FUJISHOJI CO.,LTD.

The Gaming Machine Business (Single Segment) is subject to regulation under the Entertainment Business Law and related statutes, and amendments, repeals, or enactment of new laws and regulations may affect operating results. In addition, the manufacture and sale of Pachinko Gaming Machines and Pachislot Gaming Machines requires model-type testing by designated testing organizations and inspection by the Public Safety Commission of each prefecture, and there is a risk that if such testing or inspection is prolonged or results in non-conformity, product supply may be disrupted. Although the Group's basic policy is to comply with laws and regulations, responding to changes in the regulatory environment is a precondition for business continuity.

Gaming machines are sold to pachinko halls, and a significant change in the social or economic environment due to a major disaster, the spread of infectious disease, or other factors could worsen the operating environment for halls and lead to a contraction of the gaming machine market. The Group strives to gather market information and formulate highly accurate sales plans, but it may be difficult to respond to sudden changes in the external environment. If a market contraction materializes, it will directly affect net sales and profit levels.

Against the backdrop of a difficult operating environment, pachinko halls are increasingly selecting machine models expected to achieve stable utilization, and unit sales per model have generally been declining. If the sales timing of the Company's products overlaps with highly topical models from competitors, there is a risk that actual unit sales may deviate significantly from initial expectations. The Company promotes product development incorporating innovative ideas, but depending on the competitive situation, this could have a material impact on operating results.

Because the period from production to delivery is short, components requiring a long procurement lead time are ordered in stages in advance, creating a risk that substantial inventory valuation and disposal losses may arise if sales of new products fall significantly short of expectations. The Company is implementing inventory reduction measures such as standardizing components and shortening procurement lead times through strengthened relationships with suppliers, but the structure is such that the accuracy of sales forecasts directly affects operating results. The Company has previously recorded inventory valuation losses in connection with voluntary product recalls, and this potential risk continues to exist.

In FY2005 (ended March 2005), the Company conducted a voluntary recall of all units due to a component defect in gaming machines sold that year, recording substantial extraordinary losses related to the voluntary product recall and inventory valuation losses. The Company has worked to rebuild its research and development framework and thoroughly strengthen quality control to prevent recurrence, but if a serious defect occurs in gaming machines sold in the future, it may result in substantial losses and a decline in credibility that affects operating results. Since gaming machines are required to conform to technical standards under the Entertainment Business Law and related statutes, the importance of quality control is particularly high.

The Company pays patent royalties to management organizations and others related to gaming machines, and there is a risk of being subject to claims for damages if there are significant changes in patent and other royalty fees or if intellectual property rights of which the Group is unaware are established. In addition, licensing fees for the portrait and copyright of talents and characters have tended to rise due to intensifying competition among gaming machine manufacturers, and a sharp rise in licensing fees could put pressure on earnings. The Company conducts investigations into potential infringement of third-party rights from the planning and development stages, but it is difficult to completely eliminate such risks.

In connection with the operation of membership-based websites, the Company holds a large amount of personal information, and while it implements thorough management in accordance with the Personal Information Protection Act, in the event that information is leaked, there is a risk of claims for damages and a decline in credibility that could affect operating results. The channels through which information leaks can occur, including cyberattacks and internal misconduct, are becoming increasingly diverse, requiring ongoing strengthening of security measures.

Manufacturing of products is concentrated at a single facility, the Nagoya Plant, and there is a risk that if the production line suffers significant damage due to a major disaster such as an earthquake, fire, or storm/flood damage, or due to the spread of infectious disease, the manufacture and shipment of products could be temporarily or long-term halted. The Company conducts disaster prevention drills at the Nagoya Plant and undertakes disaster prevention, mitigation, and recovery initiatives, but dependence on a single facility constitutes a structural risk to business continuity.

Among the components used, some have limited procurement sources or are difficult to switch to alternative suppliers, and if a supply delay occurs due to a major disaster, the spread of infectious disease, or other factors, there is a risk that product manufacturing and shipment could be halted. The Company conducts close coordination on delivery plans with suppliers, taking into account inventory security and early arrangement risk, but dependence on specific procurement sources leads to vulnerability in the supply chain.

Deferred tax assets depend on estimates of future taxable income, and if there are changes to the underlying premises or assumptions, deferred tax assets may be reduced, resulting in the recognition of tax expense. In addition, in assessing impairment of fixed assets, the projected unit sales of gaming machines are a critical assumption, and if a revision becomes necessary due to changes in business plans or the market environment, impairment losses may be recognized in the following consolidated fiscal year. Both factors have the potential to further worsen financial figures during a downturn in business performance.