  
|Additions to property, plant and equipment                                             |  |                 | (16,530 | ) |      |   | (26,457 | )    |  |   | (28,207 | )
|Proceeds from sales of property, plant and equipment                                   |  |                 | 1,286   |   |      |   | 4,493   |      |  |   | 15,167  |  
|Additions to intangible assets                                                         |  |                 | (10,892 | ) |      |   | (15,158 | )    |  |   | (1,501  | )
|Purchase of marketable securities and other securities investments                     |  |                 | (46,285 | ) |      |   | (63,493 | )    |  |   | (84,300 | )
|Proceeds from sales and maturities of marketable securities and securities investments |  |                 | 74,076  |   |      |   | 59,203  |      |  |   | 81,619  |  
|Increase in time deposits                                                              |  |                 | (10,900 | ) |      |   | (9,604  | )    |  |   | (7,889  | )
|Decrease in time deposits                                                              |  |                 | 11,832  |   |      |   | 9,763   |      |  |   | 10,842  |  
|Other                                                                                  |  |                 | (249    | ) |      |   | 660     |      |  |   | 735     |  
|                                                                                       |  |                 |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) investing activities                                    |  |                 | 2,338   |   |      |   | (40,593 | )    |  |   | (13,534 | )
|                                                                                       |  |                 |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                                  |  |                 |         |   |      |   |         |      |  |   |         |  
|Proceeds from issuance of long-term debt                                               |  |                 | 1,190   |   |      |   | 29      |      |  |   | 470     |  
|Repayments of long-term debt                                                           |  |                 | (5,808  | ) |      |   | (5,331  | )    |  |   | (1,282  | )
|Increase (decrease) in short-term borrowings                                           |  |                 | (2,629  | ) |      |   | 691     |      |  |   | 2,142   |  
|Purchase of treasury stock                                                             |  |                 | (8,282  | ) |      |   | (20,020 | )    |  |   | (76     | )
|Dividends paid                                                                         |  |                 | (11,203 | ) |      |   | (11,112 | )    |  |   | (14,069 | )
|Other                                                                                  |  |                 | (115    | ) |      |   |        |      |  |   | (124    | )
|                                                                                       |  |                 |         |   |      |   |         |      |  |   |         |  
|Net cash used in financing activities                                                  |  |                 | (26,847 | ) |      |   | (35,743 | )    |  |   | (12,939 | )
|                                                                                       |  |                 |         |   |      |   |         |      |  |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                           |  |                 | (1,164  | ) |      |   | (892    | )    |  |   | (176    | )
|                                                                                       |  |                 |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                   |  |                 | 45,254  |   |      |   | (11,822 | )    |  |   | 66,754  |  
|Cash and cash equivalents at beginning of the fiscal year                              |  |                 | 168,302 |   |      |   | 213,556 |      |  |   | 201,734 |  
|                                                                                       |  |                 |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of the fiscal year                                    |  | ¥               | 213,556 |   |      | ¥ | 201,734 |      |  | ¥ | 268,488 |  
|                                                                                       |  |                 |         |   |      |   |         |      |  |   |         |  



The accompanying notes
are an integral part of these statements.



F-9



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##### Table of Contents

SANKYO COMPANY, LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)



For the Years Ended March 31, 2003, 2004 and 2005



|                                              |  |   |        |  |   |        |  |   |       
|--------------------------------------------- |  | - | ------ |  | - | ------ |  | - | ------
|Supplemental data:                            |  |   |        |  |   |        |  |   |       
|Cash paid during the year for                |  |   |        |  |   |        |  |   |       
|Income taxes                                  |  | ¥ | 46,396 |  | ¥ | 41,746 |  | ¥ | 28,851
|Interest                                      |  |   | 617    |  |   | 465    |  |   | 484   
|                                              |  |   |        |  |   |        |  |   |       
|Non-cash investing and financing activities  |  |   |        |  |   |        |  |   |       
|Capital lease agreements                      |  | ¥ | 2,315  |  | ¥ | 827    |  | ¥ | 2,021 
|                                              |  |   |        |  |   |        |  |   |       



The accompanying notes
are an integral part of these statements



F-10



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##### Table of Contents

SANKYO COMPANY, LIMITED



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS



1. Nature of operations



Sankyo Company, Limited (the Company) and its subsidiaries
(collectively Sankyo) are primarily engaged in the research, development, manufacturing and marketing of pharmaceuticals, which include pravastatin, an antihyperlipidemic agent, and olmesartan, an antihypertensive agent, as well as other
products including food products, additives, and agrochemical products. Research and development activities are performed primarily in Japan, the United States, and Germany. Manufacturing operations of pharmaceuticals are located primarily in Japan
and Europe. Sankyo markets and distributes its products primarily in Japan, North America and Europe. Pravastatin (marketed as Mevalotin ® in Japan) accounted for 32%, 34% and 28% of total consolidated sales for the years ended March 31, 2003, 2004 and 2005, respectively.



2. Summary of significant accounting policies



Sankyo Company, Limited and its subsidiaries in Japan maintain their records and prepare
their financial statements in accordance with accounting principles generally accepted in Japan while its foreign subsidiaries maintain their records and prepare the financial statements in conformity with accounting principles generally accepted in
the countries of their domiciles. Certain adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to conform with accounting principles generally accepted in the United States of America
(U.S. GAAP). These adjustments were not recorded in the statutory books of account.



| | (1) | Significant accounting policies:
| | --- | --------------------------------



Basis of consolidation and accounting for investments in affiliated companies 



The consolidated financial statements include the accounts of Sankyo Company, Limited and those of its majority-owned
subsidiary companies. The Company also consolidates entities in which controlling interest exists through variable interests in accordance with Financial Accounting Standard Board (FASB) Interpretation No.46 (revised December 2003),
Consolidation of Variable Interest Entities(FIN 46R). The Company currently does not have any variable interest entities to be consolidated.



The results of certain foreign subsidiaries are reported in the consolidated financial statements using a December 31 year-end. There have been no
significant transactions with such subsidiaries during the period from January 1 to March 31. All intercompany transactions and accounts are eliminated in consolidation.



Investments in affiliated companies in which Sankyo has significant influence, but which it does not control, are stated at
cost plus equity in undistributed earnings. Consolidated net income includes Sankyos equity in current earnings or losses of such companies, after elimination of unrealized intercompany profits. If the value of an investment has declined and
is judged to be other than temporary, the investment is written down to its fair value.



Use of estimates 



The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates. The more significant estimates include: allowance for doubtful accounts, sales returns, inventory obsolescence, useful life of distribution and patent rights, impairment of long-lived assets, postretirement
benefit costs and obligations and other than temporary losses on marketable securities.



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##### Table of Contents

Translation of foreign currencies 



Foreign currency transactions are translated at the applicable rates of
exchange prevailing at the transaction dates. Foreign currency receivables and payables are translated at appropriate current year-end rates and the resulting translation gains or losses are taken into income.



All asset and liability accounts of foreign subsidiaries and affiliates are
translated into Japanese yen at exchange rates in effect at the balance sheet date and all income and expense accounts are translated using average rates during the year. The resulting translation adjustments are accumulated as a component of
accumulated other comprehensive income.



Cash and cash
equivalents 



Cash and cash equivalents include all
highly liquid investments, with original maturities of three months or less when purchased, that are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in
interest rates.



Allowance for doubtful accounts 



Allowance for doubtful accounts is the Companys best
estimate of the amount of probable credit losses in its existing receivables. The allowance is determined based on factors including, but not limited to, the Companys historical collection experience adjusted for the effects of current
economic environment, assessment of inherent risks, aging and financial performance of debtors. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered
remote.



Marketable securities 



Marketable securities consist of debt and equity securities. Debt
securities and equity securities designated as available-for-sale, whose fair values are readily determinable, are carried at fair value with unrealized gains or losses included as a component of accumulated other comprehensive income, net of
applicable taxes. Debt securities that are expected to be held-to-maturity are carried at amortized cost. Individual securities classified as either available-for-sale or held-to-maturity are reduced to net realizable value by a charge to income for
other than temporary declines in fair value. In determining if a decline in value is other than temporary, Sankyo considers the length of time and the extent to which the fair value has been less than the carrying value, the financial condition and
prospects of the company and Sankyos ability and intent to retain its investment in the company for a period of time sufficient to allow any anticipated recovery in market value. Realized gains and losses are determined on the average cost
method and are reflected in the statement of income.



Equity
securities in non-public companies 



Equity
securities in non-public companies are carried at cost as fair value is not readily determinable. If the value of a non-public equity investment is determined to have declined and such decline is judged to be other than temporary, Sankyo recognizes
the impairment of the investment and the carrying value is reduced to its fair value. Determination of impairment is based on the consideration of such factors as operating results, business plans and estimated future cash flows. Fair value is
determined through the use of such methodologies as discounted cash flows, valuation of recent transactions and comparable valuations of similar companies.



Inventories 



Inventories are valued at cost, not in excess of market, cost being determined on the average cost basis, except for the cost of finished
products carried by certain subsidiary companies which is determined on the first in, first out (FIFO) basis.



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##### Table of Contents

Property, plant and equipment and depreciation 



Property, plant and equipment are stated at cost. Depreciation of property,
plant and equipment except for certain buildings is primarily computed on the declining-balance method for Sankyo Company, Limited and Japanese subsidiaries, and on the straight-line method for foreign subsidiaries at rates based on estimated useful
lives of the assets, principally, ranging from 31 years up to 60 years for buildings and from 2 years up to 17 years for machinery and equipment. Depreciation expenses for property, plant and equipment for the fiscal years ended March 31, 2003, 2004
and 2005 were ¥25,090 million, ¥23,022 million and ¥25,142 million, respectively. Significant renewals and additions are capitalized at cost. Maintenance and repairs, and minor renewals and betterments are charged to income as incurred.



From the fiscal year beginning April 1, 2002, Sankyo adopted
the Statement of Financial Accounting Standard (FAS) No. 143, Accounting for Asset Retirement Obligations (FAS 143). FAS 143 requires full recognition of asset retirement obligations on the balance sheet from the point in
time at which a legal obligation exists. The obligation is required to be measured at fair value. The carrying value of the asset or assets to which the retirement obligation relates would be increased by an amount equal to the liability recognized.
This amount is included in the depreciable base of the asset and charged to income over its life as depreciation. The adoption of FAS 143 did not have a material impact on Sankyos results of operations and financial position.



Business combinations 



All business combinations are accounted for by the purchase method. The
excess of the acquisition cost, over the underlying net equity of the business acquired is allocated to identifiable assets and liabilities based on fair values at the date of acquisition. The unassigned residual value of the excess of the cost over
the underlying net assets acquired is recognized as goodwill.



Goodwill and intangible assets 



Goodwill and certain intangible assets that are determined to have an indefinite life are not amortized and are tested for impairment on an annual basis and more frequently between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value below its carrying amount. Fair value for those assets is generally determined using a discounted cash flow analysis.



Long-lived assets 



Sankyo periodically reviews the carrying value of its long-lived assets held and used, other than goodwill and intangible assets with indefinite lives,
and assets to be disposed of, whenever events or changes in circumstances indicated that the carrying amount may not be recoverable. Long-lived assets to be held and used are reviewed for impairment by comparing the carrying value of the assets with
their estimated future undiscounted cash flows. If it is determined that an impairment loss has occurred, the loss would be recognized during the period. The impairment loss would be calculated as the difference between the assets carrying value and
the present value of estimated net cash flows or comparable market values, giving consideration to recent operating performance. Long-lived assets that are to be disposed of other than by sale are considered held and used until they are disposed of.
Long-lived assets that are to be disposed of by sale are reported at the lower of their carrying value or fair value less cost to sell. Reductions in carrying value are recognized in the period in which the long-lived assets are classified as held
for sale.



Derivative financial instruments 



Sankyo employs derivative financial instruments, including
forward foreign currency exchange contracts, and interest rate swap agreements to manage its exposure to fluctuations in foreign currency exchange rates and interest rates. Sankyo does not use derivatives for speculation or trading purposes. Sankyo
recognizes all derivative instruments as assets or liabilities in the balance sheet and measures them at fair value. Changes in the fair value of derivatives are recorded each period in current earnings.



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Revenue recognition 



Revenue from sales of pharmaceutical and other products is recognized upon delivery which is considered to have occurred
when the customer has taken title to the products, and risk and reward of ownership have been transferred to the customer. In the case of arrangements where title to delivered products passes to distributors, but the substance of the transaction is
that of a consignment, Sankyo recognizes revenue when distributors sell the products to end users. In the case of sales made to a buyer where the price is not considered fixed or determinable or cash collection is not reasonably assured at the time
of delivery, Sankyo recognizes revenue when cash is collected from customers. Provisions for rebates, sales incentives, product returns and discounts to customers are provided for as reductions in determining sales in the same period the related
sales are recognized based on the conditions agreed with the customers.



Milestone payments received for the rights to distribute pharmaceutical products developed by Sankyo are deferred and recognized as revenue over the terms of the distribution agreements beginning on the product launch
date.



Research and development costs 



Research and development (R&D) costs are expensed as
incurred. These expenses include the costs of Sankyos proprietary R&D efforts as well as costs incurred in connection with Sankyos third-party collaboration efforts. Milestone payments made by Sankyo to third parties under contracted
R&D arrangements are expensed prior to regulatory approval. The milestone payments after obtaining regulatory approval are recorded as other intangible assets.



Shipping and handling costs 



Shipping and handling, warehousing and internal transfer costs for finished goods are included in selling and marketing
expenses. Shipping and handling costs were ¥6,813 million, ¥6,742 million and ¥7,197 million for the years ended March 31, 2003, 2004 and 2005, respectively.



Advertising expenses 



Advertising costs are expensed as incurred. Advertising costs were ¥16,595 million, ¥14,561 million and ¥14,008 million for the years ended
March 31, 2003, 2004 and 2005, respectively.



Income taxes




The provision for income taxes is computed based
on the pretax income included in the consolidated statements of income. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.



Net income per share 



Basic net income per common share is calculated by dividing net income by
the weighted-average number of shares outstanding during the reported period. The calculation of diluted net income per common share is similar to the calculation of basic net income per share, except that the weighted-average number of shares
outstanding includes the additional dilution from the assumed exercise of dilutive stock options.



F-14



---

##### Table of Contents

Stock-based compensation 



Sankyo accounts for its stock-based compensation plans under the recognition and measurements principles of the Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations. Sankyo records compensation expense for its stock option plans under variable plan accounting. The
following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS No. 123, Accounting for Stock-Based Compensation (FAS 123). See Note 13 to the
consolidated financial statements for weighted-average assumptions used in the stock option pricing model.



|                                                                                                                                            |  |                             |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                            |  | Yen in millions             |       
|                                                                                                                                            |  | For the year ended March 31 |       
|                                                                                                                                            |  | 2003                        |        |   | 2004 |   |        | 2005 | 
|Income from continuing operations:                                                                                                          |  |                             |        |   |      |   |        |      |  |   |        |  
|As reported                                                                                                                                 |  | ¥                           | 34,941 |   |      | ¥ | 44,410 |      |  | ¥ | 56,500 |  
|Add: Total stock-based compensation expense recorded in net income from continuing operations                                               |  |                             |       |   |      |   | 363    |      |  |   | (3     | )
|Deduct: Total stock-based compensation expense (income) determined under fair value based method for all awards, net of related tax
effects |  |                             | (92    | ) |      |   | (104   | )    |  |   | (214   | )
|                                                                                                                                            |  |                             |        |   |      |   |        |      |  |   |        |  
|Pro forma                                                                                                                                   |  | ¥                           | 34,849 |   |      | ¥ | 44,669 |      |  | ¥ | 56,283 |  
|                                                                                                                                            |  |                             |        |   |      |   |        |      |  |   |        |  
|Net income:                                                                                                                                 |  |                             |        |   |      |   |        |      |  |   |        |  
|As reported                                                                                                                                 |  | ¥                           | 34,851 |   |      | ¥ | 38,211 |      |  | ¥ | 56,500 |  
|Add: Total stock-based compensation expense recorded in net income from continuing operations                                               |  |                             |       |   |      |   | 363    |      |  |   | (3     | )
|Deduct: Total stock-based compensation expense (income) determined under fair value based method for all awards, net of related tax
effects |  |                             | (92    | ) |      |   | (104   | )    |  |   | (214   | )
|                                                                                                                                            |  |                             |        |   |      |   |        |      |  |   |        |  
|Pro forma                                                                                                                                   |  | ¥                           | 34,759 |   |      | ¥ | 38,470 |      |  | ¥ | 56,283 |  
|                                                                                                                                            |  |                             |        |   |      |   |        |      |  |   |        |  
|Per share amounts:                                                                                                                          |  |                             |        |   |      |   |        |      |  |   |        |  
|Income from continuing operations                                                                                                           |  |                             |        |   |      |   |        |      |  |   |        |  
| Basic                                                                                                                                     |  |                             |        |   |      |   |        |      |  |   |        |  
|As reported                                                                                                                                 |  | ¥                           | 79.17  |   |      | ¥ | 101.61 |      |  | ¥ | 131.54 |  
|Pro forma                                                                                                                                   |  |                             | 78.96  |   |      |   | 102.20 |      |  |   | 131.04 |  
|                                                                                                                                            |  |                             |       
| Diluted                                                                                                                                   |  |                             |        |   |      |   |        |      |  |   |        |  
|As reported                                                                                                                                 |  | ¥                           | 79.17  |   |      | ¥ | 101.60 |      |  | ¥ | 131.49 |  
|Pro forma                                                                                                                                   |  |                             | 78.96  |   |      |   | 102.19 |      |  |   | 130.99 |  
|                                                                                                                                            |  |                             |       
|Net income                                                                                                                                  |  |                             |        |   |      |   |        |      |  |   |        |  
| Basic                                                                                                                                     |  |                             |        |   |      |   |        |      |  |   |        |  
|As reported                                                                                                                                 |  | ¥                           | 78.97  |   |      | ¥ | 87.43  |      |  | ¥ | 131.54 |  
|Pro forma                                                                                                                                   |  |                             | 78.76  |   |      |   | 88.02  |      |  |   | 131.04 |  
|                                                                                                                                            |  |                             |       
| Diluted                                                                                                                                   |  |                             |        |   |      |   |        |      |  |   |        |  
|As reported                                                                                                                                 |  | ¥                           | 78.97  |   |      | ¥ | 87.42  |      |  | ¥ | 131.49 |  
|Pro forma                                                                                                                                   |  |                             | 78.76  |   |      |   | 88.01  |      |  |   | 130.99 |  



| | (2) | New accounting standards adopted:
| | --- | ---------------------------------



Impairment of securities investments 



In November 2003, the EITF reached consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments (EITF 03-1). EITF 03-1 established additional disclosure requirements for each category of FAS No. 115 investments in a loss position. In March 2004, the EITF also reached a consensus on the additional accounting guidance for
other-than-temporary impairments and its application to debt and equity investments. In accordance with the new disclosure requirements under EITF 03-1, Note 6 has been expanded to include certain additional information regarding Sankyos
securities investments.



F-15



---

##### Table of Contents

| | (3) | Recent pronouncement:
| | --- | ---------------------



Accounting for share-based payments 



In December 2004, the FASB revised FAS No. 123 (FAS 123(R)) to require expense recognition for share-based payments. This statement shall be
effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The adoption of FAS 123(R) is not expected to have a material impact on Sankyos results of operations and financial position.



Inventory cost 



In December 2004, the FASB issued FAS No. 151, Inventory Costs (FAS
151). This statement amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material.
The provisions of this statement shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of FAS 151 is not expected to have a material impact on Sankyos results of operations and
financial position.



Accounting for exchanges of nonmonetary
assets 



In December 2004, the FASB issued FAS No.
153, Accounting for Exchanges of Nonmonetary Assets (FAS 153). This statement addresses financial accounting and reporting for exchange transactions of nonmonetary assets on a fair value basis. This statement shall be effective for
fiscal years beginning after June 15, 2005. The adoption of FAS 153 is not expected to have a material impact on Sankyos results of operations and financial position.



Accounting for Limited Partnership Entities 



In June 2005 the FASB ratified Emerging Issues Task Force (EITF) 04-5, Determining Whether a General
Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. Under EITF 04-5, the general partners in a limited partnership or similar entity are presumed to
control that limited partnership regardless of the extent of the general partners ownership interest in the limited partnership. A general partner should assess the limited partners rights and their impact on the presumption of control.
If the limited partners have either (a) the substantive ability to dissolve the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights, the general partners do not control the limited
partnership. For general partners of all new limited partnerships formed and for existing limited partnerships for which the partnership agreement is modified, EITF 04-5 is effective after June 29, 2005. For general partners in all other limited
partnerships, EITF 04-5 is effective for the first reporting period in fiscal years beginning after December 15, 2005, and allows either of two transition methods. The Company is currently determining the effect of EITF 04-5 on the Companys
consolidated financial statements.



| | (4) | Reclassifications
| | --- | -----------------



Certain amounts in the consolidated financial statements for the years ended March 31, 2003 and 2004 have been reclassified to conform to the 2005
presentations.



F-16



---

##### Table of Contents

3. Inventories



Inventories comprise the following:



|                           |  |                 |        |      |   |       
|-------------------------- |  | --------------- | ------ | ---- | - | ------
|                           |  | Yen in millions
|                           |  | March 31       
|                           |  | 2004            |        | 2005
|Finished products          |  | ¥               | 49,272 |      | ¥ | 46,720
|Work in process            |  |                 | 28,937 |      |   | 30,807
|Raw materials and supplies |  |                 | 19,316 |      |   | 17,428
|                           |  |                 |        |      |   |       
|                           |  | ¥               | 97,525 |      | ¥ | 94,955
|                           |  |                 |        |      |   |       



Finished goods include inventory
consigned to others totaling ¥6,034 million and ¥5,787 million, at March 31, 2004 and 2005, respectively.



4. Allowances



An analysis of activity within the allowance for doubtful accounts relating to trade notes and accounts receivable, accruals for product returns, customer rebates and incentives for the years ended March 31, 2003,
2004 and 2005 is as follows:



Information related to the Companys
allowance for doubtful accounts was as follows:



|                                                     |  |                 |       |   |      |   |     |      |  |   |      |  
|---------------------------------------------------- |  | --------------- | ----- | - | ---- | - | --- | ---- |  | - | ---- | -
|                                                     |  | Yen in millions |      
|                                                     |  | March 31        |      
|                                                     |  | 2003            |       |   | 2004 |   |     | 2005 | 
|Allowance for doubtful accounts at beginning of year |  | ¥               | 1,018 |   |      | ¥ | 927 |      |  | ¥ | 884  |  
|Provision for doubtful accounts                      |  |                 | 60    |   |      |   | 16  |      |  |   | (637 | )
|Write-offs                                           |  |                 | (153  | ) |      |   | (5  | )    |  |   | (16  | )
|Translation adjustments and other                    |  |                 | 2     |   |      |   | (54 | )    |  |   | (7   | )
|                                                     |  |                 |       |   |      |   |     |      |  |   |      |  
|Allowance for doubtful accounts at end of year       |  | ¥               | 927   |   |      | ¥ | 884 |      |  | ¥ | 224  |  
|                                                     |  |                 |       |   |      |   |     |      |  |   |      |  



Information related to the
Companys accrual for product returns was as follows:



|                                                |  |                 |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------- |  | --------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                |  | Yen in millions |       
|                                                |  | March 31        |       
|                                                |  | 2003            |        |   | 2004 |   |        | 2005 | 
|Accrual for product return at beginning of year |  | ¥               | 5,459  |   |      | ¥ | 4,965  |      |  | ¥ | 4,642  |  
|Provision for product returns                   |  |                 | 2,719  |   |      |   | 4,079  |      |  |   | 4,437  |  
|Balances utilized                               |  |                 | (3,213 | ) |      |   | (4,402 | )    |  |   | (3,193 | )
|                                                |  |                 |        |   |      |   |        |      |  |   |        |  
|Accrual for product return at end of year       |  | ¥               | 4,965  |   |      | ¥ | 4,642  |      |  | ¥ | 5,886  |  
|                                                |  |                 |        |   |      |   |        |      |  |   |        |  



F-17



---

##### Table of Contents

Information related to the Companys accrual for rebates and incentives was as follows:



|                                                        |  |                 |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------- |  | --------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                        |  | Yen in millions |        
|                                                        |  | March 31        |        
|                                                        |  | 2003            |         |   | 2004 |   |         | 2005 | 
|Accrual for rebates and incentives at beginning of year |  | ¥               | 3,986   |   |      | ¥ | 5,478   |      |  | ¥ | 5,618   |  
|Provision for rebates and incentives                    |  |                 | 53,443  |   |      |   | 58,999  |      |  |   | 61,659  |  
|Balances utilized                                       |  |                 | (51,951 | ) |      |   | (58,859 | )    |  |   | (60,470 | )
|                                                        |  |                 |         |   |      |   |         |      |  |   |         |  
|Accrual for rebates and incentives at end of year       |  | ¥               | 5,478   |   |      | ¥ | 5,618   |      |  | ¥ | 6,807   |  
|                                                        |  |                 |         |   |      |   |         |      |  |   |         |  



5. Related party transactions



Account balances and transactions with affiliated companies accounted for
under the equity method are presented below:



|                           |  |                     |       |                 |   |       |  |   |   
|-------------------------- |  | ------------------- | ----- | --------------- | - | ----- |  | - | --
|                           |  |                     |       | Yen in millions
|                           |  |                     |       | March 31       
|                           |  |                     |       | 2004            |   | 2005 
|Accounts receivable, trade |  |                     |       |                 | ¥ | 965   |  | ¥ |  
|                           |  |                     |       |                 |   |       |  |   |   
|                           | 
|                           |  | Yen in millions    
|                           |  | Year ended March 31
|                           |  | 2003                |       | 2004            |   | 2005 
|Sales                      |  | ¥                   | 3,226 |                 | ¥ | 2,909 |  | ¥ | 93
|                           |  |                     |       |                 |   |       |  |   |   
|Purchases                  |  | ¥                   | 5     |                 | ¥ | 3     |  | ¥ | 3 
|                           |  |                     |       |                 |   |       |  |   |   



Dividends from affiliated companies
accounted for under the equity method for the years ended March 31, 2003, 2004 and 2005 were ¥18 million, ¥14 million and ¥8 million, respectively.



6. Marketable securities and other securities investments



Marketable securities and other securities investments both current and long-term include debt and equity securities of which the aggregate cost, gross unrealized gains
and losses and fair value pertaining to available-for-sale securities and held-to-maturity securities are as follows:



|                                        |  |                 |  |                      |  |                       |       |            |          |      |          |                      |         |                       |       |            |         
|--------------------------------------- |  | --------------- |  | -------------------- |  | --------------------- | ----- | ---------- | -------- | ---- | -------- | -------------------- | ------- | --------------------- | ----- | ---------- | --------
|                                        |  | Yen in millions
|                                        |  | March 31, 2004  |  | March 31, 2005      
|                                        |  | Cost            |  | Grossunrealizedgains |  | Grossunrealizedlosses |       | Fair value |          | Cost |          | Grossunrealizedgains |         | Grossunrealizedlosses |       | Fair value
|Available-for-sale:                     |  |                 |  |                      |  |                       |       |            |          |      |          |                      |         |                       |       |            |         
|Equity securities                       |  | ¥19,240         |  | ¥47,889              |  |                       | ¥(2)  |            | ¥67,127  |      | ¥ 20,933 |                      | ¥47,715 |                       | ¥(1)  |            | ¥ 68,647
|Held-to-maturity                        |  |                 |  |                      |  |                       |       |            |          |      |          |                      |         |                       |       |            |         
|Japanese government and municipal bonds |  | 22,731          |  | 4                    |  |                       |      |            | 22,735   |      | 29,091   |                      |        |                       |      |            | 29,091  
|Corporate debt securities               |  | 58,554          |  | 136                  |  |                       | (36)  |            | 58,654   |      | 54,225   |                      | 145     |                       | (13)  |            | 54,357  
|                                        |  |                 |  |                      |  |                       |       |            |          |      |          |                      |         |                       |       |            |         
|Total                                   |  | ¥100,525        |  | ¥48,029              |  |                       | ¥(38) |            | ¥148,516 |      | ¥104,249 |                      | ¥47,860 |                       | ¥(14) |            | ¥152,095
|                                        |  |                 |  |                      |  |                       |       |            |          |      |          |                      |         |                       |       |            |         



At March 31, 2005, debt securities
classified as held-to-maturity are due within 5 years.



F-18



---

##### Table of Contents

Proceeds from sales of available-for-sale securities were ¥76 million, ¥2,151 million and ¥1,184 million for
the years ended March 31, 2003, 2004 and 2005, respectively. Gross realized gains were ¥39 million, ¥821 million and ¥984 million and gross realized losses were ¥4,942 million, ¥81 million and ¥10 million for the years ended
March 31, 2003, 2004 and 2005, respectively.



Certain investments, included in
marketable securities and other securities investments, with an aggregate carrying amounts of ¥15,682 million and ¥13,035 million at March 31, 2004 and 2005, respectively, consisted of investments in equity securities of non-public
companies. These investments are recorded at cost. The Company did not identify any events or changes in circumstances that may have had a significant adverse effect on the fair value of the investments and the Company determined that it is not
reasonably practicable to estimate the fair value of such investments.



The
following table presents the gross unrealized losses on, and fair value of, Sankyos investment securities with unrealized losses, aggregated by investment category and the length of time that individual investment securities have been in a
continuous unrealized loss position, at March 31, 2005.



|                            |  |                     |        |                   |   |           |  |                  |       |           |   |                  |  |   |        |  |   |   
|--------------------------- |  | ------------------- | ------ | ----------------- | - | --------- |  | ---------------- | ----- | --------- | - | ---------------- |  | - | ------ |  | - | --
|                            |  | Yen in millions    
|                            |  | Less than 12 months |        | 12 months or more |   | Total    
|                            |  | Fairvalue           |        | Unrealizedlosses  |   | Fairvalue |  | Unrealizedlosses |       | Fairvalue |   | Unrealizedlosses
|Available-for-sale:         |  |                     |        |                   |   |           |  |                  |       |           |   |                  |  |   |        |  |   |   
|Equity securities           |  | ¥                   |       |                   | ¥ |          |  | ¥                | 9     |           | ¥ | 1                |  | ¥ | 9      |  | ¥ | 1 
|Held-to-maturity Securities |  |                     | 12,051 |                   |   | 6         |  |                  | 1,993 |           |   | 7                |  |   | 14,044 |  |   | 13
|                            |  |                     |        |                   |   |           |  |                  |       |           |   |                  |  |   |        |  |   |   
|Total                       |  | ¥                   | 12,051 |                   | ¥ | 6         |  | ¥                | 2,002 |           | ¥ | 8                |  | ¥ | 14,053 |  | ¥ | 14
|                            |  |                     |        |                   |   |           |  |                  |       |           |   |                  |  |   |        |  |   |   



In evaluating the factors for
available-for-sale securities whose fair values are readily determinable, Sankyo presumes a decline in value to be other-than-temporary if the fair value of the security is below its original cost for an extended period of time (generally a period
of six months). This criteria is employed as a threshold to identify securities which may have a decline in value that is other-than-temporary. The presumption of an other-than-temporary impairment in such cases may be overcome if there is evidence
to support that the decline is temporary in nature due to the existence of other factors which overcome the duration or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when such decline has not
existed for an extended period of time, as a result of considering specific factors which may indicate the decline in the fair value is other-than-temporary.



At March 31, 2005, Sankyo determined that the decline in value for securities with unrealized losses shown in the above table is temporary in nature.



7. Leased assets



Sankyo leases certain assets under capital lease and operating lease agreements. An analysis of leased assets under capital leases is as
follows:



|                         |  |                 |        |   |      |   |        |  
|------------------------ |  | --------------- | ------ | - | ---- | - | ------ | -
|                         |  | Yen in millions |       
|                         |  | March 31        |       
|Class of property        |  | 2004            |        |   | 2005 |  
|Machinery and equipment  |  | ¥               | 11,042 |   |      | ¥ | 11,749 |  
|Other leased assets      |  |                 | 56     |   |      |   | 35     |  
|Accumulated amortization |  |                 | (7,919 | ) |      |   | (7,674 | )
|                         |  |                 |        |   |      |   |        |  
|                         |  | ¥               | 3,179  |   |      | ¥ | 4,110  |  
|                         |  |                 |        |   |      |   |        |  



Amortization expense under capital
leases for the years ended March 31, 2003, 2004 and 2005 were ¥2,842 million, ¥2,535 million and ¥2,479 million, respectively.



F-19



---

##### Table of Contents

The following is a schedule by year of the future minimum lease payments under capital leases together with the present
value of the net minimum lease payments as of March 31, 2005:



|                                                     |  |                 |      
|---------------------------------------------------- |  | --------------- | -----
|                                                     |  | Yen in millions
|Year ending March 31:                                |  |                 |      
|2006                                                 |  | ¥               | 2,171
|2007                                                 |  |                 | 1,832
|2008                                                 |  |                 | 754  
|2009                                                 |  |                 | 349  
|2010                                                 |  |                 | 155  
|Later years                                          |  |                 | 95   
|                                                     |  |                 |      
|Total minimum lease payments                         |  |                 | 5,356
|Less  Amount representing estimated executory costs |  |                 | 986  
|                                                     |  |                 |      
|Net minimum lease payments                           |  |                 | 4,370
|Less  Amount representing interest                  |  |                 | 109  
|                                                     |  |                 |      
|Present value of net minimum lease payments          |  |                 | 4,261
|Less  Current obligations                           |  |                 | 1,735
|                                                     |  |                 |      
|                                                     | 
|Long-term capital lease obligations                  |  | ¥               | 2,526
|                                                     |  |                 |      



Expense under operating leases for
premises and machinery and equipment for the years ended March 31, 2003, 2004 and 2005 were ¥4,534 million, ¥4,957 million and ¥5,187 million, respectively. The minimum rental payments required under operating leases that have initial or
remaining noncancelable lease terms in excess of one year at March 31, 2005 are as follows:



|                             |  |                 |      
|---------------------------- |  | --------------- | -----
|                             |  | Yen in millions
|Year ending March 31:        |  |                 |      
|2006                         |  | ¥               | 1,105
|2007                         |  |                 | 882  
|2008                         |  |                 | 745  
|2009                         |  |                 | 621  
|2010                         |  |                 | 496  
|Later years                  |  |                 | 1,386
|                             |  |                 |      
|                             | 
|Total minimum future rentals |  | ¥               | 5,235
|                             |  |                 |      



8. Goodwill and intangible assets



Intangible assets, other than those with indefinate lives, are amortized
on a straight-line basis over their estimated useful life. The weighted average amortization periods for acquired patent rights, distribution rights and software are 5 years, 10 years and 5 years, respectively.



F-20



---

##### Table of Contents

Intangible assets subject to amortization comprise the following:



|                          |  |                      |        |                         |      |        |                      |  |                         |        |  |   |         |  
|------------------------- |  | -------------------- | ------ | ----------------------- | ---- | ------ | -------------------- |  | ----------------------- | ------ |  | - | ------- | -
|                          |  | Yen in millions      |       
|                          |  | March 31             |       
|                          |  | 2004                 |        |                         | 2005 |       
|                          |  | Gross carryingamount |        | Accumulatedamortization |      |        | Gross carryingamount |  | Accumulatedamortization |       
|Software for internal use |  | ¥                    | 12,080 |                         | ¥    | (2,571 | )                    |  | ¥                       | 13,062 |  | ¥ | (4,758  | )
|Distribution rights       |  |                      | 18,997 |                         |      | (1,675 | )                    |  |                         | 20,176 |  |   | (3,959  | )
|Patent rights and others  |  |                      | 4,527  |                         |      | (1,659 | )                    |  |                         | 6,574  |  |   | (4,000  | )
|                          |  |                      |        |                         |      |        |                      |  |                         |        |  |   |         |  
|                          |  |                      |        |                        
|Total                     |  | ¥                    | 35,604 |                         | ¥    | (5,905 | )                    |  | ¥                       | 39,812 |  | ¥ | (12,717 | )
|                          |  |                      |        |                         |      |        |                      |  |                         |        |  |   |         |  



The aggregate amortization expenses
for intangible assets for the years ended March 31, 2003, 2004 and 2005 were ¥1,040 million, ¥3,738 million and ¥5,959 million, respectively. The estimated aggregate amortization expense for intangible assets for the next five years is
as follows:



|                      |  |                 |      
|--------------------- |  | --------------- | -----
|                      |  | Yen in millions
|Year ending March 31: |  |                 |      
|2006                  |  | ¥               | 6,433
|2007                  |  |                 | 6,432
|2008                  |  |                 | 6,403
|2009                  |  |                 | 3,754
|2010                  |  |                 | 1,006



The changes in the carrying amount of
goodwill related to the pharmaceuticals segment for the years ended March 31, 2003, 2004 and 2005 are as follows:



|                              |  |                 |      
|----------------------------- |  | --------------- | -----
|                              |  | Yen in millions
|                              |  | Pharmaceuticals
|Balance at March 31, 2002     |  | ¥               | 1,179
|Goodwill acquired during year |  |                 | 1,492
|Translation adjustments       |  |                 | 81   
|                              |  |                 |      
|Balance at March 31, 2003     |  |                 | 2,752
|                              | 
|Translation adjustments       |  |                 | 113  
|                              |  |                 |      
|Balance at March 31, 2004     |  |                 | 2,865
|                              | 
|Contingent consideration paid |  |                 | 85   
|Translation adjustments       |  |                 | 100  
|                              |  |                 |      
|Balance at March 31, 2005     |  | ¥               | 3,050
|                              |  |                 |      



During the years ended March 31, 2003,
2004 and 2005, Sankyo performed the annual impairment tests for goodwill and recorded no impairment losses. The fair value of that reporting unit was estimated principally using the expected present value of future cash flows.



F-21



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##### Table of Contents

9. Short-term borrowings and long-term debt



Short-term borrowings comprise the following:



|                                              |  |                 |        |      |   |       
|--------------------------------------------- |  | --------------- | ------ | ---- | - | ------
|                                              |  | Yen in millions
|                                              |  | March 31       
|                                              |  | 2004            |        | 2005
|Secured loans, principally from banks:        |  |                 |        |      |   |       
|with weighted-average interest rate of 0.76%  |  | ¥               |       |      | ¥ | 2,812 
|with weighted-average interest rate of 0.75%  |  |                 | 2,650  |      |   |      
|Unsecured loans, principally from banks:      |  |                 |        |      |   |       
|with weighted-average interest rate of 0.82%  |  |                 |       |      |   | 12,756
|with weighted-average interest rate of 0.86%  |  |                 | 11,023 |      |   |      
|Guarantee deposits received from distributors |  |                 |        |      |   |       
|with weighted-average interest rate of 2.45%  |  |                 | 3,963  |      |   | 3,740 
|                                              |  |                 |        |      |   |       
|                                              |  |                
|                                              |  | ¥               | 17,636 |      | ¥ | 19,308
|                                              |  |                 |        |      |   |       



At March 31, 2005, Sankyo had unused
committed lines of credit amounting to ¥72,643 million. Such credit lines are subject to commitment fees on the unused portion at 0.1% per annum. The aggregate commitment fee paid for the credit lines for the year ended March 31, 2005 was
¥43 million.



Long-term debt comprises the following:



|                                                                     |  |                 |       |      |   |      
|-------------------------------------------------------------------- |  | --------------- | ----- | ---- | - | -----
|                                                                     |  | Yen in millions
|                                                                     |  | March 31       
|                                                                     |  | 2004            |       | 2005
|Secured loans, representing obligations principally to banks:        |  |                 |       |      |   |      
|Due 2004 to 2014 with interest ranging from 1.45% to 4.35% per annum |  | ¥               | 1,564 |      | ¥ |     
|Due 2005 to 2019 with interest ranging from 0.71% to 4.35% per annum |  |                 |      |      |   | 1,124
|Unsecured loans, representing obligations principally to banks:      |  |                 |       |      |   |      
|Due 2004 to 2013 with interest ranging from 0.69% to 2.25% per annum |  |                 | 5,012 |      |   |     
|Due 2005 to 2013 with interest ranging from 1.10% to 2.25% per annum |  |                 |      |      |   | 3,380
|Capital lease obligations:                                           |  |                 |       |      |   |      
|Due 2004 to 2014 with interest ranging from 1.1% to 1.5% per annum   |  |                 | 3,286 |      |   |     
|Due 2005 to 2011 with interest ranging from 0.5% to 1.9% per annum   |  |                 |      |      |   | 4,261
|                                                                     |  |                 |       |      |   |      
|                                                                     |  |                 | 9,862 |      |   | 8,765
|Less  Portion due within one year                                   |  |                 | 3,650 |      |   | 2,866
|                                                                     |  |                 |       |      |   |      
|                                                                     |  |                
|                                                                     |  | ¥               | 6,212 |      | ¥ | 5,899
|                                                                     |  |                 |       |      |   |      



At March 31, 2005, property, plant and
equipment with a book value of ¥4,312 million, and securities with a book value of ¥415 million were pledged as collateral for short-term borrowings and long-term secured loans, representing obligations principally to banks.



Annual maturities on long-term debt and lease obligations during the next five years are as
follows:



|                      |  |                 |      
|--------------------- |  | --------------- | -----
|                      |  | Yen in millions
|Year ending March 31: |  |                 |      
|2006                  |  | ¥               | 2,866
|2007                  |  |                 | 2,232
|2008                  |  |                 | 1,222
|2009                  |  |                 | 738  
|2010                  |  |                 | 524  
|Later years           |  |                 | 1,183
|                      |  |                 |      
|                      |  | ¥               | 8,765
|                      |  |                 |      



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##### Table of Contents

As is customary in Japan, both short-term and long-term bank loans are made under general agreements which provide that
security and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have the right to offset cash deposits against obligations that have become due or, in the event of default, against all
obligations due to the bank.



10. Restructuring charges and asset
impairments



As part of its effort to improve the performance of the
various businesses, Sankyo has undertaken a number of restructuring initiatives within the Pharmaceuticals and other business segments. For the years ended March 31, 2003, 2004 and 2005, Sankyo recorded total restructuring charges of ¥3,006
million, ¥3,444 million and ¥2,151 million, respectively.



Pharmaceuticals Segment



In an effort to improve the
performance of its Pharmaceutical segment, Sankyo has undergone a number of restructuring efforts to reduce its operating costs. For the years ended March 31, 2003, 2004 and 2005, Sankyo recorded total restructuring charges of ¥1,770 million,
¥3,059 million and ¥1,343 million, respectively. Significant restructuring activities are as follows:



Closing of Mishima-Plant in Japan 



During the year ended March 31, 2003, Sankyo closed the Mishima-plant to integrate its health care operations and recorded restructuring charges totaling ¥188 million, which consisted of the acceleration of depreciation for equipment of
¥75 million due to shortening the remaining useful lives, employee termination benefits costs of ¥103 million and other costs of ¥10 million, including demolition costs. These charges were recorded in cost of sales in the consolidated
statements of income.



During the year ended March 31, 2004, Sankyo recorded
net restructuring charges totaling ¥78 million, which represents disposal costs of equipment. This restructuring program was completed during the year ended March 31, 2004.



Plan for sale of Taiwan plant 



Under a reorganization plan for Taiwan operations, Sankyo entered into memorandum of understanding with a counterparty in January 2005, regarding the sale of the Taiwan
plant. The Taiwan plant assets were classified as an asset to be sold, and impairment losses on the plant assets amounting to ¥1,060 million were recorded during the year ended March 31, 2005, and net book value after recognition of the
impairment losses was ¥253 million as of March 31, 2005. The impairment losses were included in selling, general and administrative expenses in the consolidated statements of income. This reorganization plan will be completed during the year
ending March 31, 2006.



Retirement Programs 



In addition to the restructuring efforts discussed above, Sankyo has undergone several
headcount reduction programs to further reduce operating costs in the Pharmaceuticals segment. As a result of these programs, Sankyo recorded restructuring charges totaling ¥1,582 million, ¥2,981 million and ¥283 million for the years
ended March 31, 2003, 2004 and 2005 respectively, and these charges were included in selling, general and administrative expense in the accompanying consolidated statements of income. These staff reductions were primarily achieved through the
implementation of voluntary early retirement programs. The remaining liability balance as of March 31, 2005 was ¥70 million and will be paid during the year ending March 31, 2006.



F-23



---

##### Table of Contents

Other Segment



For the years ended March 31, 2003, 2004 and 2005, Sankyo recorded total restructuring charges of ¥1,236 million, ¥385 million and ¥808 million, respectively,
within the Other segment. Significant restructuring activities are the following:



Closing of Tanashi-Plant 



Sankyo made a decision in the
second quarter of the year ended March 31, 2001 to enter an alliance with the Oriental Yeast Co., Ltd., and close the Tanashi yeast-plant in Japan. During the year ended March 31, 2003, Sankyo recorded restructuring charges totaling ¥305
million, which consisted of the acceleration of depreciation for equipment of ¥248 million due to shortening the remaining useful lives, employee termination benefits costs of ¥48 million and other costs of ¥9 million, mainly demolition
costs. These charges were all recorded in cost of sales in the consolidated statements of income.



During the year ended March 31, 2004, Sankyo recorded net restructuring charges totaling ¥384 million, which represents disposal costs of equipment. This restructuring program was completed by the end of the year
ended March 31, 2004.



Closing of Yasugawa-Plant 



Sankyo made a decision in the third quarter of the year ended March 31, 2002 to integrate
the agrichemicals operations and close the Yasugawa-plant on March 31 2003. During the year ended March 31, 2003, Sankyo recorded restructuring charges totaling ¥931 million, which consisted of the accelerated depreciation of equipment of
¥619 million due to shortening the remaining useful lives, employee termination benefits costs of ¥287 million and other costs of ¥25 million including demolition costs. These charges were all recorded in cost of sales in the
consolidated statements of income.



During the year ended March 31, 2004,
Sankyo recorded net restructuring charges totaling ¥1 million of disposal costs of equipment. This restructuring program was completed by March 31, 2004.



Closing of Meguro-Plant in Japan 



Sankyo made a decision in the third quarter of the year ended March 31, 2004 to close the Meguro-plant and transfer its operations into the Shizuoka plant. During the
year ended March 31, 2005, Sankyo recorded restructuring charges totaling ¥585 million, which consisted of employee termination benefits costs of ¥286 million and transfer costs of ¥299 million. These charges were all recorded in cost of
sales in the consolidated statements of income. This restructuring program was completed during end of the year ended March 31, 2005.



Closing of Tokyo-Plant in Japan 



Sankyo made a decision in the second quarter of the year ended March 31, 2005 to close its Tokyo-plant, which produced baby food for the food industry. During the year
ended March 31, 2005, Sankyo recorded restructuring charges totaling ¥223 million, which consisted of the accelerated depreciation of equipment of ¥196 million due to shortening the remaining useful lives and employee termination benefits
costs of ¥27 million. These charges were all recorded in cost of sales in the consolidated statements of income. This restructuring program is scheduled to be completed during the year ending March 31, 2006.



F-24



---

##### Table of Contents

The following table displays the activity of accrued restructuring charges recorded for the years ended March 31, 2003,
2004 and 2005.



|                          |  |                             |        |   |                                   |   |        |                       |  |   |       |   |  |   |        |  
|------------------------- |  | --------------------------- | ------ | - | --------------------------------- | - | ------ | --------------------- |  | - | ----- | - |  | - | ------ | -
|                          |  | Yen in millions             |       
|                          |  | Employeeterminationbenefits |        |   | Non-cash write-downs and disposal |   |        | Other associatedcosts |  |   | Total |  
|Balance at March 31, 2002 |  | ¥                           | 201    |   |                                   | ¥ |       |                       |  | ¥ |      |   |  | ¥ | 201    |  
|Restructuring costs       |  |                             | 2,020  |   |                                   |   | 942    |                       |  |   | 44    |   |  |   | 3,006  |  
|Non-cash charges          |  |                             |       |   |                                   |   | (942   | )                     |  |   |      |   |  |   | (942   | )
|Cash payments             |  |                             | (2,065 | ) |                                   |   |       |                       |  |   |      |   |  |   | (2,065 | )
|                          |  |                             |        |   |                                   |   |        |                       |  |   |       |   |  |   |        |  
|Balance at March 31, 2003 |  |                             | 156    |   |                                   |   |       |                       |  |   | 44    |   |  |   | 200    |  
|Restructuring costs       |  |                             | 2,981  |   |                                   |   |       |                       |  |   | 463   |   |  |   | 3,444  |  
|Non-cash charges          |  |                             |       |   |                                   |   |       |                       |  |   |      |   |  |   |       |  
|Cash payments             |  |                             | (1,727 | ) |                                   |   |       |                       |  |   | (369  | ) |  |   | (2,096 | )
|                          |  |                             |        |   |                                   |   |        |                       |  |   |       |   |  |   |        |  
|Balance at March 31, 2004 |  |                             | 1,410  |   |                                   |   |       |                       |  |   | 138   |   |  |   | 1,548  |  
|Restructuring costs       |  |                             | 596    |   |                                   |   | 1,060  |                       |  |   | 495   |   |  |   | 2,151  |  
|Non-cash charges          |  |                             |       |   |                                   |   | (1,060 | )                     |  |   | (196  | ) |  |   | (1,256 | )
|Cash payments             |  |                             | (1,936 | ) |                                   |   |       |                       |  |   | (437  | ) |  |   | (2,373 | )
|                          |  |                             |        |   |                                   |   |        |                       |  |   |       |   |  |   |        |  
|Balance at March 31, 2005 |  | ¥                           | 70     |   |                                   | ¥ |       |                       |  | ¥ |      |   |  | ¥ | 70     |  
|                          |  |                             |        |   |                                   |   |        |                       |  |   |       |   |  |   |        |  



11. Income taxes



Income before income taxes and income tax expense from continuing operations comprise the
following:



|                                                  |  |                     |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------- |  | ------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                  |  | Yen in millions     |       
|                                                  |  | Year ended March 31 |       
|                                                  |  | 2003                |        |   | 2004 |   |        | 2005 | 
|Income (loss) before income taxes:                |  |                     |        |   |      |   |        |      |  |   |        |  
|Sankyo Company, Limited and subsidiaries in Japan |  | ¥                   | 79,498 |   |      | ¥ | 86,281 |      |  | ¥ | 72,251 |  
|Foreign subsidiaries                              |  |                     | (1,690 | ) |      |   | (960   | )    |  |   | 17,455 |  
|                                                  |  |                     |        |   |      |   |        |      |  |   |        |  
|                                                  |  | ¥                   | 77,808 |   |      | ¥ | 85,321 |      |  | ¥ | 89,706 |  
|                                                  |  |                     |        |   |      |   |        |      |  |   |        |  
|Income taxes  Current:                           |  |                     |        |   |      |   |        |      |  |   |        |  
|Sankyo Company, Limited and subsidiaries in Japan |  | ¥                   | 43,553 |   |      | ¥ | 32,904 |      |  | ¥ | 32,007 |  
|Foreign subsidiaries                              |  |                     | 1,068  |   |      |   | 5,543  |      |  |   | 572    |  
|                                                  |  |                     |        |   |      |   |        |      |  |   |        |  
|                                                  |  | ¥                   | 44,621 |   |      | ¥ | 38,447 |      |  | ¥ | 32,579 |  
|                                                  |  |                     |        |   |      |   |        |      |  |   |        |  
|Income taxes  Deferred:                          |  |                     |        |   |      |   |        |      |  |   |        |  
|Sankyo Company, Limited and subsidiaries in Japan |  | ¥                   | (5,006 | ) |      | ¥ | 2,575  |      |  | ¥ | (182   | )
|Foreign subsidiaries                              |  |                     | 2,890  |   |      |   | (625   | )    |  |   | 105    |  
|                                                  |  |                     |        |   |      |   |        |      |  |   |        |  
|                                                  |  | ¥                   | (2,116 | ) |      | ¥ | 1,950  |      |  | ¥ | (77    | )
|                                                  |  |                     |        |   |      |   |        |      |  |   |        |  



Sankyo is subject to a number of
different income taxes, which, in the aggregate, results in a statutory tax rate in Japan of approximately 41.9% for the years ended March 31, 2003 and 2004, and 40.6% for the year ended March 31, 2005.



For the year ended March 31, 2005, a new size-based enterprise tax was introduced in place of
the current enterprise tax. The newly enacted rate was used in calculating the future expected tax effects of temporary differences as of March 31, 2004. The effect of the changes in the tax rates on the balance of deferred tax assets and
liabilities was insignificant.



F-25



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##### Table of Contents

Reconciliation of the differences between the statutory tax rate and the effective income tax rate from continuing
operations is as follows:



|                                              |  |                     |   |  |      |   |  |      |  
|--------------------------------------------- |  | ------------------- | - |  | ---- | - |  | ---- | -
|                                              |  | Year ended March 31 |  
|                                              |  | 2003                |   |  | 2004 |   |  | 2005 |  
|Statutory tax rate                            |  | 41.9                | % |  | 41.9 | % |  | 40.6 | %
|                                              |  |                     |  
|Increase (reduction) in taxes resulting from: |  |                     |   |  |      |   |  |      |  
|Tax credits on IT investments                 |  |                    |   |  | (1.5 | ) |  | (0.3 | )
|Tax credits on research and development costs |  | (1.9                | ) |  | (5.7 | ) |  | (5.3 | )
|Expenses not deductible for tax purposes      |  | 6.1                 |   |  | 5.3  |   |  | 4.9  |  
|Change in valuation allowances                |  | 5.9                 |   |  | 6.6  |   |  | (0.2 | )
|Effects of tax rate changes                   |  | 1.5                 |   |  |     |   |  |     |  
|Income not taxable                            |  | (0.5                | ) |  | (0.5 | ) |  | (0.9 | )
|Other                                         |  | 1.6                 |   |  | 1.2  |   |  | (2.6 | )
|                                              |  |                     |   |  |      |   |  |      |  
|Effective income tax rate                     |  | 54.6                | % |  | 47.3 | % |  | 36.2 | %
|                                              |  |                     |   |  |      |   |  |      |  



The significant components of deferred
tax assets and liabilities are as follows:



|                                                       |  |                 |         |   |      |   |         |  
|------------------------------------------------------ |  | --------------- | ------- | - | ---- | - | ------- | -
|                                                       |  | Yen in millions |        
|                                                       |  | March 31        |        
|                                                       |  | 2004            |         |   | 2005 |  
|Deferred tax assets:                                   |  |                 |         |   |      |   |         |  
|Reserve for employee retirement and severance benefits |  | ¥               | 26,219  |   |      | ¥ | 26,984  |  
|Prepaid research and development costs                 |  |                 | 13,821  |   |      |   | 16,041  |  
|Operating loss carryforwards for tax purposes          |  |                 | 16,014  |   |      |   | 14,013  |  
|Accrued compensation                                   |  |                 | 6,820   |   |      |   | 7,283   |  
|Intangible assets                                      |  |                 | 6,629   |   |      |   | 6,941   |  
|Inventories                                            |  |                 | 4,913   |   |      |   | 6,506   |  
|Revenue                                                |  |                 | 6,146   |   |      |   | 5,441   |  
|Depreciation of property, plant and equipment          |  |                 | 2,809   |   |      |   | 4,114   |  
|Loss on investments in securities                      |  |                 | 2,106   |   |      |   | 1,423   |  
|Co-promotion advertising                               |  |                 | 1,699   |   |      |   | 1,264   |  
|Accrued enterprise taxes                               |  |                 | 1,403   |   |      |   | 1,162   |  
|Other                                                  |  |                 | 6,649   |   |      |   | 8,201   |  
|                                                       |  |                 |         |   |      |   |         |  
|Gross deferred tax assets                              |  |                 | 95,228  |   |      |   | 99,373  |  
|Less: Valuation allowance                              |  |                 | (25,124 | ) |      |   | (25,506 | )
|                                                       |  |                 |         |   |      |   |         |  
|Total deferred tax assets                              |  |                 | 70,104  |   |      |   | 73,867  |  
|                                                       |  |                 |         |   |      |   |         |  
|Deferred tax liabilities:                              |  |                 |         |   |      |   |         |  
|Unrealized gains on securities                         |  |                 | (19,360 | ) |      |   | (19,265 | )
|Depreciation of property, plant and equipment          |  |                 | (6,922  | ) |      |   | (10,661 | )
|Other                                                  |  |                 | (230    | ) |      |   | (936    | )
|                                                       |  |                 |         |   |      |   |         |  
|Gross deferred tax liabilities                         |  |                 | (26,512 | ) |      |   | (30,862 | )
|                                                       |  |                 |         |   |      |   |         |  
|Net deferred tax assets                                |  | ¥               | 43,592  |   |      | ¥ | 43,005  |  
|                                                       |  |                 |         |   |      |   |         |  



F-26



---

##### Table of Contents

The valuation allowance mainly relates to deferred tax assets of certain consolidated subsidiaries with operating loss
carryforwards and tax credit carryforwards for tax purposes that are not expected to be realized. The net changes in the total valuation allowance for the years ended March 31, 2003, 2004 and 2005 consisted of the following:



|                                          |  |      |        |   |      |   |        |      |  |   |        |  
|----------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                          |  | 2003 |        |   | 2004 |   |        | 2005 | 
|Valuation allowances at beginning of year |  | ¥    | 16,515 |   |      | ¥ | 21,779 |      |  | ¥ | 25,124 |  
|Additions                                 |  |      | 5,797  |   |      |   | 5,143  |      |  |   | 4,082  |  
|Deductions                                |  |      | (42    | ) |      |   | (1,202 | )    |  |   | (4,274 | )
|Translation adjustments                   |  |      | (491   | ) |      |   | (596   | )    |  |   | 574    |  
|                                          |  |      |        |   |      |   |        |      |  |   |        |  
|Valuation allowances at end of year       |  | ¥    | 21,779 |   |      | ¥ | 25,124 |      |  | ¥ | 25,506 |  
|                                          |  |      |        |   |      |   |        |      |  |   |        |  



Tax benefits which have been realized
through utilization of operating loss carryforwards for the years ended March 31, 2003, 2004 and 2005 were approximately ¥4,083 million, ¥219 million and ¥4,681 million, respectively.



Net deferred tax assets are included in the consolidated balance sheets as follows:



|                                       |  |                 |        |   |      |   |        |  
|-------------------------------------- |  | --------------- | ------ | - | ---- | - | ------ | -
|                                       |  | Yen in millions |       
|                                       |  | March 31        |       
|                                       |  | 2004            |        |   | 2005 |  
|Current assets  Deferred income taxes |  | ¥               | 25,900 |   |      | ¥ | 29,784 |  
|Other assets  Deferred income taxes   |  |                 | 21,119 |   |      |   | 16,944 |  
|Current liabilities  Other            |  |                 | (530   | ) |      |   | (514   | )
|Long-term liabilities  Other          |  |                 | (2,897 | ) |      |   | (3,209 | )
|                                       |  |                 |        |   |      |   |        |  
|Net deferred tax assets                |  | ¥               | 43,592 |   |      | ¥ | 43,005 |  
|                                       |  |                 |        |   |      |   |        |  



At March 31, 2005, deferred income
taxes have not been provided on undistributed earnings of foreign subsidiaries totaling ¥36,754 million. Earnings from foreign subsidiaries are expected to be reinvested indefinitely. Sankyo does not anticipate any significant tax consequences
on possible future disposition of its investments in subsidiaries based on its tax planning strategies. The unrecognized deferred tax liabilities as of March 31, 2005 for such temporary differences amounted to ¥1,263 million.



Operating loss carryforwards for corporate income tax and local income tax purposes of
certain consolidated subsidiaries in Japan at March 31, 2005 amounted to ¥2,137 million, which are available to offset future taxable income. Total available operating loss carryforwards of subsidiaries in Japan expire at various dates through
2012.



Operating loss carryforwards for tax purposes of certain foreign
consolidated subsidiaries at March 31, 2005 amounted to ¥25,988 million. With the exception of ¥18,582 million with no expiration period, total available operating loss carryforwards expire at various dates primarily up to 18 years.
Realization is dependent on such companies generating sufficient taxable income prior to expiration of the loss carryforwards and tax credit carryforwards. Although realization is not assured, management believes it is more likely than not that all
of the deferred tax assets, less valuation allowance, will be realized. The amount of such net deferred tax assets considered realizable, however, could be changed in the near term if estimates of future taxable income during the carryforward period
are changed.



F-27



---

##### Table of Contents

12. Shareholders equity



Changes in the number of shares of common stock issued have resulted in the following:



|                             |  |                     |  |             |   |  |            
|---------------------------- |  | ------------------- |  | ----------- | - |  | -----------
|                             |  | Year ended March 31
|                             |  | 2003                |  | 2004        |   |  | 2005       
|Common stock issued          |  |                     |  |             |   |  |            
|Balance at beginning of year |  | 449,498,765         |  | 449,498,765 |   |  | 439,498,765
|Retirement                   |  |                    |  | (10,000,000 | ) |  |           
|                             |  |                     |  |             |   |  |            
|Balance at end of year       |  | 449,498,765         |  | 439,498,765 |   |  | 439,498,765
|                             |  |                     |  |             |   |  |            



The Japanese Commercial code provides
that an amount equivalent to at least 10% of cash dividends and other distributions from retained earnings paid by the parent companies and its Japanese subsidiaries with respect to each fiscal period be appropriated to a legal reserve until the
aggregate amount of additional paid-in capital and the legal reserve equals 25% of stated capital. The legal reserve is not available for cash dividends, but may be used to reduce a deficit or may be transferred to stated capital. Retained earnings
included a legal reserve of ¥13,799 million and ¥13,814 million at March 31, 2004 and 2005, respectively, and are restricted to be used as dividends.



The amount of statutory retained earnings of the Company available for dividends to shareholders as of March 31, 2005 was ¥551,953 million.



In accordance with customary practice in Japan, the appropriations for dividends are not
accrued in the financial statements for the period to which they relate, but are recorded in the subsequent accounting period after shareholders approval has been obtained. Retained earnings at March 31, 2005 includes amounts representing
final cash dividends of ¥10,738 million, ¥25 per share, which were approved at the shareholders meeting held on June 29, 2005. Retained earnings at March 31, 2005 include ¥214 million relating to equity in undistributed earnings of
companies accounted for by the equity method.



The Japanese Commercial Code
allows the company to purchase treasury stock at any reason at any time by the resolution of the Board of Directors up to the limitation approved at the Shareholders Meeting. During the years ended March 31, 2003, 2004 and 2005, 5,000,000
shares, 9,764,400 shares and 34,142 shares of the Companys common stock were repurchased from the market for aggregate amounts of ¥8,014 million, ¥19,986 million and ¥76 million, respectively. For the year ended March 31, 2004,
10,000,000 shares of the Companys common stock were retired at aggregate costs of ¥18,147 million. The entire repurchase cost of the retired shares was charged directly to retained earnings in accordance with the Japanese Commercial Code.



In fiscal year 1995, the Company made a free distribution of shares to its
shareholders for which no accounting entry is required in Japan. Had the distributions been accounted for in a manner used by companies in the United States of America, ¥86,320 million would have been transferred from retained earnings to the
appropriate capital accounts.



Under the Japanese Commercial Code, a stock
dividend can be effected by an appropriation of retained earnings to the common stock account, followed by a free share distribution with respect to the amount appropriated by resolution of the Board of Directors meeting.



F-28



---

##### Table of Contents

Detailed components of accumulated other comprehensive income (loss) at March 31, 2004 and 2005 and the related changes,
net of taxes, for the years ended March 31, 2003, 2004 and 2005 consist of the following:



|                                  |  |                                       |        |   |                                       |   |        |                                    |  |   |                                            |   |  |   |        |  
|--------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------------- | - | ------ | ---------------------------------- |  | - | ------------------------------------------ | - |  | - | ------ | -
|                                  |  | Yen in millions                       |       
|                                  |  | Foreigncurrencytranslationadjustments |        |   | Unrealizedgains (losses)on securities |   |        | Minimumpensionliabilityadjustments |  |   | Accumulatedothercomprehensiveincome (loss) |  
|Balances at March 31, 2002        |  | ¥                                     | (1,727 | ) |                                       | ¥ | 13,617 |                                    |  | ¥ |                                           |   |  | ¥ | 11,890 |  
|Other comprehensive income (loss) |  |                                       | (4,536 | ) |                                       |   | (2,944 | )                                  |  |   | (1,775                                     | ) |  |   | (9,255 | )
|                                  |  |                                       |        |   |                                       |   |        |                                    |  |   |                                            |   |  |   |        |  
|Balances at March 31, 2003        |  |                                       | (6,263 | ) |                                       |   | 10,673 |                                    |  |   | (1,775                                     | ) |  |   | 2,635  |  
|Other comprehensive income (loss) |  |                                       | (3,459 | ) |                                       |   | 14,443 |                                    |  |   | 1,238                                      |   |  |   | 12,222 |  
|                                  |  |                                       |        |   |                                       |   |        |                                    |  |   |                                            |   |  |   |        |  
|Balances at March 31, 2004        |  |                                       | (9,722 | ) |                                       |   | 25,116 |                                    |  |   | (537                                       | ) |  |   | 14,857 |  
|Other comprehensive income (loss) |  |                                       | 567    |   |                                       |   | (204   | )                                  |  |   | (529                                       | ) |  |   | (166   | )
|                                  |  |                                       |        |   |                                       |   |        |                                    |  |   |                                            |   |  |   |        |  
|Balances at March 31, 2005        |  | ¥                                     | (9,155 | ) |                                       | ¥ | 24,912 |                                    |  | ¥ | (1,066                                     | ) |  | ¥ | 14,691 |  
|                                  |  |                                       |        |   |                                       |   |        |                                    |  |   |                                            |   |  |   |        |  



Tax effects allocated to each
component of other comprehensive income for the years ended March 31, 2003, 2004 and 2005 are as follows:



|                                                                     |  |                 |         |   |                     |   |         |                  |  |   |        |  
|-------------------------------------------------------------------- |  | --------------- | ------- | - | ------------------- | - | ------- | ---------------- |  | - | ------ | -
|                                                                     |  | Yen in millions |        
|                                                                     |  | Pre-taxamount   |         |   | Tax(expense)benefit |   |         | Net-of-taxamount | 
|For the year ended March 31, 2003                                    |  |                 |         |   |                     |   |         |                  |  |   |        |  
|                                                                     |  |                 |        
|Foreign currency translation adjustments                             |  | ¥               | (4,536  | ) |                     | ¥ |        |                  |  | ¥ | (4,536 | )
|Unrealized losses on securities:                                     |  |                 |         |   |                     |   |         |                  |  |   |        |  
|Unrealized holding gains (losses) arising for the year               |  |                 | (10,080 | ) |                     |   | 4,589   |                  |  |   | (5,491 | )
|Less: reclassification adjustments for losses included in net income |  |                 | 4,903   |   |                     |   | (2,356  | )                |  |   | 2,547  |  
|Minimum pension liability adjustments                                |  |                 | (2,931  | ) |                     |   | 1,156   |                  |  |   | (1,775 | )
|                                                                     |  |                 |         |   |                     |   |         |                  |  |   |        |  
|Other comprehensive income (loss)                                    |  | ¥               | (12,644 | ) |                     | ¥ | 3,389   |                  |  | ¥ | (9,255 | )
|                                                                     |  |                 |         |   |                     |   |         |                  |  |   |        |  
|                                                                     |  |                 |        
|For the year ended March 31, 2004                                    |  |                 |         |   |                     |   |         |                  |  |   |        |  
|                                                                     |  |                 |        
|Foreign currency translation adjustments                             |  | ¥               | (3,459  | ) |                     | ¥ |        |                  |  | ¥ | (3,459 | )
|Unrealized gains on securities:                                      |  |                 |         |   |                     |   |         |                  |  |   |        |  
|Unrealized holding gains (losses) arising for the year               |  |                 | 25,146  |   |                     |   | (10,436 | )                |  |   | 14,710 |  
|Less: reclassification adjustments for losses included in net income |  |                 | (463    | ) |                     |   | 196     |                  |  |   | (267   | )
|Minimum pension liability adjustments                                |  |                 | 2,275   |   |                     |   | (1,037  | )                |  |   | 1,238  |  
|                                                                     |  |                 |         |   |                     |   |         |                  |  |   |        |  
|Other comprehensive income (loss)                                    |  | ¥               | 23,499  |   |                     | ¥ | (11,277 | )                |  | ¥ | 12,222 |  
|                                                                     |  |                 |         |   |                     |   |         |                  |  |   |        |  
|                                                                     |  |                 |        
|For the year ended March 31, 2005                                    |  |                 |         |   |                     |   |         |                  |  |   |        |  
|                                                                     |  |                 |        
|Foreign currency translation adjustments                             |  | ¥               | 567     |   |                     | ¥ |        |                  |  | ¥ | 567    |  
|Unrealized gains on securities:                                      |  |                 |         |   |                     |   |         |                  |  |   |        |  
|Unrealized holding gains (losses) arising for the year               |  |                 | 608     |   |                     |   | (231    | )                |  |   | 377    |  
|Less: reclassification adjustments for losses included in net income |  |                 | (978    | ) |                     |   | 397     |                  |  |   | (581   | )
|Minimum pension liability adjustments                                |  |                 | (618    | ) |                     |   | 89      |                  |  |   | (529   | )
|                                                                     |  |                 |         |   |                     |   |         |                  |  |   |        |  
|Other comprehensive income (loss)                                    |  | ¥               | (421    | ) |                     | ¥ | 255     |                  |  | ¥ | (166   | )
|                                                                     |  |                 |         |   |                     |   |         |                  |  |   |        |  



F-29



---

##### Table of Contents

13. Stock-based compensation



In June 2002, the Companys shareholders approved a stock option plan for board members. In June 2003 and 2004, the shareholders also
approved plans to include both board members and key employees. Each year, since the plans inception, the shareholders have approved the authorization for the grant of options for the purchase of the Companys common stock. Authorized
shares for each year that remain ungranted are unavailable for grant in future years. Stock options with a term of 10 years are granted with an exercise price equal to 1.05 times the average closing price of the Companys common stock for the
month previous to the grant unless the average closing price is less than the closing price of the day before the grant, in which case the closing price of the day before the grant will become the exercise price.



The terms of the options are subject to adjustment if there is a share split or consolidation
of shares, or in certain circumstances, if new shares are issued at a price less than the current quoted market price. As a result, the plans are accounted for as variable plans.



Compensation cost of ¥363 million was recorded in the year ended March 31, 2004. A reduction of compensation cost of ¥3 million was
recorded in the year ended March 31, 2005 due to the decline in the market value of the Companys stock compared to the previous year.



The following table summarizes Sankyos stock option activity:



|                              |  |                 |  |                                 |       |                                                     |     
|----------------------------- |  | --------------- |  | ------------------------------- | ----- | --------------------------------------------------- | ----
|                              |  | Yen            
|                              |  | Numberof shares |  | Weighted-average exercise price |       | Weighted-average remainingcontractual life in years
|Balances at March 31, 2002    |  |                |  | ¥                               |      |                                                     |    
|                              |  |                 | 
|Granted                       |  | 244,000         |  |                                 | 1,823 |                                                     |     
|Exercised                     |  |                |  |                                 |      |                                                     |     
|Canceled                      |  |                |  |                                 |      |                                                     |     
|                              |  |                 |  |                                 |       |                                                     |     
|Balances at March 31, 2003    |  | 244,000         |  |                                 | 1,823 |                                                     | 9.25
|                              |  |                 | 
|Granted                       |  | 342,000         |  |                                 | 1,519 |                                                     |     
|Exercised                     |  |                |  |                                 |      |                                                     |     
|Canceled                      |  |                |  |                                 |      |                                                     |     
|                              |  |                 |  |                                 |       |                                                     |     
|Balances at March 31, 2004    |  | 586,000         |  |                                 | 1,646 |                                                     | 8.83
|                              |  |                 | 
|Granted                       |  | 376,000         |  |                                 | 2,365 |                                                     |     
|Exercised                     |  |                |  |                                 |      |                                                     |     
|Canceled                      |  |                |  |                                 |      |                                                     |     
|                              |  |                 |  |                                 |       |                                                     |     
|Balances at March 31, 2005    |  | 962,000         |  |                                 | 1,927 |                                                     | 8.39
|                              |  |                 |  |                                 |       |                                                     |     
|Exercisable at March 31, 2005 |  | 962,000         |  | ¥                               | 1,927 |                                                     | 8.39
|                              |  |                 |  |                                 |       |                                                     |     



The following table summarizes
information for outstanding options exercisable at March 31, 2005:



|                     |  |  |  |                  |     |                                |       |                                |      |  |     |                 |         |                                |   |      
|-------------------- |  |  |  | ---------------- | --- | ------------------------------ | ----- | ------------------------------ | ---- |  | --- | --------------- | ------- | ------------------------------ | - | -----
|                     |  |  |  | Outstanding      |     |                                |       | Exercisable                   
|Exercise price range |  |  |  | Number of shares |     | Weighted- averageexerciseprice |       | Weighted- averageremaininglife |      |  |     | Numberof shares |         | Weighted- averageexerciseprice
|Yen                  |  |  |  |                  | Yen |                                | Years |                                |      |  | Yen
|¥            1,519   |  |  |  | 342,000          |     | ¥                              | 1,519 |                                | 8.25 |  |     |                 | 342,000 |                                | ¥ | 1,519
|1,823                |  |  |  | 244,000          |     |                                | 1,823 |                                | 7.25 |  |     |                 | 244,000 |                                |   | 1,823
|2,365                |  |  |  | 376,000          |     |                                | 2,365 |                                | 9.25 |  |     |                 | 376,000 |                                |   | 2,365
|                     |  |  |  |                  |     |                                |       |                                |      |  |     |                 |         |                                |   |      
|                     |  |  |  | 962,000          |     |                                | 1,927 |                                | 8.39 |  |     |                 | 962,000 |                                |   | 1,927
|                     |  |  |  |                  |     |                                |       |                                |      |  |     |                 |         |                                |   |      



F-30



---

##### Table of Contents

The weighted-average fair value per option at the date of grant for options granted during the years ended March 31,
2003, 2004 and 2005 were ¥376, ¥304 and ¥568, respectively. The fair value of options granted, which is amortized over the option vesting period in determining the pro forma impact in Note 2, is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average assumptions:



|                        |  |         |   |  |         |   |  |         |  
|----------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                        |  | 2003    |   |  | 2004    |   |  | 2005    |  
|Dividend rate           |  | 1.53    | % |  | 1.74    | % |  | 1.27    | %
|Risk-free interest rate |  | 0.44    | % |  | 0.37    | % |  | 0.87    | %
|Expected volatility     |  | 35.06   | % |  | 31.54   | % |  | 30.06   | %
|Expected holding period |  | 5 years |   |  | 5 years |   |  | 5 years |  



In June 2005, a resolution was
approved at the shareholders meeting to terminate these stock options on or before September 26, 2005. No cash disbursement will be made as a result of this termination, and weighted-average remaining life will be 0.49 years.



In April 2002, Sankyo Pharma Inc. (SPI), a wholly-owned subsidiary in the United
States, adopted a stock appreciation rights (SAR) plan as an incentive plan for selected employees, including officers. Under the terms of the plan, the employees can receive cash equal to the amount that the market price of the Companys
common stock exceeds the grant price (market price at time of grant) of the SAR. The SARs vest 50%, 25%, and 25%, at the second, third, and fourth anniversary of the grant date, respectively. As of December 31, 2004, 117,301 rights were exercisable.
The SAR expires ten years after the grant date. The total number of SARs authorized and granted were 286,101 rights, 789,181 rights and 572,240 rights for the years ended December 31, 2002, 2003 and 2004, respectively.



The following table summarizes SAR activity:



|                                 |  |               |  |                                |  |                                                   
|-------------------------------- |  | ------------- |  | ------------------------------ |  | --------------------------------------------------
|                                 |  |               |  | U.S. dollar                    |  |                                                   
|                                 |  | Number ofSARs |  | Weighted-averageexercise price |  | Weighted-averageremainingcontractual life in years
|Balances at December 31, 2001    |  |              |  |                               |  |                                                  
|                                 |  |               | 
|Granted                          |  | 286,101       |  | 14.63                          |  |                                                   
|Exercised                        |  |              |  |                               |  |                                                   
|Forfeited                        |  |              |  |                               |  |                                                   
|                                 |  |               |  |                                |  |                                                   
|Balances at December 31, 2002    |  | 286,101       |  | 14.63                          |  | 9.25                                              
|                                 |  |               | 
|Granted                          |  | 789,181       |  | 13.27                          |  |                                                   
|Exercised                        |  |              |  |                               |  |                                                   
|Forfeited                        |  | 95,314        |  | 13.73                          |  |                                                   
|                                 |  |               |  |                                |  |                                                   
|Balances at December 31, 2003    |  | 979,968       |  | 13.62                          |  | 9.01                                              
|                                 |  |               | 
|Granted                          |  | 572,240       |  | 21.64                          |  |                                                   
|Exercised                        |  | 3,221         |  | 14.63                          |  |                                                   
|Forfeited                        |  | 95,011        |  | 15.14                          |  |                                                   
|                                 |  |               |  |                                |  |                                                   
|Balances at December 31, 2004    |  | 1,453,976     |  | 16.68                          |  |                                                   
|                                 |  |               |  |                                |  |                                                   
|Exercisable at December 31, 2004 |  | 117,301       |  | 14.63                          |  | 7.25                                              
|                                 |  |               |  |                                |  |                                                   



F-31



---

##### Table of Contents

The following table summarizes information for SAR outstanding and SAR exercisable at December 31, 2004:



|                     |       |  |  |                  |           |                                |      |             |  |                  |        
|-------------------- | ----- |  |  | ---------------- | --------- | ------------------------------ | ---- | ----------- |  | ---------------- | -------
|                     |       |  |  | Outstanding      |           |                                |      | Exercisable
|Exercise price range |       |  |  | Number of shares |           | Weighted-averageremaining life |      |             |  | Number of shares
|US dollar            |       |  |  |                  | Years     |                                |      |            
|$                    | 13.27 |  |  |                  | 665,791   |                                | 8.25 |             |  |                  |       
|                     | 14.63 |  |  |                  | 234,602   |                                | 7.25 |             |  |                  | 117,301
|                     | 21.64 |  |  |                  | 553,583   |                                | 9.25 |             |  |                  |       
|                     |       |  |  |                  |           |                                |      |             |  |                  |        
|                     |       |  |  |                  | 1,453,976 |                                | 8.47 |             |  |                  | 117,301
|                     |       |  |  |                  |           |                                |      |             |  |                  |        



In accordance with APB 25 and its
related interpretations, the SAR compensation expense is measured as the excess of the quoted market price of the Companys common stock over the SARs strike price, which is consistent with the accounting treatment prescribed for SAR plans in
FAS 123. For the years ended March 31, 2003, 2004 and 2005, Sankyo recognized SARs compensation expense of ¥0 million, ¥211 million and ¥381 million, respectively.



In order to offset the potential cash outflow for SAR as a result of increase in the Companys stock price, SPI entered into call
option agreements for the Companys common stock in 2002 and 2004. The options mature in 2009 and 2011, respectively. At the settlement date, SPI has the option to acquire the Companys common stock equal to the grant price with the
settlement of net cash or physical delivery of the Companys stock. The premium paid for the call options in the years ended March 31, 2003 and 2005 were ¥262 million and ¥1,094 million, respectively, and are included as investment and
advances  other. Sankyo charged the changes in fair value of the call option to earnings. The fair value of the option as of December 31, 2003 and 2004 were ¥250 million and ¥1,348 million, respectively.



14. Employee benefit plans



Pension and severance plans 



Upon termination or retirement, employees of the parent company and subsidiaries in Japan
are entitled, under most circumstances, to lump-sum indemnities or pension payments as described below, based on length of service, current rates of pay and performances. Under normal circumstances, the minimum payment prior to retirement age is an
amount based on voluntary retirement. Employees usually receive additional benefits on involuntary retirement, including retirement at the age limit.



The parent company and most subsidiaries in Japan have non-contributory unfunded defined benefit lump-sum indemnity plans and/or contributory funded defined benefit
pension plans, under which the contributions are made by the companies and their employees. The pension benefits are determined based on years of service, current rates of pay and performance as stipulated in the internal regulations, and are
payable, at the option of the retiring employee, as a monthly pension payment or in a lump-sum amount. The contributions to the plans are funded with several financial institutions in accordance with the applicable laws and regulations. These
pension plan assets consist principally of investments in domestic and international bonds and stocks.



During the year ended March 31, 2004, the parent company revised its lump-sum indemnity plan for certain employees. Under the revised plan, the benefits are determined based on the accumulated credits earned in
connection with employees length of service and performance up to the end of the period. Prior to the revision, the benefits were determined based on the length of service and current rate of pay. As a result of this revision, the projected
benefit obligation under the lump-sum indemnity plan was reduced by approximately ¥305 million and this reduction is being treated as negative unrecognized prior service cost.



F-32



---

##### Table of Contents

During the year ended March 31, 2005, the parent companys plan amendment that had applied to certain employees was
expanded to all parent companys employees. As a result of this revision, the projected benefit obligation under the lump-sum indemnity plan was reduced by approximately ¥5,424 million and this reduction is being treated as negative
unrecognized prior service cost. In addition, a domestic subsidiary revised its lump-sum indemnities plan to adopt a new plan that is similar to the parent companys plan described in the preceding paragraph, and as a result, the projected
benefit obligation under the lump-sum indemnity plan was reduced by ¥142 million.



Certain foreign subsidiaries have defined benefit pension plans or severance indemnity plans covering substantially all of their employees under which the cost of benefits is currently funded or accrued. The benefits for these plans are
based primarily on current rate of pay and lengths of service.



Sankyo uses a
March 31 measurement date for the majority of its benefit plans.



Information
regarding Sankyos defined benefit plans is as follows:



|                                               |  |                 |         |   |      |   |        |  
|---------------------------------------------- |  | --------------- | ------- | - | ---- | - | ------ | -
|                                               |  | Yen in millions |        
|                                               |  | March 31        |        
|                                               |  | 2004            |         |   | 2005 |  
|Change in benefit obligation                   |  |                 |         |   |      |   |        |  
|Benefit obligation at beginning of year        |  | ¥               | 106,725 |   |      | ¥ | 95,771 |  
|Service cost                                   |  |                 | 5,652   |   |      |   | 4,820  |  
|Interest cost                                  |  |                 | 1,696   |   |      |   | 2,166  |  
|Plan participants contributions               |  |                 | 423     |   |      |   | 464    |  
|Plan amendments                                |  |                 | (305    | ) |      |   | (5,566 | )
|Actuarial loss (gain)                          |  |                 | (5,978  | ) |      |   | 4,971  |  
|Acquisition and other                          |  |                 | 159     |   |      |   | 425    |  
|Benefits paid                                  |  |                 | (12,601 | ) |      |   | (7,741 | )
|                                               |  |                 |         |   |      |   |        |  
|Benefit obligation at end of year              |  |                 | 95,771  |   |      |   | 95,310 |  
|                                               |  |                 |         |   |      |   |        |  
|                                               |  |                
|Change in plan assets                          |  |                 |         |   |      |   |        |  
|Fair value of plan assets at beginning of year |  |                 | 15,010  |   |      |   | 20,575 |  
|Actual return on plan assets                   |  |                 | 2,014   |   |      |   | 741    |  
|Acquisition and other                          |  |                 | (9      | ) |      |   | 49     |  
|Employer contributions                         |  |                 | 3,703   |   |      |   | 2,487  |  
|Plan participants contributions               |  |                 | 423     |   |      |   | 464    |  
|Benefits paid                                  |  |                 | (566    | ) |      |   | (1,013 | )
|                                               |  |                 |         |   |      |   |        |  
|Fair value of plan assets at end of year       |  |                 | 20,575  |   |      |   | 23,303 |  
|                                               |  |                 |         |   |      |   |        |  
|Funded status                                  |  |                 | 75,196  |   |      |   | 72,007 |  
|Unrecognized actuarial loss                    |  |                 | (1,440  | ) |      |   | (5,449 | )
|Unrecognized prior service costs               |  |                 | 298     |   |      |   | 5,683  |  
|Unrecognized net transition obligations        |  |                 | (214    | ) |      |   | (107   | )
|                                               |  |                 |         |   |      |   |        |  
|Net amount recognized                          |  | ¥               | 73,840  |   |      | ¥ | 72,134 |  
|                                               |  |                 |         |   |      |   |        |  



Amounts recognized in the consolidated
balance sheets are comprised of the following:



|                                       |  |                 |        |   |      |   |        |  
|-------------------------------------- |  | --------------- | ------ | - | ---- | - | ------ | -
|                                       |  | Yen in millions |       
|                                       |  | March 31        |       
|                                       |  | 2004            |        |   | 2005 |  
|Accrued pension and severance costs    |  | ¥               | 74,496 |   |      | ¥ | 73,408 |  
|Accumulated other comprehensive income |  |                 | (656   | ) |      |   | (1,274 | )
|                                       |  |                 |        |   |      |   |        |  
|Net amount recognized                  |  | ¥               | 73,840 |   |      | ¥ | 72,134 |  
|                                       |  |                 |        |   |      |   |        |  



F-33



---

##### Table of Contents

The accumulated benefit obligation for all defined benefit pension plans was ¥84,015 million and ¥90,347 million
at March 31, 2004 and 2005, respectively.



Components of net periodic pension
costs are as follows:



|                                          |  |                     |       |   |      |   |       |      |  |   |       |  
|----------------------------------------- |  | ------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                          |  | Yen in millions     |      
|                                          |  | Year ended March 31 |      
|                                          |  | 2003                |       |   | 2004 |   |       | 2005 | 
|Service cost                              |  | ¥                   | 5,999 |   |      | ¥ | 5,652 |      |  | ¥ | 4,820 |  
|Interest cost                             |  |                     | 2,160 |   |      |   | 1,696 |      |  |   | 2,166 |  
|Expected return on plan assets            |  |                     | (320  | ) |      |   | (213  | )    |  |   | (446  | )
|Amortization of prior service costs       |  |                     |      |   |      |   | (8    | )    |  |   | (180  | )
|Recognized net actuarial loss             |  |                     |      |   |      |   | 691   |      |  |   | 716   |  
|Amortization of net transition obligation |  |                     | 107   |   |      |   | 107   |      |  |   | 107   |  
|                                          |  |                     |       |   |      |   |       |      |  |   |       |  
|Net periodic pension cost                 |  | ¥                   | 7,946 |   |      | ¥ | 7,925 |      |  | ¥ | 7,183 |  
|                                          |  |                     |       |   |      |   |       |      |  |   |       |  



Changes in recognized net actuarial
loss for the years ended March 31, 2003 and 2004 were primarily due to changes in estimates made for actuarial assumptions, primarily the discount rate. The actuarial gain or loss is deferred and is being amortized to pension costs over the average
remaining service period of active employees of 15 years.



In addition to net
periodic pension costs, Sankyo recorded an additional minimum liability totaling ¥656 million and ¥1,274 million at March 31, 2004 and 2005, respectively, for plans where the accumulated benefit obligation exceeded the fair market value of
plan assets and accrued pension and severance costs. Minimum pension liability adjustments included in other comprehensive income (loss) for the years ended March 31, 2003, 2004 and 2005 are as follows:



|                                                                                     |  |                     |        |   |      |   |       |  |   |      |  
|------------------------------------------------------------------------------------ |  | ------------------- | ------ | - | ---- | - | ----- |  | - | ---- | -
|                                                                                     |  | Yen in millions     |       
|                                                                                     |  | Year ended March 31 |       
|                                                                                     |  | 2003                |        |   | 2004 |   | 2005  | 
|Minimum pension liability adjustments, included in other comprehensive income (loss) |  | ¥                   | (1,775 | ) |      | ¥ | 1,238 |  | ¥ | (529 | )
|                                                                                     |  |                     |        |   |      |   |       |  |   |      |  



Weighted-average assumptions used to
determine benefit obligations as of March 31, 2003, 2004 and 2005 are as follows:



|                              |  |          |   |  |      |   |  |      |  
|----------------------------- |  | -------- | - |  | ---- | - |  | ---- | -
|                              |  | March 31 |  
|                              |  | 2003     |   |  | 2004 |   |  | 2005 |  
|Discount rate                 |  | 1.7      | % |  | 2.5  | % |  | 2.0  | %
|Rate of compensation increase |  | 3.5      | % |  | 3.5  | % |  | 3.1  | %



Weighted-average assumptions used to
determine net periodic pension costs for the years ended March 31, 2003, 2004 and 2005 are as follows:



|                               |  |                     |   |  |      |   |  |      |  
|------------------------------ |  | ------------------- | - |  | ---- | - |  | ---- | -
|                               |  | Year ended March 31 |  
|                               |  | 2003                |   |  | 2004 |   |  | 2005 |  
|Discount rate                  |  | 2.5                 | % |  | 1.7  | % |  | 2.5  | %
|Expected return on plan assets |  | 2.5                 | % |  | 1.7  | % |  | 2.5  | %
|Rate of compensation increase  |  | 3.5                 | % |  | 3.5  | % |  | 3.5  | %



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The expected rate of return on plan assets is determined considering several applicable factors including, compositions
of plan assets held, assumed risks of asset management, historical return on plan assets, Sankyos principal policy for plan asset management, and forecasted market conditions.



In accordance with FAS132(R),the weighted-average rate of compensation increase is calculated based on the pay-related plans only, because
benefit payments made under other plans are not based on employees compensation.



Sankyos pension plan weighted-average asset allocations as of March 31, 2004 and 2005, by asset category are as follows:



|                     |  |                         |   |  |       |  
|-------------------- |  | ----------------------- | - |  | ----- | -
|                     |  | Plan assets at March 31 |  
|                     |  | 2004                    |   |  | 2005  |  
|Domestic bonds       |  | 29.1                    | % |  | 29.1  | %
|Domestic stocks      |  | 33.7                    | % |  | 36.6  | %
|International bonds  |  | 8.1                     | % |  | 9.6   | %
|International stocks |  | 22.0                    | % |  | 20.5  | %
|Other                |  | 7.1                     | % |  | 4.2   | %
|                     |  |                         |   |  |       |  
|Total                |  | 100.0                   | % |  | 100.0 | %
|                     |  |                         |   |  |       |  



Sankyos policy and objective for
plan asset management is to maximize returns on plan assets to meet future benefit payments at a level of risk which Sankyo considers permissible. Asset allocations are determined based on Sankyos plan asset management guideline established to
achieve the optimized asset compositions in terms of the long-term overall plan asset management. To determine individual investments, Sankyo performs advance assessments on certain factors including risks, transaction costs and liquidity of each
potential investee under the evaluation. To measure results of the plan asset management, Sankyo establishes benchmark return rates for each individual investment, combines these individual bench mark rates based on the asset composition ratios
within each asset category, and compares the combined rates with the corresponding actual return rates on each asset category.



Sankyo expects to contribute ¥2,471 million to its pension plans in the year ending March 31, 2006.



Certain foreign subsidiaries have defined contribution retirement plans, mainly 401(K) retirement plans in the United States, covering all
of their employees. The contributions by those subsidiaries to the plans are based on employees contributions and annual compensation of employees. The expenses for the defined contribution retirement plans for the years ended March 31, 2003,
2004 and 2005 were ¥537 million, ¥613 million and ¥757 million, respectively.



Certain domestic subsidiaries participate in multi-employer plans, which provide defined benefits to their eligible employees. Pension expenses for these plans accounted to ¥282 million, ¥360 million and
¥334 million for the years ended March 31, 2003, 2004 and 2005.



In
connection with Sankyos restructuring initiatives, the parent company and a certain subsidiary closed their manufacturing facilities and offered early retirement programs to their employees only for a short period of time, and paid special
termination benefits to the employees who accepted the offer. These benefits recognized as expenses when employees accepted the offer amounted to ¥2,020 million, ¥2,981 million and ¥593 million, in the aggregate, for the years ended
March 31, 2003, 2004 and 2005, respectively. (See Note 10 for detailed discussions.)



The future benefit payments are expected as follows:



|                      |  |                 |       
|--------------------- |  | --------------- | ------
|                      |  | Yen in millions
|Year ending March 31: |  |                 |       
|2006                  |  | ¥               | 6,426 
|2007                  |  |                 | 7,687 
|2008                  |  |                 | 7,974 
|2009                  |  |                 | 6,076 
|2010                  |  |                 | 5,633 
|2011-2015             |  |                 | 27,200



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##### Table of Contents

15. Derivative financial instruments



Sankyo employs derivative financial instruments, including interest rate swap, coupon swap, foreign exchange forward contracts and stock
price option agreement to manage its exposure to fluctuations in interest rates, foreign currency exchange rates and stock appreciation rights. Sankyo does not use derivatives for speculation or trading.



Sankyo enters into interest rate swap agreements mainly to convert its variable-rate debt to
fixed-rate debt. Sankyo uses interest rate swap agreements in managing its exposure to interest rate fluctuations. Interest rate swap agreements are executed as either an integral part of specific debt transactions or on a portfolio basis.



For the years ended March 31, 2003, 2004 and 2005, Sankyo reported gains of
¥21 million, ¥22 million and ¥12 million respectively, related to the change in fair values of interest rate swaps which are included in other income (expenses) in the accompanying consolidated statements of income. At March 31, 2004 and
2005, the aggregate notional amounts of interest rate swap agreements were ¥1,239 million pay fixed and ¥965 million pay fixed, respectively.



Sankyo enters into coupon swap and foreign exchange forward contracts agreements to manage its exposure to foreign currency exchange risk.



For the years ended March 31, 2003, 2004 and 2005, Sankyo reported losses of ¥31 million
and ¥57 million and gain of ¥13 million respectively, related to the change in fair values of coupon swap and foreign exchange forward contracts which is included in other income (expenses), net in the accompanying consolidated statement of
income.



The contracted amounts outstanding at March 31, 2005 were ¥377
million.



16. Other financial instruments



Sankyo has certain financial instruments, including financial assets and liabilities and
off-balance sheet financial instruments which arose in the normal course of business. These financial instruments are executed with creditworthy financial institutions, and virtually all foreign currency contracts are denominated in U.S. dollars,
euros and other currencies of major industrialized countries. Financial instruments involve, to varying degrees, market risk as instruments are subject to price fluctuations, and elements of credit risk in the event a counterparty should default. In
the unlikely event the counterparties fail to meet the contractual terms of a foreign currency or an interest rate instrument, Sankyos risk is limited to the fair value of the instrument. Although Sankyo may be exposed to losses in the event
of non-performance by counterparties on financial instruments, it does not anticipate significant losses due to the nature of its counterparties. Counterparties to Sankyos financial instruments represent, in general, international financial
institutions. Additionally, Sankyo does not have a significant exposure to any individual counterparty. Based on the creditworthiness of these financial institutions, collateral is generally not required of the counterparties or of Sankyo. Sankyo
believes that the overall credit risk related to its financial instruments is not significant.



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The estimated fair values of Sankyos financial instruments, excluding marketable securities and other securities
investments and affiliated companies, are summarized as follows:



|                                                              |  |                 |         |   |                     |   |         |  
|------------------------------------------------------------- |  | --------------- | ------- | - | ------------------- | - | ------- | -
|                                                              |  | Yen in millions |        
|                                                              |  | March 31, 2004  |        
|                                                              |  | Carryingamount  |         |   | Estimatedfair value |  
|Asset (Liability)                                             |  |                 |         |   |                     |   |         |  
|Cash and cash equivalents                                     |  | ¥               | 201,734 |   |                     | ¥ | 201,734 |  
|Time deposits                                                 |  |                 | 5,451   |   |                     |   | 5,451   |  
|Short-term borrowings                                         |  |                 | (17,636 | ) |                     |   | (17,636 | )
|Long-term debt including the current portion                  |  |                 | (9,862  | ) |                     |   | (9,537  | )
|Foreign exchange forward contracts and coupon swap agreements |  |                 | (49     | ) |                     |   | (49     | )
|Interest rate swap agreements                                 |  |                 | (22     | ) |                     |   | (22     | )



|                                                              |  |                 |         |   |                     |   |         |  
|------------------------------------------------------------- |  | --------------- | ------- | - | ------------------- | - | ------- | -
|                                                              |  | Yen in millions |        
|                                                              |  | March 31, 2005  |        
|                                                              |  | Carryingamount  |         |   | Estimatedfair value |  
|Asset (Liability)                                             |  |                 |         |   |                     |   |         |  
|Cash and cash equivalents                                     |  | ¥               | 268,488 |   |                     | ¥ | 268,488 |  
|Time deposits                                                 |  |                 | 2,485   |   |                     |   | 2,485   |  
|Short-term borrowings                                         |  |                 | (19,308 | ) |                     |   | (19,308 | )
|Long-term debt including the current portion                  |  |                 | (8,765  | ) |                     |   | (8,515  | )
|Foreign exchange forward contracts and coupon swap agreements |  |                 | (35     | ) |                     |   | (35     | )
|Interest rate swap agreements                                 |  |                 | (10     | ) |                     |   | (10     | )



Following are explanatory notes
regarding the financial assets and liabilities other than derivative financial instruments, marketable securities and other securities and affiliated companies.



Cash and cash equivalents, and time deposits 



In the normal course of business, substantially all cash and cash equivalents, and time deposits are highly liquid and are carried at amounts which approximate fair
value.



Short-term borrowings and long-term debt 



The fair values of short-term borrowings and total long-term debt including the current
portion were estimated based on the discounted amounts of future cash flows using Sankyos current incremental borrowing rates for similar liabilities.



17. Acquisition



In November 2002, Sankyo Pharma GmbH, a wholly owned subsidiary, acquired 100 percent of the outstanding common shares of Laboratoires Pharmaceutiquies FORNET S.A.S. and two of its affiliated companies (hereinafter
collectively referred as Fornet). The results of Fornets operations for the two months ended December 31, 2002 have been included in the consolidated financial statements of Sankyo for the year ended March 31, 2003. Fornet was a
distributor of certain branded generic products in France and after the acquisition, became a distributor of Sankyo products. In 2004 upon obtaining local government approval, Sankyo commenced marketing of its products in Europe.



The aggregate purchase price, fully paid in cash, was 30,274 thousand which was
translated to and reflected in the consolidated financial statements by ¥3,672 million out of which ¥1,971 million was to settle liabilities assumed. The purchase agreement contained a contingent payment clause based upon the performance of
certain product sales through 2007. Under this clause, during the year ended March 31, 2005, an additional payment was made and resulted in an increase in goodwill of ¥85 million.



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##### Table of Contents

18. Discontinued Operations



On December 23, 2003, Sankyo and Cygnus reached an agreement that, among other things, Sankyo pay a $30 million (¥3,238 million)
settlement fee to Cygnus and transfer title to all Gluco Watch products to Cygnus. The agreement nullified the licensing agreement between Sankyo and Cygnus for Sankyo to exclusively sell and market Gluco Watch. The settlement fee was paid in 2003.
Sankyo provided certain distribution and customer services through June 30, 2004. Sankyo has classified all losses related to Cygnus and the Gluco Watch operations as a discontinued operation. The before-tax loss from operations of Gluco Watch
amounted to ¥149 million and ¥10,322 million and the after-tax loss from operations of Gluco Watch amounted to ¥90 million and ¥6,199 million for the years ended March 31, 2003 and 2004, respectively.



A major element of the loss included a write off of inventory of ¥2,369 million recorded
on December 23, 2003.



Sankyo had also previously paid a nonrefundable license
fee to Cygnus of $25 million (¥2,698 million), which had been capitalized as an intangible asset and was being amortized over the estimated life of the agreement. On December 23, 2003 the carrying amount of this intangible asset, ¥2,398
million, was charged to earnings. Additionally, a ¥975 million receivable from Cygnus was written off.



Sankyo recorded tax benefits of approximately ¥59 million and ¥4,133 million for the years ended March 31, 2003 and 2004, respectively, in connection with the discontinued operations.



19. Other commitments and contingencies, concentrations and factors that may affect future
operations



Commitments outstanding at March 31, 2005 for the purchase of
property, plant and equipment approximated ¥8,063 million. Sankyo has entered into various supply agreements for the future minimum purchase of certain licensed products. Purchases of the licensed products were ¥3,696 million, ¥3,602
million and ¥3,908 million, at March 31, 2003, 2004 and 2005, respectively. Future payments remaining under the agreements as of March 31, 2005 approximated ¥16,637 million. The payments are scheduled at ¥6,328 million in fiscal year
2006; ¥4,929 million in fiscal year 2007; ¥5,380 million in fiscal year 2008. Of these amounts, payments of ¥4,359 million in fiscal year 2007, and ¥4,810 million in fiscal year 2008 are subject to renegotiation with the
counterparty.



Sankyo has also entered into several R&D agreements with
alliance partners whereby Sankyo is committed to fund certain payments upon achievement of certain milestones. Future conditional payments remaining under the agreements as of March 31, 2005 approximated ¥12,300 million.



At March 31, 2005, contingent liabilities for guarantees of loans of Sankyos employees
and a certain investee which Sankyo accounts for under cost method amounted to approximately ¥130 million and ¥366 million, respectively. Terms of the loan gurantees for the certain investee range from 1 to 5 years.



It is common practice in Japan for companies, in the ordinary course of business, to receive
promissory notes for the settlement of trade accounts receivable and subsequently to discount such notes to banks. At March 31, 2004 and 2005, Sankyo was contingently liable for discounted trade notes receivable of ¥526 million and ¥561
million, respectively.



In the United States, numerous lawsuits seeking damages
and other compensation were brought against Warner-Lambert Company and other pharmaceutical companies by patients who took the diabetes drug Rezulin, which had been sold until March 2000 using a compound with the generic name
troglitazone supplied by Sankyo. A U.S. subsidiary of Sankyo, Sankyo Pharma Inc., was named as defendant in a small portion of these cases, and it is defending these cases in cooperation with Warner-Lambert.



In these cases, the compensation demanded from all defendants includes claims for both
compensatory and punitive damages. In connection with the costs and damages to be borne by Sankyo and its subsidiaries, there is a provision in the license agreement with Warner-Lambert indemnifying Sankyo and its subsidiaries.



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Sankyo believes that it is in compliance in all material respects with applicable environmental laws and regulations.
Sankyo has made, and intends to continue to make, necessary expenditures for compliance with applicable laws and regulations. Sankyo also is cleaning up environmental contamination from past industrial activities at certain sites. As a result,
Sankyo is in various stages of investigation or remediation for sites where contamination might exist, and recorded a liability of ¥1,499 million at March 31, 2005. The amount is included in other current liabilities in the accompanying
consolidated balance sheets. While Sankyo cannot predict with certainty future capital expenditures or operating costs for environmental compliance, Sankyo does not believe it will have a material effect on its capital expenditures, earnings or
competitive position.



20. Segment data



The operating segments reported below are the segments of Sankyo for which separate
financial information is available and for which operating income/loss amounts are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. Sankyo management primarily evaluates the performance
of business segments based on operating income reported under accounting principles generally accepted in Japan (Japanese GAAP). There are several differences between Japanese GAAP and U.S. GAAP. The principal differences that affect
segment operating profit are accounting for impairment of long lived assets, pension and severance costs, revenue recognition and the scope of consolidation.



The major portions of Sankyos operations on a worldwide basis are derived from the Pharmaceuticals and Other business segments. The Pharmaceuticals segment
researches, develops, manufactures, and markets pharmaceuticals, medical devices and diagnostics. The Other segment includes operations that manufacture and market food products, additives, and agrochemical products.



The following tables present certain Japanese GAAP information regarding Sankyos
operating segments and operations by geographic areas as of and for the years ended March 31, 2003, 2004 and 2005:



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##### Table of Contents

Segment operating results and assets 



As of and for the year ended March 31, 2003:



|                                     |  |                   |         |       |   |           |  |       |         |                           |   |         |                    |   |        |                   |  |   |        |   |  |   |        
|------------------------------------ |  | ----------------- | ------- | ----- | - | --------- |  | ----- | ------- | ------------------------- | - | ------- | ------------------ | - | ------ | ----------------- |  | - | ------ | - |  | - | -------
|                                     |  | Yen in millions  
|                                     |  | Pharma- ceuticals |         | Other |   | Corporate |  | Total |         | Inter- segmentelimination |   |         | US GAAPadjustments |   |        | Consolidatedtotal
|Revenue from external customers      |  | ¥                 | 443,534 |       | ¥ | 126,394   |  | ¥     |        |                           | ¥ | 569,928 |                    | ¥ |       |                   |  | ¥ | 6,342  |   |  | ¥ | 576,270
|Revenue from other operating segment |  |                   | 319     |       |   | 2,524     |  |       |        |                           |   | 2,843   |                    |   | (2,843 | )                 |  |   |       |   |  |   |       
|Segment profit or loss               |  |                   | 77,934  |       |   | 1,898     |  |       |        |                           |   | 79,832  |                    |   | 6      |                   |  |   | 480    |   |  |   | 80,318 
|Depreciation and amortization        |  |                   | 21,418  |       |   | 4,396     |  |       |        |                           |   | 25,814  |                    |   |       |                   |  |   | 316    |   |  |   | 26,130 
|                                     |  |                   |         |       |   |           | 
|Segment assets                       |  |                   | 459,500 |       |   | 119,036   |  |       | 337,326 |                           |   | 915,862 |                    |   | (70    | )                 |  |   | 17,558 |   |  |   | 933,350
|Expenditures for segment assets      |  |                   | 28,246  |       |   | 3,695     |  |       |        |                           |   | 31,941  |                    |   |       |                   |  |   | (4,519 | ) |  |   | 27,422 







As of and for the year ended March 31, 2004:



|                                     |  |                   |         |       |   |           |  |       |         |                           |   |         |                    |   |        |                   |  |   |         |   |  |   |        
|------------------------------------ |  | ----------------- | ------- | ----- | - | --------- |  | ----- | ------- | ------------------------- | - | ------- | ------------------ | - | ------ | ----------------- |  | - | ------- | - |  | - | -------
|                                     |  | Yen in millions  
|                                     |  | Pharma- ceuticals |         | Other |   | Corporate |  | Total |         | Inter- segmentelimination |   |         | US GAAPadjustments |   |        | Consolidatedtotal
|Revenue from external customers      |  | ¥                 | 466,734 |       | ¥ | 129,612   |  | ¥     |        |                           | ¥ | 596,346 |                    | ¥ |       |                   |  | ¥ | 4,927   |   |  | ¥ | 601,273
|Revenue from other operating segment |  |                   | 1,288   |       |   | 3,171     |  |       |        |                           |   | 4,459   |                    |   | (4,459 | )                 |  |   |        |   |  |   |       
|Segment profit or loss               |  |                   | 89,114  |       |   | 5,506     |  |       |        |                           |   | 94,620  |                    |   | 935    |                   |  |   | (10,722 | ) |  |   | 84,833 
|Depreciation and amortization        |  |                   | 23,873  |       |   | 3,974     |  |       |        |                           |   | 27,847  |                    |   |       |                   |  |   | (1,087  | ) |  |   | 26,760 
|                                     |  |                   |         |       |   |           | 
|Segment assets                       |  |                   | 518,432 |       |   | 140,649   |  |       | 269,617 |                           |   | 928,698 |                    |   | (1,454 | )                 |  |   | 12,760  |   |  |   | 940,004
|Expenditures for segment assets      |  |                   | 42,395  |       |   | 4,961     |  |       |        |                           |   | 47,356  |                    |   |       |                   |  |   | (5,741  | ) |  |   | 41,615 







As of and for the year ended March 31, 2005:



|                                     |  |                   |         |       |   |           |  |       |         |                           |   |         |                    |   |        |                   |  |   |        |   |  |   |          
|------------------------------------ |  | ----------------- | ------- | ----- | - | --------- |  | ----- | ------- | ------------------------- | - | ------- | ------------------ | - | ------ | ----------------- |  | - | ------ | - |  | - | ---------
|                                     |  | Yen in millions  
|                                     |  | Pharma- ceuticals |         | Other |   | Corporate |  | Total |         | Inter- segmentelimination |   |         | US GAAPadjustments |   |        | Consolidatedtotal
|Revenue from external customers      |  | ¥                 | 454,710 |       | ¥ | 133,121   |  | ¥     |        |                           | ¥ | 587,831 |                    | ¥ |       |                   |  | ¥ | 3,931  |   |  | ¥ | 591,762  
|Revenue from other operating segment |  |                   | 923     |       |   | 1,723     |  |       |        |                           |   | 2,646   |                    |   | (2,646 | )                 |  |   |       |   |  |   |         
|Segment profit or loss               |  |                   | 77,496  |       |   | 6,587     |  |       |        |                           |   | 84,083  |                    |   | 842    |                   |  |   | 998    |   |  |   | 85,923   
|Depreciation and amortization        |  |                   | 25,633  |       |   | 3,178     |  |       |        |                           |   | 28,811  |                    |   |       |                   |  |   | 2,290  |   |  |   | 31,101   
|                                     |  |                   |         |       |   |           | 
|Segment assets                       |  |                   | 512,239 |       |   | 146,943   |  |       | 318,220 |                           |   | 977,402 |                    |   | (1,171 | )                 |  |   | 25,112 |   |  |   | 1,001,343
|Expenditures for segment assets      |  |                   | 25,276  |       |   | 8,518     |  |       |        |                           |   | 33,794  |                    |   |       |                   |  |   | (4,086 | ) |  |   | 29,708   



Sankyo evaluates performance based on
segmental profit and loss, which consists of revenue less operating expenses. Those measurements are determined using the accounting principles generally accepted in Japan. Transfers between segments are made at amounts which Sankyos
management believes approximate arms length prices.



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##### Table of Contents

Enterprise-wide information:



Major customers 



Sankyo had sales to Bristol-Myers Squibb Company of ¥61,230 million, ¥92,570 million and ¥70,520 million during the years ended March 31, 2003, 2004 and 2005,
respectively, and sales to Alfresa of ¥64,985 million during the year ended March 31, 2005, within the Pharmaceuticals segment, that exceeded 10% of Sankyos net sales.



Geographic Information 



As of and for the year ended March 31, 2003:



|                   |  |                 |         |              |   |                        |  |                                           |        |  |       |        |   |  |   |        
|------------------ |  | --------------- | ------- | ------------ | - | ---------------------- |  | ----------------------------------------- | ------ |  | ----- | ------ | - |  | - | -------
|                   |  | Yen in millions
|                   |  | Japan           |         | NorthAmerica |   | Other foreigncountries |  | IntersegmentElimination/UnallocatedAmount |        |  | Total
|Revenues           |  |                 |         |              |   |                        |  |                                           |        |  |       |        |   |  |   |        
|External customers |  | ¥               | 497,676 |              | ¥ | 48,986                 |  | ¥                                         | 29,608 |  | ¥     |       |   |  | ¥ | 576,270
|Inter-segment      |  |                 | 3,821   |              |   | 2,726                  |  |                                           | 1,222  |  |       | (7,769 | ) |  |   |       
|                   |  |                 |         |              |   |                        |  |                                           |        |  |       |        |   |  |   |        
|Total revenue      |  | ¥               | 501,497 |              | ¥ | 51,712                 |  | ¥                                         | 30,830 |  | ¥     | (7,769 | ) |  | ¥ | 576,270
|                   |  |                 |         |              |   |                        |  |                                           |        |  |       |        |   |  |   |        
|Long-lived assets  |  | ¥               | 198,423 |              | ¥ | 3,319                  |  | ¥                                         | 10,638 |  | ¥     |       |   |  | ¥ | 212,380
|                   |  |                 |         |              |   |                        |  |                                           |        |  |       |        |   |  |   |        



As of and for the year ended March 31,
2004:



|                   |  |                 |         |              |   |                        |  |                                           |        |  |       |         |   |  |   |        
|------------------ |  | --------------- | ------- | ------------ | - | ---------------------- |  | ----------------------------------------- | ------ |  | ----- | ------- | - |  | - | -------
|                   |  | Yen in millions
|                   |  | Japan           |         | NorthAmerica |   | Other foreigncountries |  | IntersegmentElimination/UnallocatedAmount |        |  | Total
|Revenues           |  |                 |         |              |   |                        |  |                                           |        |  |       |         |   |  |   |        
|External customers |  | ¥               | 504,245 |              | ¥ | 60,781                 |  | ¥                                         | 36,247 |  | ¥     |        |   |  | ¥ | 601,273
|Inter-segment      |  |                 | 7,830   |              |   | 3,220                  |  |                                           | 2,730  |  |       | (13,780 | ) |  |   |       
|                   |  |                 |         |              |   |                        |  |                                           |        |  |       |         |   |  |   |        
|Total revenue      |  | ¥               | 512,075 |              | ¥ | 64,001                 |  | ¥                                         | 38,977 |  | ¥     | (13,780 | ) |  | ¥ | 601,273
|                   |  |                 |         |              |   |                        |  |                                           |        |  |       |         |   |  |   |        
|Long-lived assets  |  | ¥               | 194,994 |              | ¥ | 3,382                  |  | ¥                                         | 11,424 |  | ¥     |        |   |  | ¥ | 209,800
|                   |  |                 |         |              |   |                        |  |                                           |        |  |       |         |   |  |   |        



As of and for the year ended March 31,
2005:



|                   |  |                 |         |              |   |                        |  |                                           |        |  |       |         |   |  |   |        
|------------------ |  | --------------- | ------- | ------------ | - | ---------------------- |  | ----------------------------------------- | ------ |  | ----- | ------- | - |  | - | -------
|                   |  | Yen in millions
|                   |  | Japan           |         | NorthAmerica |   | Other foreigncountries |  | IntersegmentElimination/UnallocatedAmount |        |  | Total
|Revenues           |  |                 |         |              |   |                        |  |                                           |        |  |       |         |   |  |   |        
|External customers |  | ¥               | 464,219 |              | ¥ | 76,946                 |  | ¥                                         | 50,597 |  | ¥     |        |   |  | ¥ | 591,762
|Inter-segment      |  |                 | 13,033  |              |   | 3,425                  |  |                                           | 4,014  |  |       | (20,472 | ) |  |   |       
|                   |  |                 |         |              |   |                        |  |                                           |        |  |       |         |   |  |   |        
|Total revenue      |  | ¥               | 477,252 |              | ¥ | 80,371                 |  | ¥                                         | 54,611 |  | ¥     | (20,472 | ) |  | ¥ | 591,762
|                   |  |                 |         |              |   |                        |  |                                           |        |  |       |         |   |  |   |        
|Long-lived assets  |  | ¥               | 197,994 |              | ¥ | 4,648                  |  | ¥                                         | 10,764 |  | ¥     |        |   |  | ¥ | 213,406
|                   |  |                 |         |              |   |                        |  |                                           |        |  |       |         |   |  |   |        



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Revenues are attributed to geographies based on the country location of the parent company or the subsidiary that
transacted the sale with the external customer.



There are no any individually
material countries with respect to revenues, operating expenses, operating income and segment assets included in other foreign countries.



21. Per share amounts



Reconciliations of the differences between basic and diluted net income per share for the years ended March 31, 2003, 2004 and 2005 are as follows:



|                                           |  |                |        |                        |         |                     |   |       
|------------------------------------------ |  | -------------- | ------ | ---------------------- | ------- | ------------------- | - | ------
|                                           |  | Yen inmillions |        | Thousands of shares    |         | Yen                
|                                           |  | Net income     |        | Weightedaverage shares |         | Net incomeper share
|For the year ended March 31, 2003          |  |                |        |                        |         |                     |   |       
|Continuing operations per common share     |  |                |        |                        |         |                     |   |       
|Basic                                      |  | ¥              | 34,941 |                        | 441,325 |                     | ¥ | 79.17 
|Effect of dilutive securities              |  |                |        |                        |         |                     |   |       
|Assumed exercise of dilutive stock options |  |                |       |                        |        |                     |   |      
|                                           |  |                |        |                        |         |                     |   |       
|Diluted                                    |  | ¥              | 34,941 |                        | 441,325 |                     | ¥ | 79.17 
|                                           |  |                |        |                        |         |                     |   |       
|Discontinued operations per common share   |  |                |        |                        |         |                     |   |       
|Basic                                      |  | ¥              | 90     |                        | 441,325 |                     | ¥ | 0.20  
|Diluted                                    |  |                | 90     |                        | 441,325 |                     |   | 0.20  
|Net income per common share                |  |                |        |                        |         |                     |   |       
|Basic                                      |  | ¥              | 34,851 |                        | 441,325 |                     | ¥ | 78.97 
|Diluted                                    |  |                | 34,851 |                        | 441,325 |                     |   | 78.97 
|                                           |  |                |       
|For the year ended March 31, 2004          |  |                |        |                        |         |                     |   |       
|Continuing operations per common share     |  |                |        |                        |         |                     |   |       
|Basic                                      |  | ¥              | 44,410 |                        | 437,053 |                     | ¥ | 101.61
|Effect of dilutive securities              |  |                |        |                        |         |                     |   |       
|Assumed exercise of dilutive stock options |  |                |       |                        | 46      |                     |   |      
|                                           |  |                |        |                        |         |                     |   |       
|Diluted                                    |  | ¥              | 44,410 |                        | 437,099 |                     | ¥ | 101.60
|                                           |  |                |        |                        |         |                     |   |       
|Discontinued operations per common share   |  |                |        |                        |         |                     |   |       
|Basic                                      |  | ¥              | 6,199  |                        | 437,053 |                     | ¥ | 14.18 
|Diluted                                    |  |                | 6,199  |                        | 437,099 |                     |   | 14.18 
|Net income per common share                |  |                |        |                        |         |                     |   |       
|Basic                                      |  | ¥              | 38,211 |                        | 437,053 |                     | ¥ | 87.43 
|Diluted                                    |  |                | 38,211 |                        | 437,099 |                     |   | 87.42 
|                                           |  |                |       
|For the year ended March 31, 2005          |  |                |        |                        |         |                     |   |       
|Continuing operations per common share     |  |                |        |                        |         |                     |   |       
|Basic                                      |  | ¥              | 56,500 |                        | 429,528 |                     | ¥ | 131.54
|Effect of dilutive securities              |  |                |        |                        |         |                     |   |       
|Assumed exercise of dilutive stock options |  |                |       |                        | 156     |                     |   |      
|                                           |  |                |        |                        |         |                     |   |       
|Diluted                                    |  | ¥              | 56,500 |                        | 429,684 |                     | ¥ | 131.49
|                                           |  |                |        |                        |         |                     |   |       
|Discontinued operations per common share   |  |                |        |                        |         |                     |   |       
|Basic                                      |  | ¥              |       |                        |        |                     | ¥ |      
|Diluted                                    |  |                |       |                        |        |                     |   |      
|Net income per common share                |  |                |        |                        |         |                     |   |       
|Basic                                      |  | ¥              | 56,500 |                        | 429,528 |                     | ¥ | 131.54
|Diluted                                    |  |                | 56,500 |                        | 429,684 |                     |   | 131.49



Certain stock options were not
included in the computation of diluted net income per share for the year ended March 31, 2003 because the options exercise prices were greater than the average market price per common share during the period.



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22. Subsequent Events



Integration with Daiichi Pharmaceutical Co., Ltd. 



On May 13, 2005, the board of directors of the Company approved the terms and conditions of a joint share transfer with Daiichi Pharmaceutical Co., Ltd.
(Daiichi). Daiichi Sankyo Company, Limited (Daiichi Sankyo), a joint stock corporation to be organized under the laws of Japan would be created in order to integrate the managements and businesses of the Company and Daiichi
under a single holding company in an effort to realize the potential synergies available from integrating their pharmaceutical businesses. In June 2005, the shareholders of the Company and Daiichi also approved the establishment of a holding company
and a share transfer.



The joint share transfer will be accounted for by
Daiichi Sankyo under the purchase method of accounting in accordance with U.S. GAAP. The exchange ratio of 1.159 Daiichi Sankyo shares for each share of common stock of Daiichi and the Companys exchange ratio of one Daiichi Sankyo share for
each share of the Companys common stock was set forth in the joint share transfer agreement. After the closing of the joint share transfer, which is expected to be September 28, 2005, former Daiichi shareholders will own approximately 42.0%
and former shareholders of the Company will own approximately 58.0% of Daiichi Sankyo. Based on these projected ownership percentages, the Company will be the accounting acquiror for financial reporting purposes. Under the purchase method of
accounting, in accordance with FAS No. 141, Business Combinations (FAS 141), the Company will record the tangible and intangible assets acquired and liabilities of Daiichi assumed at their fair values. The reported financial condition
and results of operations of Daiichi Sankyo after the closing of the joint share transfer will reflect Daiichis balances and results of operations from the date of the acquisition in addition to the Companys balances and results of
operations.



The following is an unaudited preliminary estimate of the purchase
price for Daiichi as if the joint share transfer had occurred on March 31, 2005:



|                                                                                                                                                                                                        |  |                      |         |  |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------- |  | - | -------
|                                                                                                                                                                                                        |  | Unaudited           
|                                                                                                                                                                                                        |  | (In millions of yen)
|Number of shares of Daiichi common stock outstanding as of March 31, 2005, excluding treasury shares (in thousands)                                                                                     |  |                      | 268,404 |  |   |        
|Exchange ratio                                                                                                                                                                                          |  |                      | 1.159   |  |   |        
|                                                                                                                                                                                                        |  |                      |         |  |   |        
|                                                                                                                                                                                                        |  |                      | 311,080 |  |   |        
|                                                                                                                                                                                                        |  |                     
|Multiplied by the average market price of Sankyos stock for the period beginning two days before and ending two days after February 25,
2005, the date of the announcement of the joint share transfer |  | ¥                    | 2,393   |  | ¥ | 744,414
|                                                                                                                                                                                                        |  |                      |         |  |   |        
|Estimated transaction costs                                                                                                                                                                             |  |                      |         |  |   | 2,500  
|                                                                                                                                                                                                        |  |                      |         |  |   |        
|Estimated purchase price                                                                                                                                                                                |  |                      |         |  | ¥ | 746,914
|                                                                                                                                                                                                        |  |                      |         |  |   |        



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##### Table of Contents

Note that the final purchase price allocation will be dependent upon certain valuations and other studies that have not
progressed, at this time, to a stage where there is sufficient information to make a definitive allocation.



The following table summarizes on an unaudited pro forma basis as of March 31, 2005 the estimated fair value of the assets to be acquired and liabilities to be assumed.



|                                    |  |                      |           |  
|----------------------------------- |  | -------------------- | --------- | -
|                                    |  | (In millions of yen) |          
|Current assets                      |  |                      | ¥322,341  |  
|Property, plant and equipment       |  |                      | 135,734   |  
|Intangible assets                   |  |                      | 448,416   |  
|Goodwill                            |  |                      | 5,953     |  
|Other assets                        |  |                      | 119,523   |  
|                                    |  |                      |           |  
|Total assets acquired               |  |                      | 1,031,967 |  
|                                    |  |                      |           |  
|Current liabilities                 |  |                      | (79,188   | )
|Long-term debt                      |  |                      | (2,216    | )
|Accrued pension and severance costs |  |                      | (39,375   | )
|Deferred income taxes and other     |  |                      | (163,162  | )
|                                    |  |                      |           |  
|Total liabilities assumed           |  |                      | (283,941  | )
|                                    |  |                      |           |  
|Minority interest                   |  |                      | (1,112    | )
|                                    |  |                      |           |  
|Net assets acquired                 |  |                      | ¥746,914  |  
|                                    |  |                      |           |  



Included in ¥448,416 million of
acquired intangible assets are ¥302,000 million of completed technology, ¥44,004 million of patents and ¥13,412 million of other intangible assets such as distribution rights. It also includes ¥89,000 million of research and
development assets that will be written off at the date of acquisition in accordance with FASB Interpretation No.4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method. The effect of the write-off is
not reflected in the supplementary estimated pro forma information of results of operations as it is not expected to have a continuing impact on the Company. Amortization expenses relating to the estimated value of the intangible assets will be
calculated based on their various estimated useful lives, 9.7 years for completed technology and 5.3 years for patents, with no significant residual value. There are no intangible assets not subject to amortization.



The following is the supplementary estimated pro forma information of results of operations
as though the joint share transfer had occurred on April 1 of each period presented.



|                              |  |                                            |  |          |  |  |  | 
|----------------------------- |  | ------------------------------------------ |  | -------- |  |  |  | 
|                              |  | Pro Forma Unaudited                       
|                              |  | Yen in millions, except for per share data
|                              |  | Year ended March 31                       
|                              |  | 2004                                       |  | 2005    
|Net revenue                   |  | ¥924,250                                   |  | ¥916,622
|Net income                    |  | 47,082                                     |  | 64,623  
|Net income per share (in yen) |  |                                            |  |         
| Basic                       |  | 63.03                                      |  | 87.95   
| Diluted                     |  | 63.03                                      |  | 87.92   



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##### Table of Contents

The above estimated pro forma information has been presented for information purposes only and is based on certain
limited information available at this time.



Upon completion of the joint share
transfer, the Company and Daiichi will review their accounting policies and financial statement classifications. As a result of that review, it may become necessary to make certain changes to Daiichis accounting policies to conform those
accounting policies to those of the Company.



Termination of distribution
rights 



In July 2005, as a result of the joint share transfer
discussed above, the Company agreed with the co-marketer that the distribution of Alesion will be consolidated to the co-marketers operations as of September 28, 2005. Upon termination of the co-marketing contract, the Company will incur a
loss of approximately ¥1,500 million by writing off the unamortized distribution right.



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##### Table of Contents

SIGNATURE PAGE



The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused
and authorized the undersigned to sign annual report on its behalf.



SANKYO COMPANY, LIMITEDBy:

/s/ Takashi ShodaName:

Takashi ShodaTitle:

President and Representative DirectorDate:

September 26, 2005




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##### Table of Contents

Exhibit Index



|             |  |                                                                                                                                                                                                                                     
|------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 12.1 |  | Certification of Chief Executive Officer Pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934                                                                                                                       
|             | 
|Exhibit 12.2 |  | Certification of Principal Financial Officer Pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934                                                                                                                   
|             | 
|Exhibit 13.1 |  | Certifications of Chief Executive Officer and Principal Financial Officer Pursuant to Rule 15d-14(b) under the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of
the United States Code (18 U.S.C. 1350)
|             | 
|Exhibit 15.1 |  | Report of Independent Registered Public Accounting Firm, as auditors of Luitpold Pharmaceuticals, Inc., submitted pursuant to Rule 2-05 of Regulation S-X                                                                           



A-1