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A N N U A L R E P O RT 2006SBI E *TRADE SECURIT IES Co . , L td .

For the Year Ended March 31, 2006

Printed in Japan

SBI E*TRADE SECURITIES Co., Ltd.

a core securities company in the SBI Group, which manages Japan’s largest venture capital fund and

is expanding a broad array of financial businesses.

SBI E*TRADE SECURITIES’ operations include the on-line brokerage of transactions in stocks

and other securities, securities underwriting, public subscriptions and secondary offerings of securi-

ties, as well as private placements of securities. Through these and other securities company opera-

tions, the Company seeks to provide financial services that are finely tailored to match customers’

needs.

A pioneer of on-line brokerage business in Japan, SBI E*TRADE SECURITIES has a customer-

oriented business philosophy that is reflected in the Company’s goal of offering the industry’s

highest-quality services as well as the industry’s lowest commissions.

On July 1, 2006, the Company changed its name from E*TRADE SECURITIES Co., Ltd., to SBI

E*TRADE SECURITIES Co., Ltd. Besides enabling the Company to better leverage the power of the

SBI brand, the addition of “SBI” to the Company name is promoting awareness of the concerted

nature of the operations of SBI Group companies and facilitating efforts to generate still-greater

synergies within the Group.

In the future, SBI E*TRADE SECURITIES intends to respond to customers’ needs by providing

an increasingly diverse array of financial services and thereby realize a sustained increase in its

corporate value.

SECURITIES IS

Financial Highlights 1

To Our Shareholders 2

Overview of Operations 4

An Interview with the President 6

New Initiatives to Further

Increase Customer Convenience 12

Corporate Governance

and Social Contribution 14

Management’s Discussion and Analysis 16

Financial Statements 22

Corporate Officers/History 44

Corporate Data/Investor Information 45

Forward-looking statements

This annual report contains statements about such topics

as the Company’s current plans, outlook, and strategies,

and the portions of those statements that are not histori-

cal facts are forward-looking statements. In accordance

with the Company’s current management policies, these

forward-looking statements are made based on currently

available information and on assumptions that the

Company judges to be rational. Consequently, the for-

ward-looking statements are subject to diverse risks,

including, but not limited to, risks related to economic

trends in principal markets, trends in demand for ser-

vices, and fluctuations in currency exchange rates.

Because of these factors, actual results may differ greatly

from those projected in this annual report.

CONTENTS

SBI E*TRADE

SBI E*TRADE SECURIT IES Co., Ltd. 45

I N V E S T O R I N F O R M AT I O N (As of March 31, 2006)

Shares Authorized 11,400,000 shares

Shares Issued 3,143,817 shares

Number of Shareholders 95,014

Principal Shareholders

Share of Number of shares voting rights (%)

SBI Holdings, Inc. 1,608,465 51.16SOFTBANK INTERNET TECHNOLOGY FUND No. 2 451,356 14.35 SOFTBANK INTERNET TECHNOLOGY FUND No. 1 112,839 3.58 Japan Securities Finance Co., Ltd. 47,207 1.50 SOFTBANK INTERNET TECHNOLOGY FUND No. 3 30,729 0.97 The Master Trust Bank of Japan, Ltd. (Trust Account) 29,803 0.94 Trust & Custody Services Bank, Ltd. (Trust Account B) 21,084 0.67

* Shareholding and voting rights figures for Japan Securities Finance Co., Ltd., include figures for 1,050 shares held in that company’scommercial account.

Shareholder Information (As of March 31, 2006)

Number of shares heldPercentage of total shares issued (%)

Financial Institutions144,940 (4.61%)

Securities Companies30,120 (0.96%)

Other Japanese Companies1,629,766 (51.84%)

Foreign Companies, Etc.133,064 (4.23%)

Individuals and Others1,205,927 (38.36%)

C O R P O R AT E D ATACorporate Name SBI E*TRADE SECURITIES Co., Ltd.

(Name changed from E*TRADE SECURITIES Co., Ltd., as of July 1, 2006)

Location 1-6-1, Roppongi, Minato-ku, Tokyo

Tel. (81) 3-5562-7210

Established March 30, 1944

Paid-in Capital ¥46,874,835,631 (As of March 31, 2006)

Number of Employees 129 (As of March 31, 2006)

Consolidated Subsidiary E*Trade Korea Co., Ltd.

URL http://www.etrade.ne.jp/


F I N A N C I A L H I G H L I G H T S

SBI E*TRADE SECURITIES Co., Ltd. (Former E*TRADE SECURITIES Co., Ltd.) and a Consolidated SubsidiaryYears ended March 31, 2005 and 2006

Thousands ofMillions of yen U.S. dollars

2005 2006 2006

At fiscal year-end:Net assets ¥ 50,921 ¥118,908 $1,012,243Total assets 489,056 957,337 8,149,626Short-term bank borrowings 10,440 4,258 36,243Cash used in operating activities (16,777) (58,371) (496,905)

For the year:Operating revenues 27,175 60,214 512,590Net operating revenues 25,181 56,317 479,417Net income 6,179 16,971 144,470

Yen U.S. dollars

Per share:Net assets ¥17,679.78 ¥37,751.31 $321.37Net income 2,425.47 5,649.18 48.09

Equity ratio (%) 10.4 12.4Return on equity (ROE, %) 17.3 20.0

Note: Yen amounts have been translated, for convenience only, at ¥117.47=US$1, the approximate exchange rate on March 31, 2006.

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and Equity RatioNet IncomeNet Operating RevenuesOperating Revenues

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Total assetsTotal shareholders’ equityEquity ratio

2 SBI E*TRADE SECURIT IES Co., Ltd.

T O O U R S H A R E H O L D E R S

Yoshitaka KitaoChairman

Taro IzuchiPresident

providing an increasingly broad array of products and services related to stocks as well as other kinds of

securities and investments. This approach has enabled us to earn an overwhelmingly large share of Japan’s

market for the products and services of specialized on-line securities companies, and we have been effec-

tively leveraging this powerful market position as we seek to expand our operations in underwriting and

other fields as well as thereby realize steady growth in profitability.

In recent years, on-line securities companies have steadily increased their presence in Japan’s securities

markets. SBI E*TRADE SECURITIES has maintained its position as the leading on-line securities company by

operating as an on-line comprehensive securities company that provides products and services that meet the

needs of all types of customers. In addition to sustaining this approach, we plan to make additional efforts to

greatly reduce investment costs; provide highly attractive investment opportunities (products); provide abun-

dant, high-quality investment-related information; and provide highly reliable transactions. In these ways, we

are aiming to maximize our customers’ investment returns as well as to contribute to growth in stock prices

and corporate values that promotes the healthy development of Japan’s financial markets and economy.

By operating as the on-line comprehensive securities company that offers the industry’s low-

est brokerage commission levels and highest service quality levels, SBI E*TRADE SECURI-

TIES Co., Ltd., is working to achieve sustained growth in its business scale and corporate value.

SBI E*TRADE SECURITIES Co., Ltd., is a core securities company within the SBI Group, which is dynami-

cally developing diverse business operations in five core business fields—the asset management, broker-

age and investment banking, financial services, housing and real estate, and lifestyle network businesses.

A pioneer in the field of on-line securities business, SBI E*TRADE SECURITIES is committed to a

customer-oriented business philosophy that underlies its efforts to consistently offer the industry’s lowest

brokerage commission levels and highest service quality levels. Being an on-line comprehensive securities

company, SBI E*TRADE SECURITIES is working to offer the lowest brokerage commission levels while also


BUSINESS PHILOSOPHY

Financial Innovation and Customer-Oriented Approach to Business

As a pioneering financial innovator, SBI E*TRADE SECURITIES has created a revolutionary

business model centered on the Internet and is endeavoring to provide high-value-added financial

services based on a customer-oriented management strategy. The Company is also striving

to invigorate the Japanese economy by promoting greater stock market participation by ordinary

Japanese and thereby help shift individuals’ assets from passive savings to active investments.

SBI E*TRADE SECURITIES’ mission is to provide customer-oriented financial services,

and the Company is tirelessly working to further improve its services and realize still-higher levels

of customer satisfaction.

THE SBI GROUP AT A GLANCE

SBI E*TRADE SECURITIES’ parent company is SBI Holdings, Inc., which is the core member of

the SBI Group of financial companies.

The SBI Group focuses on five core business fields—the asset management, brokerage and

investment banking, financial services, housing and real estate, and lifestyle network businesses.

While working to realize synergies among Group member companies, the Group is dynamically

developing its operations in each field and seeking to undertake those operations on a global scale.

SBI E*TRADE SECURITIES plays a key role in the SBI Group’s brokerage and investment

banking segment by operating as an on-line securities company that handles business related

to equities, bonds, and other securities by efficiently interacting with customers via the Internet.

Customer-Oriented Business Philosophy Emphasized Items

The lowest commission fees in the industry

Abundant, high-quality investment information and real-time transaction tools

Highly attractive investment opportunities (products)

Highly secure transactions

SBI Holdings, Inc.8473(First Sections of Tokyo Stock Exchange

and Osaka Securities Exchange)

http://www.sbigroup.co.jp

Asset Management Business

Brokerage and Investment Banking Business

Financial Services Business

Lifestyle Network Business

Housing and Real Estate Business


O V E R V I E W O F O P E R AT I O N S

� Brokerage

� Public subscriptions and secondary offerings

of securities

� Processing of orders and contracts

SBI E*TRADE SECURITIES’ main business fields include

the brokerage of transactions in stocks and other secu-

rities based on interaction with customers via the

Internet and telephone call center facilities; securities

underwriting, public subscriptions, and secondary

offerings of securities; as well as private placements of

securities. Through these and other securities company

operations, the Company seeks to provide financial ser-

vices that are finely tailored to match customers’ needs.

The Company offers a broad range of products

and services that address diverse customer needs

and enable individual customers to manage their assets

in line with their unique investment goals.

Principal Products

� Japanese Stocks

Futures transactions

Margin transactions (standardized/indefinite

(general))

Odd-lot shares (numbering less than full trading

units)

Initial stock listings (public offerings and secondary

distributions)

Off-the-exchange placements

� Foreign Stocks

U.S. stocks

Chinese stocks

Korean stocks

� Investment Trusts

Equities investment trusts

Real estate investment trusts (REITs)

Money market funds (MMFs), money reserve funds

(MRFs)

U.S.-dollar MMFs

� Bonds

Foreign bonds

Government bonds suitable for individuals

Corporate bonds

� Other Financial Products

Foreign exchange transactions on margin

(E*TRADE FX)

Futures and options transactions

Covered warrants

Insurance

Real estate investment funds (anonymous

associations (dormant partnerships))

Individual annuities

RETAIL OPERATIONS

Leveraging its overwhelmingly strong customer base in

retail markets, SBI E*TRADE SECURITIES is progres-

sively expanding its underwriting of initial public offerings

(IPOs). As of the end of June 2006, the Company was

the top specialized on-line securities company in terms

of the number of IPOs underwritten. By strengthening

collaboration with financial institutions positioned to refer

potential IPO client companies, the Company is effec-

tively promoting the expansion of its IPO business. Plans

call for continuing to vigorously increase the scale of

underwriting operations.

After IPO client companies’ shares have been listed,

SBI E*TRADE SECURITIES continues to proactively pro-

vide those companies with services related to additional

stock issuances and placements as well as secondary

offerings. The Company offers IPO client companies

advice and proposals designed to help those compa-

nies expand their operations, increase their competitive-

ness, and achieve diverse other objectives.

In addition, SBI E*TRADE SECURITIES engages

in off-the-exchange placements and other activities

designed to meet the needs of listed companies desiring

to increase the number of their individual shareholders.

CORPORATE BUSINESS


IPO Underwriting Performance (Number of Issues) (Fiscal years ending)

Notes:1. Figures attributed to fiscal years are based on initial share listing dates.2. Figures exclude brokered trading and real estate investment trusts.

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Principal On-Line Securities Companies’ Shares of Individual Customer Stock Brokerage Commissions(First quarter of fiscal 2006)

Other on-line securities companiesFive top on-line securities companies

37.2%62.8%

Notes:1. Figures compiled by SBI E*TRADE SECURITIES using materials from the TSE, JASDAQ, and individual securities companies.2. Figures represent individual stock brokerage commissions as shares of aggregate total figures for the first and second sections of Japan's top three stock markets as well as JASDAQ.

SBI E*TRADE SECURITIESRakutenMatsuiMonexKabu.com

27.3%13.2%9.5%6.8%6.0%

In addition to offering attractively low commission

fees, SBI E*TRADE SECURITIES is proactively working

to upgrade and expand its order-placement systems so

that it can augment the range of the products it offers to

meet diverse customer needs and so that it can ensure

that customers enjoy a stable transactional environment.

By taking various measures in line with its customer-

oriented management philosophy, SBI E*TRADE SECURI-

TIES has increased the added value of the services it

provides as a comprehensive on-line securities company.


Fiscal 2005 Performance

Q1In fiscal 2005, ended March 31, 2006, SBI

E*TRADE SECURITIES attained new record

high levels of operating revenues, operating income,

ordinary income, and net income. Could you briefly

explain your performance during the year and the

reasons for that performance?

A: During the year, the full-scale recovery of the

Japanese economy, expansion of Japanese corporate

profitability, and expectations regarding the benefits

of structural reforms all had beneficial effects on the

domestic stock market. This and the growing number

of individual investors supported active trading and

positive price trends.

Amid this business environment, SBI E*TRADE

SECURITIES’ proactive efforts to offer products, ser-

vices, and commissions that generate high levels of cus-

tomer satisfaction led to large increases in the number

of the Company’s customer accounts and client assets.

These large increases were accompanied by smooth

growth in commission revenue, and interest revenue on

margin trades also rose. A strong performance related

to the underwriting of IPOs and other issues supported

a rise in revenue from underwriting, public subscription,

and secondary offering operations.

Conditions were also positive in the Korean stock

market, where we have a subsidiary expanding its on-

line brokerage operations, as strong corporate perfor-

mances and an influx of funds from foreign investors

supported a rise in stock prices. This had a positive

effect on the performance of our subsidiary there as

well as our consolidated performance.

As a result, we were able to greatly boost the levels

of our consolidated operating revenues and profitability.

Operating revenues grew to ¥60,214 million, up 121.6%

from the previous fiscal year. Operating income increased

170.1%, to ¥30,012 million. Thus, net income surged

174.7%, to ¥16,971 million.

Past Strategies

Q2What are the main strategies SBI E*TRADE

SECURITIES has implemented to expand its

operations since it initiated on-line transactions in 1999?

A: In line with its customer-oriented business strategy,

SBI E*TRADE SECURITIES pioneered the on-line compre-

hensive securities business in Japan by providing high-

value-added financial services. In particular, we have

striven to lower customers’ transaction costs through

thorough measures to reduce the level of the commis-

sions and other prices we charge. In February 2001, we

greatly lowered the minimum commission level, from

¥2,000 to ¥800. This had a large impact on market con-

ditions and blazed the trail for other companies to lower

their commission levels. We have continued lowering our

commission levels to maintain our position as the compa-

ny offering the lowest commission rates in the industry.

We have endeavored to accurately address cus-

tomers’ diverse needs by providing highly appealing

products and services along with abundant high-quality

investment-related information. Moreover, we have built

highly dependable and secure on-line transaction sys-

tems so that we can offer customers an investment

environment in which they can execute transactions

with peace of mind.

A N I N T E R V I E W W I T H T H E P R E S I D E N T

Performance Overview

Millions of yen

Fiscal years ended March 31 2005 2006 Change

Commissions ¥20,643 ¥44,059 Up 113.4%

Trading profit 674 2,666 Up 295.6%

Net financial revenue 3,809 9,334 Up 145.0%


Taro Izuchi

President

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While working to expand the profitability of our bro-

kerage operations, we have also pursued various new

business initiatives. In October 1999, for example, we

became the first in Japan to undertake IPO book-build-

ing over the Internet. Since then, we have arranged the

lottery-based allocation of newly listed stocks and taken

other measures to progressively expand our investment

banking business.

As a result of these strategies, SBI E*TRADE SECU-

RITIES has earned the top position among specialized

on-line securities companies in terms of the number of

customer accounts as well as the value of brokerage

volume and client assets. This strong position testifies to

the benefits of our unrelenting efforts to further boost

customer satisfaction, which have played a key role in

popularizing our products and services among a steadily

growing number of investors.

Our clientele is currently centered on individual

investors in their 30s and 40s, but we have recently

seen rapid growth in the number of people establishing

accounts with us who are in their 20s, 50s, and 60s,

along with similarly rapid growth in the number of cus-

tomers who are female and/or who are not experienced

investors. The characteristics of our customers are

becoming increasingly diverse due to our efforts to

implement customer-oriented business strategies

designed to help build relationships with new types of

customers. In the future, we intend to continue proac-

tively providing investment support that enables novice

investors to gain accurate knowledge and a good

understanding of how to invest. In this way, we are

promoting an increase in the number and diversity of

individual investors.

Future Strategies

Q3Individuals in Japan have approximately

¥1,500 trillion in financial assets, which are

steadily being shifted from passive savings-type invest-

ments to more-actively managed investments, and the

number of individual investors engaged in on-line trans-

actions is surging rapidly. Moreover, a rising number of

companies are seeking funding in capital markets for

business expansion and other objectives. What kind

of strategies will SBI E*TRADE SECURITIES be imple-

menting amid such trends?

A: One special characteristic of Internet business is the

ease with which customers can compare various com-

panies’ services and fees. Because of this, we are very

conscious that offering highly competitive commission

levels and high-quality services is an extremely impor-

tant prerequisite for encouraging potential customers

to choose SBI E*TRADE SECURITIES. In line with our

strategy of being an on-line comprehensive securities

company with a customer-oriented business philoso-

phy, we have set ourselves the goal of offering the

industry’s lowest brokerage commission levels and high-

est service quality levels. By emphasizing this goal, we

are seeking to realize large growth in the number of our

customer accounts as well as in the value of brokerage

volume and client assets. In this way, we are aiming to

win an overwhelming share of the retail market. We want

to leverage the marketing strengths and brand strength

that stem from our large customer base to proactively

expand underwriting operations and other business with

corporate customers, thereby increasing the profitability

of our investment banking operations. In the future, we

intend to maximize the synergies between brokerage



operations carried out mostly over the Internet and

investment banking operations. By doing this, we will

increase the diversity of our profit sources, prevent

excessive dependence on brokerage operations, and

thereby build a more-solid profit structure.

Diversification of Profit Sources

Q4What specific measures are you taking to

further increase the diversity of your profit

sources?

A: In brokerage business, besides making relentless

efforts to keep our commission rates the lowest in the

industry, we are working to broaden the scope of opera-

tions to cover various products other than stocks. We

are expanding transactions in Korean stocks in collabo-

ration with our Korea-based subsidiary, E*Trade Korea

Co., Ltd., and we are taking other measures to provide

multi-currency responses to foreign currency guaranty

transactions and other kinds of global investment oppor-

tunities that meet individual investors’ increasingly

diverse needs. Besides handling approximately 250

investment trusts, which makes SBI E*TRADE SECURI-

TIES one of the top specialist on-line securities compa-

nies in terms of the number of investment trust offerings,

we are proactively marketing bonds suitable for individual

investors, primarily Japanese government bonds and for-

eign bonds, and we are thereby helping promote sound

capital formation among individual investors. In the

future, besides working in this way to offer additional

products and services that meet individual investors’

diverse needs, we are aiming to establish additional

income sources, such as stock lending business.

In these ways, we aim to concurrently expand our

customer base and augment our profitability.

Regarding investment banking, we will continue to

emphasize underwriting and public subscription opera-

tions. In fiscal 2005, we underwrote the IPO issues of

94 companies. Since beginning the lead management

of IPO issues in September 2005, we have lead man-

aged IPO issues of two companies. Besides boosting

underwriting commissions, expanding our lead manage-

ment work is expected to help stimulate fund deposits

and new account creation by individual investors aiming

to purchase newly listed shares. In view of this, we will

continue proactive efforts to augment our lead manage-

ment work. We are endeavoring to expand our under-

writing business and increase related profit through such

methods as strengthening our relationships with finan-

cial institutions that are well positioned to introduce us

to companies considering IPOs.

Synergies within the SBI Group

Q5As a member of the SBI Group, what kind of

synergies are you seeking to generate with the

Group’s other members?

A: We have a system that

enables SBI E*TRADE SECU-

RITIES customers to have all

their financial service require-

ments met by SBI Group com-

panies and positions us to

meet the securities investment

needs of the customers of other Group companies. This

is the largest synergistic benefit of intra-Group coopera-

tion. Basically involving Group members telling their own

customers about the other Group members that can

meet their needs and helping arrange for those other

Group members to actually meet those needs, this kind

of synergistic collaboration increases customer conve-

nience at the same time that it helps each Group compa-

ny make the most of potential new business opportunities.

The most distinctive characteristic of the SBI Group is that

it includes a diverse range of companies that are together

capable of offering all kinds of financial services, and this is

one of the many factors that differentiate SBI E*TRADE

SECURITIES from its competitors.

We generate another kind of intra-Group synergy by

giving priority to the employment of other Group compa-

nies’ resources and cooperation when we develop and

provide new types of financial products and services.


For example, when planning the marketing of additional

investment trusts that respond to customer needs,

whenever possible, we consider the possibility of having

those investment trusts created by an investment trust

company within the Group. This kind of collaboration

conveniently allows us to benefit from the sophisticated

know-how of other Group companies.

Aiming to expand the Group’s operations into the

casualty and life insurance fields, SBI Holdings, Inc., has

already agreed to establish joint ventures with Aioi

Insurance Co., Ltd., and Axa Japan Holding Co., Ltd.,

that will focus on developing Internet-based business in

those fields. We intend to maximize the Group synergies

derivable from our alliances with Aioi and Axa as we

explore new ways to market casualty and life insurance

products.

Regarding the Group’s future development, we are

also considering the possibility of additional alliances

with banks. If we are able to implement schemes that

greatly increase the convenience of our customers on a

growing scale, we can expect to further increase the

impetus driving growth in our overall customer base.

Management Indicators

Q6What kind of management indicators are you

emphasizing as you seek to increase your

stock price over the medium-to-long term?

A: We have chosen to use the number of customer

accounts, the value of brokerage volume, and client

assets as important management indicators, and we are

working to further increase the levels of those indicators.

In the year through June 2006, SBI E*TRADE SECURI-

TIES obtained approximately 580,000 new customer

accounts. At the end of June 2006, we had approxi-

mately 1.26 million accounts, of which approximately

130,000 were margin trading accounts. Moreover, our

average daily brokerage trading volume in June 2006

was ¥325,955 million, up from ¥179,926 million in June

2005. At the end of June 2006, we had approximately

¥3,643.7 billion in client assets, up from ¥2,506.2 billion

at the end of June 2005.

SBI E*TRADE SECURITIES is the top specialized

on-line securities company in Japan in terms of each of

its three main management indicators. In the future, we

plan to maintain those industry-leading positions while

making additional efforts to enhance customer satisfac-

tion and broaden the range of our products and services.


Compliance

Q7The subject of corporate ethics has recently

been receiving a growing amount of attention

and discussion in the business world. What is SBI

E*TRADE SECURITIES doing in this regard?

A: To date, SBI E*TRADE SECURITIES has worked to

strengthen its compliance systems through such mea-

sures as those to adjust its organization and internal

regulations, and we have arranged employee training

programs and other programs to promote rigorous

compliance with all relevant laws and regulations. These

are some of the ways we are striving to keep the trust

and confidence customers have in us at high levels. We

are also emphasizing customer trading administration

systems and have developed and introduced a Trading

Oversight System able to quickly detect signs of poten-

tial market manipulation. Because this system identifies

potentially problematic behavior at an early stage, in

some cases, it will make it possible for us to eliminate

such behavior before actual problems arise by holding

meetings with the customers in question and warning

them about the potential problems.

Regarding margin trading, from June 2006, we have

set the upper limit on margin trading value at ¥100 mil-

lion. By setting a limit lower than that of other securities

companies, we are lowering the risk of problems that

could emerge in the case of sudden, large market

fluctuations.

We also recognize that the future rise in the number

of customer accounts, in our brokerage trading volume,

and in other aspects of our operations will require addi-

tional efforts to strengthen and expand our compliance

systems, and we are prepared to make those efforts in

a timely manner when needed.


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Client Assets


NEW IN IT IAT IVES TO FURTHER INCREASE CUSTOMER CONVENIENCE

PROVISION OF HYPER E*TRADE TRADING TOOL (APRIL 2005)

HYPER E*TRADE is the on-line securities industry’s first trading tool that enables the placement

of orders using only mouse operations and offers

drag-and-drop ordering functions, including those for

modifying and canceling orders. Additional measures to

supplement the functions and information offered by the

tool—implemented in August 2005 and March 2006—

have further increased the convenience the tool pro-

vides. Plans call for more measures to broaden the

range of the tool’s functions that facilitate active trading.

START OF PAYMENT SERVICE USING ATMS OF SEVEN BANK AND THE POST OFFICE SAVINGS BANK (JULY 2005 AND JANUARY 2006)

Since July 2005, an ATM usage alliance with Seven Bank has enabled SBI E*TRADE SECURITIES

cash card holders to make deposits and withdrawals for their comprehensive securities accounts

at Seven Bank’s ATMs. Moreover, an alliance with Japan’s Post Office Savings Bank

that took effect in January 2006 allows SBI E*TRADE SECURITIES cash card holders

to use that bank’s extensive nationwide ATM network. These changes are making

SBI E*TRADE SECURITIES comprehensive securities accounts increasingly conve-

nient for day-to-day use as savings accounts.

REDUCTION OF STOCK BROKERAGE COMMISSIONS (JULY AND OCTOBER 2005, SEPTEMBER 2006)

During fiscal 2005, SBI E*TRADE SECURITIES reduced its stock brokerage commissions twice,

in July and October 2005. The Company also implemented a special summer discounted com-

mission campaign for all transactions completed during the period from June 1 through August

31, 2006, followed by another reduction of brokerage commissions in September 2006. Plans

call for maintaining efforts to offer the industry’s lowest commission levels and thereby help

individual investors reduce their investment-related costs.

EXPANSION AND UPGRADING OF ON-LINE SECURITIES OPERATIONS SYSTEMS (DECEMBER 2005, MAY AND JULY 2006)

In December 2005, SBI E*TRADE SECURITIES increased the capacity of its on-line securities

operations systems 50%, from one million accounts to 1.5 million accounts. This capacity was

further boosted to 1.75 million accounts in May 2006 and to two million accounts in July 2006.

Electronic systems for securities transactions are a crucial basis for the operations of on-line

securities companies, and SBI E*TRADE SECURITIES intends to continue expanding these sys-

tems so that it can quickly respond to changes in business volume and thereby offer customers

optimal trading environments.


AUTOMATIC MONTHLY INVESTMENT SERVICE FOR INVESTMENT TRUSTS (JANUARY 2006)

SBI E*TRADE SECURITIES offers an automatic investment service that enables customers

to specify the monthly level of automatic investment and choose from seven investment trusts (as

of the end of May 2006) specially created for the automatic investment service. Customers can freely

change the monthly investment level (at or above the minimum ¥10,000 level), and investments

are executed on a specified day each month, thereby helping customers effortlessly sustain an

increase in their cumulative investment. This service enables customers to efficiently invest small

sums and thereby accumulate considerable investment assets over the long term.

HYPER MOBILE I-APPLI TRADING TOOL LAUNCHED (JANUARY 2006)

SBI E*TRADE SECURITIES has begun offering the HYPER MOBILE i-Appli Trading Tool,

which has an automatic stock price updating function and is compatible with a portion of

NTT DoCoMo’s Freedom of Mobile Multimedia Access (FOMA) 3G mobile phone mod-

els. In addition to updating stock prices at intervals as short as five seconds, the tool

provides a variety of investment information, including market information, diverse corpo-

rate rankings, and news. With such functions as a transaction notification function that

informs customers when trades are executed, HYPER MOBILE can be used as a mobile

version of HYPER E*TRADE to enable customers to gather information and execute

transactions when they are on the move.

RENOVATION OF MOBILE E*TRADE MOBILE SERVICE (FEBRUARY 2006)

The MOBILE E*TRADE mobile phone-accessible website has been completely renovated. In

addition to previous capabilities for stock transactions (cash and margin transactions), currency

exchange transactions, and futures and options transactions, the website now allows customers

to place orders for odd-lot (S stock) transactions and book-building transactions as well as to

confirm lottery results and perform other transactions. In addition, the web-

site offers an augmented array of such information as charts and quarterly

information. The MOBILE E*TRADE website is a highly useful tool that enables

customers to obtain necessary information and execute orders when they

are away from their computers, and the convenience of the website is now

greater than ever.


C O R P O R AT E G O V E R N A N C E A N D S O C I A L C O N T R I B U T I O N

Overview of Operational Execution, Supervision, and Internal Control Systems

Board of A

uditors

Financial Auditing C

ompany

Various CommitteesAuditing Auditing

Auditing

Representative Director

Marketing, Administrative, and General Affairs Departments

General Meeting of Shareholders

Internal Audit Office

Board of Directors

Basic Policy on Corporate Governance

In line with its basic policy—“We recognize that compa-

nies cannot exist without employees, shareholders, cus-

tomers, clients, and various other types of stakeholders

and that each company must consider its capabilities

for promoting the interests of each type of stakeholder.

Companies are a means for all types of stakeholders

to cooperatively thrive.”—SBI E*TRADE SECURITIES is

seeking to create corporate governance systems that

intensely focus on “speed,” “fairness,” “transparency,”

and “a management posture that emphasizes the inter-

ests of shareholders.” In the future, by further augmenting

investor relations (IR) programs and working through

such forums as general meetings of shareholders, SBI

E*TRADE SECURITIES intends to build close relation-

ships of active, two-way communication with sharehold-

ers. In this way, the Company is endeavoring to be fully

accountable to its stakeholders and inspire progressively

greater shareholder confidence.

Moreover, SBI E*TRADE SECURITIES is strengthen-

ing and expanding its compliance systems and striving

to ensure that it maintains appropriate and fair informa-

tion disclosure programs that enable stakeholders to

monitor the rigorousness of its compliance performance.

What kind of non-business activities is the SBI Group

undertaking to make additional direct contributions to

society?

The SBI Group’s five fundamental management princi-

ples include the goal of being a socially responsible

company. Recognizing that companies are important

elements of society and have important roles and

responsibilities within society, the Group seeks to meet

the needs of its various stakeholders while contributing

to the maintenance and progress of society.

The SBI Group has defined “three unique foci” that

it endeavors to give strong emphasis to within its corpo-

rate social responsibility (CSR) programs. These are

earning trust and a reputation for dependability, execut-

ing operations properly, and directly contributing to soci-

ety through CSR activities. (These are “shin” (信), which

represents earning trust and a reputation for depend-

ability; “gi” (義), which represents executing operations

properly, and “jin” (仁), which represents directly con-

tributing to society through CSR activities.) Moreover,

the Group contributes to society through its day-to-day

operations as a “financial innovator” providing financial

services that offer customers greater convenience and

as an “industrial creator” helping foster the creation and

development of new industries that will be the core

industries of Japan’s 21st century economy.

CORPORATE GOVERNANCE

SBI GROUP CSR ACTIVITIES

The SBI Group’s Direct CSR Programs

Overview of Charitable Foundation

Name: The SBI Children’s Hope Foundation

Initial assets: ¥500 million

Main activities:

1) Improving conditions at child welfare facilities, such as children’s

homes, infant homes, short-term treatment centers for emotion-

ally disturbed children, and self-help support homes

2) Supporting foundations and NPOs dedicated to child welfare

improvement

3) Helping children who stay in child welfare facilities to advance

in school, find employment, and become self-reliant adults

4) Supporting other improvements in child welfare

Strengthening Activities through the SBI Children’s Hope Foundation

Social contributionAmount

Number ofDonations budget donations

(Millions of yen)(Millions of yen)

(facilities)

FY2004(SBI Group activities) ¥167 ¥167 173

FY2005(Foundation activities) 200 155 105

FY2006(Foundation activities) 380 (planning) (planning)


Regarding its direct contributions to society through

CSR activities, the SBI Group is devoting particular

attention to helping abused children. In principle, each

Group company generating more than ¥300 million in

net income contributes approximately 1% of its net

income to programs that assist abused children. (The

actual implementation of these contributions is contin-

gent on the contributions’ approval by the governance

units of each relevant company.)

As part of its CSR programs, the SBI Group in

October 2005 established the SBI Children’s Hope

Foundation. Rather than relying on the support of the

SBI Group alone, this foundation is designed to enlist

the cooperation of a growing number of sponsors and

collaborators who can help increase the effectiveness

of the Group’s efforts and increase concern throughout

society at large regarding child abuse.

Even as low birthrates accelerate the decreasing

share of children in Japanese society, Japan is facing

evidence of an increasingly serious problem involving the

abuse and neglect of children. Children should naturally

receive abundant love from their parents. Cases in

which parents give their children sufficient love are both

private and public matters, as they are likely to create

child welfare problems as well as weaken the fabric of

Japanese society in the future. Keenly aware of the chal-

lenges facing children in difficult circumstances, the SBI

Group established the SBI Children’s Hope Foundation

to address the goals of improving child welfare condi-

tions and otherwise helping abused or neglected chil-

dren grow up to become self-reliant adults. While the

total effect of the foundation’s operations may be small

in comparison with the problems throughout society at

large, the Group believes that the problems will require

many kinds of efforts to resolve and that each and every

kind of such effort is highly worthwhile.

Through such initiatives, all members of the SBI

Group are concertedly working to contribute to society

in highly significant ways.


M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S

Throughout fiscal 2005, ended March 31, 2006, the Japanesestock market was kept firm by the expansion of corporateprofitability following the shift away from deflationary conditionsas well as by expectations regarding additional structuralreforms. In particular, the Nikkei average recovered to above¥17,000 from early 2006, and the aggregate market value ofstocks listed on the First Section of the Tokyo Stock Exchange(TSE) rose to above the ¥500 trillion mark. These and othertrends reflected the strength of stock prices, and TSE FirstSection trading volume and trading value both reached recordhigh levels. At the end of trading on March 31, 2006, theNikkei average stood at ¥17,059, up approximately 46% fromthe end of the previous fiscal year.

Against the backdrop of the increasing diffusion of broad-band, additional growth is expected in the number of individualinvestors engaging in on-line stock transactions. Moreover, theshift of funds from savings to investments is projected tobecome a full-scale financial trend that further acceleratesthe movement of individuals’ financial assets into the stockmarket.

Conditions are also positive in the Korean stock market—where the Company’s subsidiary there, E*Trade Korea Co.,Ltd., is expanding its on-line brokerage operations—as strongcorporate performances and an influx of funds from foreigninvestors are supporting a rise in stock prices, and the Koreacomposite stock price index (KOSP) is reaching new recordhigh levels.

Amid this operating environment, SBI E*TRADESECURITIES’ efforts to offer attractive products, services, and

Operating RevenuesIn fiscal 2005, total operating revenues amounted to ¥60.2 bil-lion, up ¥33.0 billion, or 121.6%, from the previous fiscal year.Operating revenues include commissions (commission earn-ings/brokerage commissions), net gain on trading profit (profitfrom trading and other earnings), financial revenues, and otherrevenues.

Reflecting stock market trends and growth in the numberof customer accounts, commission revenues rose to ¥44.1 bil-lion, up ¥23.4 billion, or 113.4%. Of commission revenues,brokerage commissions increased to ¥40.2 billion, up ¥21.5billion, or 115.0%, due to the large rise in the number of cus-tomer accounts and an increase in the number of customersactively taking advantage of margin transaction services.Underwriting and selling commissions grew to ¥0.5 billion, up

commission levels based on its customer-centric business strat-egy enabled the Company to create 575,035 new customeraccounts during fiscal 2005. In January 2006, E*TRADESECURITIES became the first on-line securities company inJapan with more than one million customer accounts. At theend of the fiscal year, the total number of customer accountsstood at 1,167,778, including 115,611 margin transactionaccounts, and client assets in custody were ¥4,582.5 billion.With respect to each of these performance indicators, SBIE*TRADE SECURITIES ranks first among all specialized on-linebrokerages in Japan. (Note: Figures for numbers of customeraccounts and client assets are for SBI E*TRADE SECURITIESon a nonconsolidated basis.) As a result, the Company’s con-solidated brokerage commissions grew smoothly in fiscal 2005and amounted to ¥40.2 billion, twice the fiscal 2004 level.Large increases were seen in loans on margin transactions(margin open interest), as receivables from customers grew92.1%, to ¥506.2 billion, and proceeds of securities sold forcustomers’ accounts grew 45.3%, to ¥64.5 billion. In under-writing, public subscription, and secondary offering operations,a strong performance was recorded with respect to suchsecurities as newly listed stocks. Consequently, increaseswere recorded in underwriting commissions as well as inpublic subscription and secondary offering commissions.

As a result, in fiscal 2005, consolidated operating revenuesamounted to ¥60.2 billion, up 121.6% from the previous fiscalyear. Operating income rose 170.1%, to ¥30.0 billion, and netincome surged 174.7%, to ¥17.0 billion.

¥0.2 billion, or 59.7%. Offering and selling commissionsadvanced to ¥1.5 billion, up ¥0.9 billion, or 146.1%, owing tostrong sales of stocks, bonds, and investment trusts. Othercommissions rose to ¥1.9 billion, up ¥0.8 billion, or 82.3%.

Net gain on trading increased to ¥2.7 billion, up ¥2.0 bil-lion, or three times, mainly because of trading in foreign bonds.Financial revenues grew to ¥13.2 billion, up ¥7.4 billion, or128.0%, while financial costs grew to ¥3.9 billion, up ¥1.9 bil-lion, or 95.4%. Thus, net financial revenue amountedto ¥9.3 billion, up ¥5.5 billion, or 145.0%.

SG&A Expenses and Other IncomeDespite a large rise in the volume of equities transactionshandled by SBI E*TRADE SECURITIES, the Company’s effortsto control costs restrained selling, general and administrative

OVERVIEW

RESULTS OF OPERATIONS


(SG&A) expenses to ¥26.3 billion, up ¥12.2 billion, or 87.0%.As the rate of increase in SG&A expenses was considerablyless that the 121.6% rate of increase in operating revenues,SG&A expenses as a percentage of operating revenuesdecreased 8.1 percentage points—falling from 51.8% in fiscal2004 to 43.7% in fiscal 2005. The principal factor behind therise in SG&A expenses was growth in the number of customeraccounts and transactions. This growth boosted trading relat-ed costs to ¥9.2 billion, up ¥5.5 billion, or 152.5%, and raisedthe level of administrative expenses to ¥6.8 billion, up ¥2.7 bil-lion, or 64.1%. In addition, owing to such factors as higherleasing fees due to the strengthening and expansion of on-linesecurities business systems, real estate-related expensestotaled ¥3.5 billion, up ¥1.1 billion, or 44.8%.

Reflecting the rapid growth of operating revenues andthe decrease in the SG&A expenses ratio, operating incomerose to ¥30.0 billion, up ¥18.9 billion, or 1.7 times. Operatingincome as a percentage of operating revenues increased con-siderably—from 40.9% in fiscal 2004 to 49.8% in fiscal 2005.Despite a rise from ¥1.1 billion to ¥2.3 billion in the provisionfor statutory reserves within other income items, incomebefore income taxes and minority interests advanced to ¥28.0billion, up ¥17.7 billion, or 1.7 times. The effective tax rate was38.9%, approximately the same as the statutory rate and 0.8percentage point lower than the 39.7% effective tax rate forfiscal 2004. As a result, net income amounted to ¥17.0 billion,up ¥10.8 billion, or 174.7%.

Financial PositionAt the end of fiscal 2005, the SBI E*TRADE SECURITIESGroup’s total assets amounted to ¥957.3 billion, up ¥468.3billion, or 95.8%, from the previous fiscal year-end. Currentassets grew to ¥944.0 billion, up ¥462.5 billion, or 96.0%.Long-lived assets rose to ¥13.3 billion, up ¥5.8 billion.

Regarding current assets, margin transaction assetstotaled ¥524.4 billion, up ¥246.1 billion, or 88.4%, anddeposits advanced to ¥320.8 billion, up ¥144.8 billion, or82.2%. With respect to long-lived assets, the value of invest-ment securities grew to ¥5.1 billion, up ¥3.4 billion, or 1.9 times.

Total liabilities were ¥837.5 billion, up ¥400.1 billion,or 91.5%. This increase mainly resulted from a ¥161.6 billionincrease in guarantee money received, to ¥323.7 billion; a¥97.6 billion increase in margin transaction liabilities, to ¥334.5billion; and a ¥54.4 billion increase in payables collateralized bysecurities, to ¥56.6 billion. Corporate bonds totaled ¥50.0 bil-lion, and long-term debt amounted to ¥20.0 billion.

Shareholders’ equity advanced past the ¥100.0 billionmark, totaling ¥118.9 billion, up ¥68.0 billion, or 133.5%. This

growth reflected such factors as the April 2005 merger withFides Securities Corporation, a December 2005 public shareoffering, and a January 2006 third-party share allocation aswell as the rise of net income owing to the Company’s strongperformance. The shareholders’ equity ratio increased 2.0 per-centage points, to 12.4%. Despite the large increase in share-holders’ equity, the ratio of operating income to total assetsrose 1.1 percentage points, to 4.1%, and return on equity(ROE) grew 2.7 percentage points, to 20.0%. All thesechanges reflect the Company’s success in strengthening itsfinancial position while concurrently enhancing its profit-earning capabilities.

Cash FlowCash and cash equivalents (hereinafter, “cash”) at the end offiscal 2005 amounted to ¥52.5 billion, up ¥49.3 billion fromthe previous fiscal year-end. Due to investments in venturefunds and other investments, ¥7.6 billion of cash was used for“purchase of investment securities,” compared with ¥0.1 billionin fiscal 2004, and ¥10.4 billion of cash was used for “repay-ments of long-term debt,” compared with zero cash used forthat purpose in fiscal 2004. While these factors had the effectof lowering the level of cash, they were more than offset bysuch factors as the generation of ¥28.0 billion in incomebefore income taxes and minority interests, compared with¥10.2 billion in fiscal 2004, along with higher cash inflow frommeasures aimed at strengthening the Company’s financialposition, including ¥50.8 billion in proceeds from the issuanceof common stock, compared with ¥24.2 billion in fiscal 2004,and ¥49.8 billion in proceeds from the issuance of corporatebonds, compared with no such proceeds in fiscal 2004.

Basic Policy on Profit DistributionThe Company’s previous basic policy on profit distributioncalled for the maintenance of a dividend payout ratio ofapproximately 20%. Rather than emphasizing the 20%dividend payout ratio level, the current policy calls for theCompany to proactively set dividend levels based on compre-hensive consideration of such factors as previous dividendlevels and corporate performance trends while also giving dueconsideration to the level of internal reserves needed for futurebusiness development and strengthening the Company’sbase. Cash dividends applicable to fiscal 2005 amounted to¥1,600 per share, and if the 1:3 stock allocation implementedon February 1, 2006, is taken into consideration, the effectivedividend per share applicable to the fiscal year was ¥4,800, up¥2,500 from ¥2,300 in fiscal 2004. As a result, the (effective)dividend payout ratio for fiscal 2005 was 29.7%.


OutlookObjectives and Management IndicatorsTo maximize corporate value over the medium-to-long term,the Company has designated the number of customeraccounts, the value of brokerage volume for individual cus-tomers, and client assets in custody as key managementindicators and laid plans to further raise the level of these indi-cators. Reflecting the effectiveness of those plans, at the endof fiscal 2005, the number of customer accounts stoodat 1,167,778, up from 592,743 at the end of fiscal 2004.Similarly, the average daily trading value during March 2006was ¥383.1 billion, up from ¥178.4 billion in March 2005.At the end of fiscal 2005, client assets were ¥4,582.5 billion,up considerably from the ¥2,340.0 billion level at the end offiscal 2004.*Note: *These indicator figures are nonconsolidated figures for SBI E*TRADE

SECURITIES only.

Medium- to Long-Term Business StrategiesThe Company intends to emphasize brokerage business,primarily on-line operations, along with investment bankingbusiness, including such operations as underwriting. Planscall for making efforts to make use of synergies between thosetwo kinds of businesses as well as to increase the diversityof the Company’s profit sources.

The Company’s strategy for augmenting its profitabilityis to offer highly competitive commission levels and high-levelservice compared with other companies in the industry, there-by enabling itself to greatly increase the number of customeraccounts and to create overwhelmingly strong marketingstrength and brand power. In the on-line brokerage industry,customers can easily compare competing companies’ ser-vices and prices, making it even more important than usual toensure that commissions and service quality are highly com-petitive. Ultimately, the Company anticipates that expandingthe volume of its brokerage transactions will augment the prof-itability of brokerage operations while also increasing profitfrom such other sources as margin transactions. Similarly, theCompany is seeking to upgrade its marketing capabilities in amanner that strengthens its underwriting capabilities and con-sequently increases profits from underwriting and product-structuring operations. By progressively increasing the diversityof its profit sources, the Company is aiming to ease excessivedependence on brokerage operations and thereby stronglyposition itself to employ flexible brokerage commission strate-gies and continuously respond to changes in its operatingenvironment.

The following is a list of what are believed to be principalpotential risk factors associated with the Company and itsoperations. Some items—items that the Company may notnecessarily view as significant business risks but that areimportant items for investors to consider when they makeinvestment decisions—are included below in line with theCompany’s policy of proactively disclosing information toinvestors. Recognizing the following potential risks, theCompany has the policy of striving to avoid such risks andappropriately responding when risks are not avoidable.However, investors considering investments in the Company’sstock should carefully consider the following potential risk fac-tors as well as other potential risk factors. The following listshould not be considered a comprehensive list of all potentialrisk factors, and items related to future developments reflectthe Company’s judgments at the time it submitted its annualsecurities report (Yuka Shoken Hokoku-sho) for fiscal 2005(on June 27, 2006).

(1) SystemsRecognizing that maintaining stable on-line transactionsystems is a key prerequisite for providing customers withhigh-quality services, the Company is working to appropriatelystrengthen and expand its information systems based on pro-jections of future growth in the number of customer accountsand in the volume of brokered transactions. Because strength-ening and expanding information systems entails higher sys-tem-related expenses—such as depreciation and leasingexpenses—if actual growth in customer accounts and brokeredtransactions is not achieved in line with the strengthening andexpanding of information systems, there is a possibility thatthe situation could have a negative impact on corporateperformance.

Moreover, if for some reason the Company’s informationsystems were to fail and the rectification of the failure wasnot expeditious or the appropriate responses were not imple-mented, there is a possibility of demands for compensationfor damages due to the failure, a decrease in customer

BUSINESS RISKS AND OTHER RISKS


M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

confidence in the Company’s systems and support systems anda resulting estrangement of customers, and other situationsthat could have a negative impact on corporate performance.

(2) Credit TransactionsMargin transactions in Japanese stocks are one of theCompany’s profit sources, but such transactions require theCompany to extend credit to its customers. Customers some-times suffer losses on margin transactions, and in the casethat the value of the negotiable securities used as collateralsecurity for the margin credit falls, there is a possibility thatthe value of the collateral may become insufficient to coverthe amount of credit extended to the customer. In addition,the Company procures funds to finance margin transactionsprimarily from securities finance companies, but changes insecurities market conditions will change the value of negotiablesecurities entrusted to securities finance companies as collat-eral. If the value of this collateral falls, the securities financecompanies may demand additional collateral, and theCompany may have to rely on its own resources to obtainloans and otherwise finance the procurement of such addition-al collateral. There is a possibility that this situation could havea negative impact on the Company’s performance.

(3) UnderwritingAs part of its strategy of increasing the diversity of its profitsources, the Company is emphasizing measures to expand itsunderwriting and public subscription business, but such busi-ness entails underwriting risks stemming from the possibilitythat the Company will not be able to sell the securities itunderwrites. There is a possibility that fluctuations in the priceof unsold securities underwritten by the Company could havea negative impact on the Company’s performance. Regardingthe underwriting of initial public offerings (IPOs), when theCompany is the lead managing underwriter for a company’sIPO and the evaluation of that company drops during or soonafter the IPO, the situation may have a negative impact onthe Company’s reputation in a manner that impairs theCompany’s capabilities for proceeding with underwritingoperations. There is a possibility that this situation couldhave a negative impact on the Company’s performance.

(4) SBI GroupThe SBI Group includes two companies engaged in secu-rities company operations in Japan—the Company and SBISecurities Co., Ltd. The Company mainly provides on-line ser-vices, while SBI Securities mainly provides services throughface-to-face interaction between its employees and customers.In this way, the two companies operational scopes are

differentiated. Previously, each of the two companies under-took underwriting business independently. In November 14,2005, however, the two companies approved a businessalliance that entails the consolidation within the Company ofthe two companies’ underwriting business. There is no guar-antee of the future position or role of the Company within theSBI Group, and a change in the strategies or policies of theSBI Group could change the Company’s position or role.There is a possibility that this situation could have a negativeimpact on the Company’s performance.

(5) Legal RegulationsA. Securities Company Registration, Etc.Because the Company is engaged in securities companyoperations, it is registered as a securities company based onArticle 28 of the Securities Exchange Law. In addition, theCompany has general trading participant or similar status inthe Tokyo Stock Exchange, the Osaka Securities Exchange,the Nagoya Stock Exchange, and the JASDAQ SecuritiesExchange, and the Company is subject to regulations estab-lished by the Japan Securities Dealers Association (JSDA), anorganization created based on Japan’s Securities ExchangeLaw. Moreover, the Company is engaged in lending business,financial futures transactions business, defined contributionpension fund management administration business, insurancemarketing business, and other businesses. In each of thesebusiness fields, the Company must execute business opera-tions while complying with the laws that regulate those busi-nesses as well as complying with the regulations establishedby the autonomous industry association and other institutions.

B. Capital Ratio RegulationsBased on the Securities Exchange Law and on Cabinet Officeregulations regarding capital regulations for securities compa-nies, a system of capital adequacy ratio regulations has beencreated. Capital adequacy ratios are ratios of capital to theaggregate value of the non-fixed portion of capital, potentialfluctuations in securities holdings, and other potential risks.Securities companies must maintain capital adequacy ratiosof 120% or higher. If the ratio falls below 120%, the FinancialServices Agency will order changes to operational methodsand other changes, and if the ratio falls below 100%, theagency may order the suspension of business operations fora period of up to three months. If the ratio is still below 100%after business has been suspended for three months andthe agency does not recognize the prospect of the relevantcompany’s recovery, the agency may cancel the company’sregistration for securities business. As of March 31, 2006,the Company’s capital adequacy ratio was 577.9%.


C. Separate Administration of Customer Assets/Investor Protection FundsTo help ensure that securities companies return customers’assets to customers in an appropriate and timely manner,securities companies are required to keep securities andcash entrusted by customers separate from the securitiescompany’s own assets. As an additional means of protectinginvestors, the Securities Exchange Law requires securitiescompanies to participate in a government approved investorprotection fund. The Company participates in the JapanInvestor Protection Fund (JIPF). Investor protection fundsobtain their funds by requiring contributions from their securi-ties company members. If a member of JIPF were to becomebankrupt, the fund will ensure that customers of the bankruptcompany receive the securities entrusted to that company aswell as other specified claims on that company up to ¥10 mil-lion. Accordingly, if the bankruptcy of a member companyrequires the disbursal of funds greater than those alreadyaccumulated by JIPF, the Company and other members maybe required to make additional contributions. There is a possi-bility that this situation could have a negative impact on theCompany’s performance.

D. Law on Sales of Financial Products/Consumer Contract LawJapan’s Law on Sales of Financial Products has been effectivesince April 1, 2001. Designed to protect investors when theypurchase financial products, the law requires financial productsellers to provide specified explanations. In the case thatinvestors lose money on investments in financial products thatwere not adequately explained, the law obliges financial prod-uct sellers to provide compensation and provides for mea-sures to ensure that the noncompliant financial product salesmethods are rectified.

Japan’s Consumer Contract Law applies to all consumercontracts (contracts between consumers and businesses)concluded on April 1, 2001, and subsequently. Focusing onthe structural gaps between consumers and businesses withregard to the volume and quality of available information aswell as negotiating capabilities, the law enables consumers inspecified situations to repudiate contracts. The Company hasestablished internal administration systems designed to ensureits rigorous compliance with this law, and there have not beenany cases of noncompliance to date. However, if such a casewere to arise in the future, it could entail the payment of com-pensation for damages, undermine customers’ trust in theCompany, and have other negative effects, and there is a

possibility that such a situation could have a negative impacton the Company’s performance.

(6) CompetitionIn the future, the Company projects that it will face increasinglyintense competition due to such factors as progressive dereg-ulation accompanied by such trends as a growing numberof competitors from other industries, a rise in the number offoreign-based companies in the Japanese market, and astrengthening of the on-line brokerage capabilities of leadingsecurities companies. The increasing intensity of competitioncould have the effect of increasing the marginal cost of obtain-ing additional customer accounts, and there is a possibilitythat such a situation could have a negative impact on theCompany’s performance.

(7) Industry TrendsA. Securities MarketsStock transaction brokerage commissions account for themajority of the Company’s operating income. Accordingly, theCompany is strongly affected by such trends as those in stockmarket trading volume and commission levels. In general,commission revenues will decrease if stock prices fall due tothe impact on the stock market or diverse other factors, suchas trends in corporate profitability, interest rates, internationalaffairs, the world’s principal markets, and investor psychology.There is no guarantee that current positive stock market con-ditions will persist, and, if a drop in stock prices is accompa-nied by a drop in trading volume, there is a possibility that thissituation could have a negative impact on the Company’s per-formance. In addition, the government is moving forward withsystemic reform measures related to the stock market.Although at this stage it is impossible to predict such futuredevelopments as future legal reforms, there is a possibility thatthe nature of such developments could have a negative impacton the Company’s performance.

B. Internet DiffusionThe Internet has a short history, and there is no guarantee thatthe number of users will continue to steadily increase. If thenumber of Internet users did not increase, there is a possibilitythat such a situation could have a negative impact on theCompany’s performance.

(8) Prospective Business ExpansionTo realize sustainable growth by further improving the prod-ucts and services it offers and successfully competing withother securities companies, it has become necessary for the


M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

Company to further expand existing operations while alsoconsidering means of increasing the diversity of its profitsources through participation in additional business fields andconcurrently working to strengthen its financial position. TheCompany has the policy of taking numerous measures basedon its recognition of this necessity. If these measures are notsufficiently successful or do not accurately reflect customerneeds, however, there is a possibility that the situation couldbe a factor obstructing the Company’s growth and have anegative impact on the Company’s performance.

(9) Customer Information SecurityIn the future, if any kind of problem regarding the managementof customer information arises, there is a possibility that thatsituation could have a negative impact on the Company’s per-formance. Japan’s Personal Information Protection Law tookeffect from April 1, 2005. The Company will work to ensure itsrigorous compliance with this law and related regulations bycreating internal administration systems as well as making sus-tained efforts to make related improvements. However, if acase of noncompliance or information leakage were to arise inthe future, it could undermine customers’ trust in the Companyand have other negative effects, and there is a possibility thatsuch a situation could have a negative impact on theCompany’s performance.

(10) Corporate OrganizationA. Internal Administration SystemsThe Company creates internal administration systemsdesigned to promote rigorous legal compliance, endeavorsto thoroughly comply with all relevant laws and regulations,and strives to maintain its customers’ trust. In April 2002, theCompany took measures to clarify the allocation of authorityand responsibility with respect to compliance and, to expandand strengthen its internal administration system, eliminatedits Compliance Department and adopted a new complianceoversight system centered on three departments—the AuditDepartment, Trading Administration Department, andMarketing Administration Department. The Company has sub-sequently moved ahead with additional measures to strength-en its internal administration system, which now encompassesthe Legal Affairs Department, the Trading AdministrationOffice, the Marketing Administration Section of the OperationsDepartment, and the Internal Auditing Office. While theCompany has striven to strengthen its internal administrationsystem, in the case that these strengthening measures arenot sufficient and internal administration system failures orother problems arise for some reason, it could undermine

customers’ trust in the Company, and there is a possibilitythat such a situation could have a negative impact on theCompany’s performance.

B. Officers and EmployeesAs of March 31, 2006, the Company had four directors, fourcorporate auditors, and 129 employees. Because of the rarityof people with a high level of capabilities, there is a possibilitythat it will become impossible to hire the kind of employeesthe Company requires. The Company has a policy of workingto increase employees’ motivation and maintain appropriateemployee incentives by introducing a system for appropriatelyevaluating employees’ capabilities and by creating a stockoption system and taking other measures, but in the case thatthe Company becomes unable to obtain and train appropriatepersonnel, there is a possibility that this situation could restrictthe expansion of business operations and could have a nega-tive impact on the Company’s performance.

(11) Stock OptionsAs of March 31, 2006, the Company had issued share war-rants that could potentially lead to the issuance of 71,370shares. If all the warrants were exercised, the resulting shareswould correspond to 2.22% of 3,215,187 outstanding shares.There also is a possibility that the Company will distributeshare warrants as part of a stock option system in the future,and the shares issued due to the warrants could have theeffects of diluting the Company’s stock value and affecting thesupply-demand relationship for the Company’s shares, andthere is a possibility that this situation could have a negativeimpact on the Company’s performance.

(12) TrademarksU.S.-based E*TRADE Financial Corporation is a company thatprovides diverse financial services to individual customers inmany countries throughout the world. Based on a licensingcontract with that company, the Company has obtained theright to use the E*TRADE name and related names (here-inafter, the “E*TRADE brand”) in Japan for an unlimited periodof time. However, if for some reason this contract were madevoid, there is a possibility that this situation could have a nega-tive impact on the Company’s performance.

22 SBI E*TRADE SECURIT IES Co. , L td .

C O N S O L I D A T E D B A L A N C E S H E E T S

SBI E*TRADE SECURITIES Co., Ltd. (Former E*TRADE SECURITIES Co., Ltd.) and a Consolidated Subsidiary

Thousands ofU.S. dollars

Millions of yen (Note 1)

31st March 31st March

ASSETS 2005 2006 2006

CURRENT ASSETS:

Cash on hand and in banks:

Cash and cash equivalents ¥ 3,125 ¥ 52,470 $ 446,664

Time deposits maturing over three months 156 399 3,399

Segregated cash (Note 3) 6,500 55,333

Deposits:

Customers’ segregated cash in trust 167,800 308,800 2,628,756

Other deposits 8,263 12,023 102,346

Trading accounts (Note 4) 1,209 2,041 17,371

Margin transaction assets:

Receivables from customers 263,458 506,158 4,308,826

Cash deposits as collateral for securities borrowed 14,840 18,281 155,626

Loans collateralized by securities:

Cash deposits as collateral for securities borrowed 14 156 1,325

Resale agreement transactions 13,545 8,143 69,324

Short-term guarantee deposits 3,331 11,097 94,463

Operational loans receivable 1,745 8,338 70,982

Deferred tax assets-current (Note 14) 451 1,052 8,959

Prepaid expenses and other current assets 3,668 8,790 74,829

Allowance for doubtful accounts (118) (296) (2,520)

Total current assets 481,487 943,952 8,035,683

PROPERTY AND EQUIPMENT-Net (Note 7) 584 695 5,917

INVESTMENTS AND OTHER ASSETS:

Investment securities (Note 5) 1,721 5,129 43,658

Investment in an affiliated company (Note 5) 39

Software 3,151 3,734 31,783

Guarantee deposits 500 685 5,833

Deferred tax assets-non-current (Note 14) 759 1,382 11,762

Other assets 846 1,845 15,716

Allowance for doubtful accounts (31) (85) (726)

Total investments and other assets 6,985 12,690 108,026

TOTAL ¥489,056 ¥957,337 $8,149,626

See notes to consolidated financial statements.

SBI E*TRADE SECURIT IES Co. , L td . 23



31st March 31st March

LIABILITIES AND SHAREHOLDERS’ EQUITY 2005 2006 2006

CURRENT LIABILITIES:

Short-term borrowings (Note 8) ¥ 40 ¥ 4,258 $ 36,243

Current portion of long-term debt (Note 8) 10,400

Income taxes payable 3,830 10,410 88,623

Margin transaction liabilities:

Payables to financial institutions (Notes 8 and 9) 192,508 269,977 2,298,262

Proceeds of securities sold for customers’ accounts 44,411 64,529 549,320

Payables collateralized by securities:

Cash deposits as collateral for securities loaned 64 55,347 471,161

Repurchase agreement transactions (Note 8) 2,105 1,206 10,266

Deposits received 16,766 28,445 242,145

Guarantee money received 162,045 323,669 2,755,330

Accrued expenses 1,761 2,559 21,786

Other current liabilities (Note 4) 1,075 2,458 20,926

Total current liabilities 435,005 762,858 6,494,062

LONG-TERM LIABILITIES:

Corporate bonds (Note 8) 50,000 425,641

Long-term debt (Note 8) 20,000 170,256

Other long-term liabilities (Note 10) 137 65 551

Total long-term liabilities 137 70,065 596,448

STATUTORY RESERVE

Reserve for liability for securities transactions (Note 11) 2,273 4,563 38,842

Total statutory reserves 2,273 4,563 38,842

MINORITY INTERESTS 720 943 8,031

SHAREHOLDERS’ EQUITY (Notes 12 and 22)

Common stock-authorized, 3,000,000 shares in 2005 and 11,400,000 shares in 2006;

issued, 956,856 shares in 2005 and 3,143,817 shares in 2006 21,330 46,875 399,037

Capital surplus 18,982 45,647 388,582

Retained earnings 10,319 24,920 212,138

Unrealized gain on available-for-sale securities 290 775 6,597

Foreign currency translation adjustments 691 5,889

Total shareholders’ equity 50,921 118,908 1,012,243

TOTAL ¥489,056 ¥957,337 $8,149,626




Year Ended 31st March Year Ended 31st March

2005 2006 2006

OPERATING REVENUES (Note 16) ¥27,175 ¥60,214 $512,590

FINANCIAL COSTS (Note 17) 1,994 3,897 33,173

Net operating revenues 25,181 56,317 479,417

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Notes 18 and 19) 14,068 26,305 223,931

Operating income 11,113 30,012 255,486

OTHER INCOME (EXPENSES):

Interest and dividends income 12 28 240

Gain (loss) on sale of investment securities-net (6) 211 1,800

Provision for statutory reserves (1,093) (2,286) (19,457)

Other-net 214 2 13

Other expenses-net (873) (2,045) (17,404)

INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 10,240 27,967 238,082

INCOME TAXES (Note 14):

Current 4,645 12,433 105,839

Deferred (584) (1,557) (13,247)

Total income taxes 4,061 10,876 92,592

MINORITY INTERESTS IN NET INCOME 120 1,020

NET INCOME ¥ 6,179 ¥16,971 $144,470

Yen U.S. dollars

2005 2006 2006

PER SHARE OF COMMON STOCK (Notes 2.q and 21):Basic net income ¥2,425.47 ¥5,649.18 $48.09

Diluted net income 2,378.03 5,521.31 47.00

Cash dividends applicable to the year 2,300.00 1,600.00 13.62


C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E



Millions of yen

Outstanding UnrealizedNumber of Gain (Loss) on ForeignShares of Available- CurrencyCommon Common Capital Retained for-sale Translation

Stock Stock Surplus Earnings Securities Adjustments

BALANCE, 1st APRIL, 2004 254,380 ¥13,001 ¥ 3,000 ¥ 4,650 ¥ (14)Stock splits (Note 12) 635,344 Stock issuance through public offering (Note 12) 55,000 7,013 13,668 Stock issuance through private placement (Note 12) 8,250 1,052 2,050 Exercise of warrants (Note 12) 3,882 264 264 Cash dividends, ¥1,800 per share (458)Bonuses to directors (52)Net income 6,179 Net increase in unrealized gain on

available-for-sale securities 304

BALANCE, 31st MARCH, 2005 956,856 21,330 18,982 10,319 290Stock splits (Note 12) 2,082,718 Stock issuance through public offering (Note 12) 66,000 22,552 22,552 Stock issuance through private placement (Note 12) 6,000 2,050 2,050 Adjustment of capital surplus for merger of Fides Securities Corporation through issuance of common stock (Note 12) 5,500 1,120 Exercise of warrants (Note 12) 26,743 943 943 Cash dividends, ¥2,300 per share (2,201)Bonuses to directors (170)Adjustment of retained earnings due to exclusion from application of equity method 1 Net income 16,971 Net increase in unrealized gain on available-for-sale securities 485 Net increase in foreign currency translation adjustments ¥691

BALANCE, 31st MARCH, 2006 3,143,817 ¥46,875 ¥45,647 ¥24,920 ¥775 ¥691

Thousands of U.S. dollars (Note 1)

UnrealizedGain (Loss) on Foreign

Available- CurrencyCommon Capital Retained for-sale Translation

Stock Surplus Earnings Securities Adjustments

BALANCE, 31st MARCH, 2005 $181,577 $161,590 $ 87,846 $2,469Stock issuance through public offering (Note 12) 191,977 191,977 Stock issuance through private placement (Note 12) 17,452 17,452 Adjustment of capital surplus for merger of Fides Securities Corporation through issuance of common stock (Note 12) 9,532 Exercise of warrants (Note 12) 8,031 8,031 Cash dividends, $19.58 per share (18,735)Bonuses to directors (1,447)Adjustment of retained earnings due to exclusion from application of equity method 4 Net income 144,470 Net increase in unrealized gain on available-for-sale securities 4,128 Net increase in foreign currency translation adjustments $5,889

BALANCE, 31st MARCH, 2006 $399,037 $388,582 $212,138 $6,597 $5,889


C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y





Year Ended 31st March Year Ended 31st March

2005 2006 2006

OPERATING ACTIVITIES: Income before income taxes and minority interests ¥10,240 ¥ 27,967 $ 238,082 Adjustments for:

Income taxes paid (2,768) (6,057) (51,561)Amortization and depreciation 773 1,509 12,843 Payment of directors’ bonuses (52) (170) (1,447)Net (gain) loss on sales of investment securities 6 (211) (1,800)Foreign exchange (gain) (46) (61) (519)Increase in statutory reserve 1,093 2,286 19,458 (Increase) in customers’ segregated cash in trust (75,800) (140,940) (1,199,791)(Increase) in segregated cash (6,500) (55,333)(Increase) in short-term guarantee deposits (1,703) (7,766) (66,109)(Increase) in operational loan receivables (6,024) (51,284)(Increase) decrease in trading accounts (51) 120 1,019 (Increase) in margin transaction assets or liabilities (25,137) (148,556) (1,264,627)Increase in guarantee deposits received 70,833 160,349 1,365,019 Increase in deposits received 8,459 11,644 99,122 (Increase) decrease in loans and payables collateralized by securities (2,563) 59,645 507,743 Other-net (61) (5,606) (47,720)

Net cash used in operating activities (16,777) (58,371) (496,905)

INVESTING ACTIVITIES:Payment for time deposits (61) (295) (2,511)Withdrawal of time deposits 61 82 698 Purchase of investment securities (150) (7,551) (64,280)Proceeds from sales of investment securities 630 5,294 45,067 Purchase of shares of a subsidiary (Note 20) (4,610)Purchase of tangible fixed assets (146) (178) (1,519)Proceeds from sales of tangible fixed assets 10 81 Purchase of intangible assets (1,548) (1,652) (14,061)Purchase of equity interest (119) (1) (11)Investments in loan receivables (465) (894) (7,610)Collection of loan receivables 430 864 7,355 Other-net 164 (319) (2,708)

Net cash used in investing activities (5,814) (4,640) (39,499)

FINANCING ACTIVITIES:Increase in short-term borrowings-net 3,741 31,846 Repayments of liabilities for finance leases (8) (67)Proceeds from long-term debt 20,000 170,256 Repayments of long-term debt (10,400) (88,533)Proceeds from issuance of corporate bonds 49,788 423,831 Proceeds from issuance of common stock 24,205 50,837 432,770 Dividends paid (458) (2,195) (18,685)

Net cash provided by financing activities 23,747 111,763 951,418 FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ON CASH ANDCASH EQUIVALENTS 46 93 798 INCREASE IN CASH AND CASH EQUIVALENTS 1,202 48,845 415,812 CASH AND CASH EQUIVALENTS DUE TO A MERGER (Note 20) 500 4,253 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,923 3,125 26,599 CASH AND CASH EQUIVALENTS, END OF YEAR ¥ 3,125 ¥ 52,470 $ 446,664 See notes to consolidated financial statements.

C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S



1. BASIS OF PRESENTING CONSOLIDATED FINANCIAL STATEMENTS

The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in theJapanese Securities and Exchange Law and its related accounting regulations, and in conformity with accounting principles gen-erally accepted in Japan (“Japanese GAAP”), which are different in certain respects as to application and disclosure requirementsof International Financial Reporting Standards.

In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the con-solidated financial statements issued domestically in order to present them in a form which is more familiar to readers outsideJapan.

The consolidated financial statements are stated in Japanese yen, the currency of the country in which SBI E*TRADE SECURI-TIES Co., Ltd. (the former E*TRADE SECURITIES Co., Ltd., the “Company”) is incorporated and operates. The translations ofJapanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have beenmade at the rate of ¥117.47 to $1, the approximate rate of exchange at 31st March, 2006. Such translations should not be con-strued as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate.

2. SUMMARY OF SIGNIFICANT POLICIES

a. Consolidation — The consolidated financial statements as at 31st March, 2005 and 2006 include the accounts of the Companyand its subsidiary (E*Trade Korea Co., Ltd.) (together, the “Group”). Under the control or influence concept, the subsidiary com-pany which the Company, directly or indirectly, is able to exercise control over operations is fully consolidated, and the compa-ny which the Company has the ability to exercise significant influence is accounted for by the equity method. Investment in anaffiliated company (Nexyz. TRADE Inc.) was accounted for by the equity method for the year ended 31st March, 2005, but sinceshares in the Company were sold, it is no longer accounted for by the equity method for the year ended 31st March, 2006.

Goodwill, representing the excess of the Company’s investment in its subsidiary over the fair value of the net assets of thesubsidiary at the date of acquisition, was fully charged to income when incurred since there was no materiality in the amount.

All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profitincluded in assets resulting from transactions within the Group is eliminated.

b. Cash Equivalents — Cash equivalents are short-term investments that are readily convertible into cash and that are exposed toinsignificant risk of changes in value. Cash equivalents include time deposits, separate deposits and call deposits, all of whichmature or become due within three months of the date of acquisition.

c. Valuation of Securities — Securities are classified and accounted for, depending on management’s intent, as follows: (1) tradingsecurities and derivatives, which are held for the purpose of earning capital gains in the near term are reported at fair value, andthe related unrealized gains and losses are included in earnings and (2) available-for-sale securities, which are not classified astrading securities, are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separatecomponent of shareholders’ equity. The cost of securities is determined based on the moving-average cost method.

Non-marketable available-for-sale securities are stated at cost determined by the moving-average cost method. For otherthan temporary declines in fair value, non-marketable available-for-sale securities are reduced to net realizable value by a chargeto income.

Investments in funds are accounted for as investment securities on the consolidated balance sheets, according to theGroup’s contributed capital in investment partnerships.

d. Allowance for Doubtful Accounts — The allowance for doubtful accounts is stated in amounts considered to be appropriatebased on the Group’s past credit loss experience and an evaluation of potential losses in the receivables outstanding.

e. Property and Equipment — Property and equipment are stated at cost less accumulated depreciation. Depreciation of propertyand equipment of the Company is computed by using the declining-balance method over the estimated useful lives of assets,while the straight-line method is applied to buildings acquired on and after 1st April, 1998 and the property and equipment of aconsolidated subsidiary. The range of useful lives is principally from 3 to 50 years for buildings and from 2 to 20 years for furni-ture and equipment.

f. Leases — All leases are accounted for as operating leases. Under Japanese accounting standards for leases, finance leasesthat deem to transfer ownership of the leased property to the lessee are to be capitalized, while other finance leases are permit-

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

SBI E*TRADE SECURITIES Co., Ltd. (Former E*TRADE SECURITIES Co., Ltd.) and a Consolidated SubsidiaryYears Ended 31st March, 2005 and 2006


ted to be accounted for as operating lease transactions if certain “as if capitalized” information is disclosed in the notes to thelessee’s financial statements.

g. Software — Software is recorded at cost, less accumulated amortization. Amortization of software used for internal purposes iscomputed by using the straight-line method over 5 years, the estimated useful life of the software.

h. Other Assets — Stock issuance costs and bond issuance costs are principally amortized by the straight-line method over 3 yearsin conformity with Japanese Commercial Code (the “Code”). Intangible assets are amortized by using straight-line method.

i. Retirement and Pension Plans — The liability for employees’ retirement benefits of a consolidated subsidiary is accounted forbased on projected benefit obligations and plan assets at the balance sheet date.

j. Retirement Allowance for Directors — Retirement allowance for directors of a consolidated subsidiary is recorded to state theliability at the amount based on the internal rule that would be required if all directors retired at each balance sheet date.

k. Statutory Reserve — Statutory reserve is provided for the possible losses resulting from securities accidents in the amount pro-vided by the Article 35 of the “Cabinet Office Ordinance concerning Securities Companies” in accordance with the provision ofthe Article 51 of the Securities and Exchange Law.

l. Income Taxes — The provision for income taxes is computed based on the pretax income included in the consolidated state-ments of income. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected futuretax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferredtax assets are measured by applying currently enacted tax laws to the temporary differences.

A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before theGroup is able to realize their benefits, or that future deductibility is uncertain.

m. Accounting for Consumption Tax — The consumption tax imposed on revenue from customers for the services is withheld uponrecognition of revenue and the consumption tax paid by the Company on the purchase of merchandise and services from ven-dors, are not included in the related accounts in the accompanying consolidated statements of income. The consumption tax paidis generally offset against the balance of consumption tax withheld, and net overpayment is included in current assets or net overwithholding is included in current liabilities.

n. Foreign Currency Transactions — All short-term and long-term monetary receivables and payables denominated in foreign cur-rencies are translated into Japanese yen at the exchange rates at the balance sheet date. The foreign exchange gains and loss-es from translation are recognized in the consolidated statements of income to the extent that they are not hedged by forwardexchange contracts.

o. Foreign Currency Financial Statements — The balance sheet accounts of the consolidated subsidiary are translated intoJapanese yen at the current exchange rate as of the balance sheet date except for shareholders’ equity, which is translated atthe historical rate. Differences arising from such translation were shown as “Foreign currency translation adjustments” in a sepa-rate component of shareholders’ equity, except for the portion pertaining to minority shareholders, which is included in “Minorityinterest.” Revenue and expense accounts of consolidated foreign subsidiaries are translated into yen at the average exchangerate.

p. Appropriations of Retained Earnings — Appropriations of retained earnings are reflected in the accompanying consolidatedstatements of shareholders’ equity for the following year upon shareholders’ approval.

q. Per Share Information — Basic net income per share is computed by dividing net income available to common shareholders bythe weighted-average number of common shares outstanding for the period, retroactively adjusted for stock splits.Diluted net income per share reflects the potential dilution that could occur if securities were exercised or converted into com-mon stock. Diluted net income per share of common stock assumes full conversion of the outstanding convertible notes andbonds at the beginning of the year (or at the time of issuance) with an applicable adjustment for related interest expense, net oftax and full exercise of outstanding warrants.

Cash dividends per share presented in the accompanying consolidated statements of income are dividends applicable to therespective years including dividends to be paid after the end of the year, which is not retroactively adjusted for stock splits.

r. New Accounting PronouncementsBusiness Combination and Business SeparationIn October 2003, the Business Accounting Council (BAC) issued a Statement of Opinion, Accounting for BusinessCombinations, and on 27th December, 2005 the Accounting Standards Board of Japan (ASBJ) issued Accounting Standard for


Business Separations and ASBJ Guidance No.10, Guidance for Accounting Standard for Business Combinations and BusinessSeparations. These new accounting pronouncements are effective for fiscal years beginning on or after 1st April, 2006.

The accounting standard for business combinations allows companies to apply the pooling of interests method of accountingonly when certain specific criteria are met such that the business combination is essentially regarded as a uniting-of-interests.These specific criteria are as follows:

(a) the consideration for the business combination consists solely of common shares with voting rights,(b) the ratio of voting rights of each predecessor shareholder group after the business combination is nearly equal, and (c) there are no other factors that would indicate any control exerted by any shareholder group other than voting rights. For business combinations that do not meet the uniting-of-interests criteria, the business combination is considered to be an

acquisition and the purchase method of accounting is required. This standard also prescribes the accounting for combinationsof entities under common control and for joint ventures. Goodwill, including negative goodwill, is to be systematically amortizedover 20 years or less, but is also subject to an impairment test.

Under the accounting standard for business separations, in a business separation where the interests of the investor nolonger continue and the investment is settled, the difference between the fair value of the consideration received for the trans-ferred business and the book value of net assets transferred to the separated business is recognized as a gain or loss on busi-ness separation in the statement of income. In a business separation where the interests of the investor continue and theinvestment is not settled, no such gain or loss on business separation is recognized.

Stock optionsOn 27th December, 2005, the ASBJ issued Accounting Standard for Stock Options and related guidance. The new standardand guidance are applicable to stock options newly granted on and after 1st May, 2006.

This standard requires companies to recognize compensation expense for employee stock options based on the fair value atthe date of grant and over the vesting period as consideration for receiving goods or services. The standard also requires com-panies to account for stock options granted to non-employees based on the fair value of either the stock option or the goods orservices received. In the balance sheet, the stock option is presented as a stock acquisition right as a separate component ofshareholders’ equity until exercised. The standard covers equity-settled, share-based payment transactions, but does not covercash-settled, share-based payment transactions. In addition, the standard allows unlisted companies to measure options attheir intrinsic value if they cannot reliably estimate fair value.

Bonuses to directors and corporate auditorsPrior to the fiscal year ended 31st March, 2005, bonuses to directors and corporate auditors were accounted for as a reductionof retained earnings in the fiscal year following approval at the general shareholders meeting. The ASBJ issued ASBJ PracticalIssues Task Force (PITF) No.13, Accounting treatment for bonuses to directors and corporate auditors, which encouraged com-panies to record bonuses to directors and corporate auditors on the accrual basis with a related charge to income, but still per-mitted the direct reduction of such bonuses from retained earnings after approval of the appropriation of retained earnings.

The ASBJ replaced the above accounting pronouncement by issuing a new accounting standard for bonuses to directorsand corporate auditors on 29th November, 2005. Under the new accounting standard, bonuses to directors and corporateauditors must be expensed and are no longer allowed to be directly charged to retained earnings. This accounting standard iseffective for fiscal years ending on or after 1st May, 2006. The companies must accrue bonuses to directors and corporateauditors at the year end to which such bonuses are attributable.

Presentation of shareholders’ equityOn 9th December, 2005, the ASBJ published a new accounting standard for presentation of shareholders’ equity. Under thisaccounting standard, certain items which were previously presented as liabilities are now presented as components of share-holders’ equity. Such items include stock acquisition rights, minority interest, and any deferred gain or loss on derivativesaccounted for under hedge accounting. This standard is effective for fiscal years ending on or after 1st May, 2006.

3. SEGREGATED CASH

At 31st March, 2005 and 2006, assets required to be segregated in certain financial institutions according to the Article 91 of theFinancial Futures Trading Law were as follows:


2005 2006 2006

Cash on hand and in banks ¥6,500 $55,333


4. TRADING ACCOUNTS

Trading accounts, including derivative contracts, are recorded at fair value, and unrealized gains and losses are reflected in netgain on trading under operating revenue. Trading activities consist of customer transactions to meet customers’ needs includingasset management and risk hedging and also proprietary trading with the aim of realizing capital gains. The Company’s tradingpositions arise mainly from cash transactions of equities, bonds and other trading securities. The trading activities of the Companyare principally exposed to market risk and counterparty risk. Market risk is arising from the changes in the value caused by fluctua-tions in equity prices, interest rates and foreign currency exchange rates and counterparty risk is a default risk on the counterpar-ties. The management believes it is critical to identify the accurate positions and fair market value for managing the market risk andevaluate the counterparties appropriately and to identify accurate credit positions and their fair market value for managing counter-party risk. Market risk is managed by computing the positions, realized gains or losses and unrealized gains or losses againstposition limits established and by monitoring the trading status by the Risk Management Division. Counterparty risk is managed byrating the counterparties and identifying credit positions and their fair market value by the Risk Management Division. These riskmanagement activities are reported to the management every day.

Trading accounts at 31st March, 2005 and 2006 consisted of the following:


2005 2006 2006

Trading securities – assets:Equities ¥ 40 ¥ 73 $ 620Bonds 1,169 1,859 15,822Others 108 919

Total ¥1,209 ¥2,040 $17,361Derivatives – assets:

Foreign currency forward contracts:Contractual amount ¥ 10 ¥ 222 $ 1,888Fair value 0 1 10

Derivatives – liabilities:Foreign currency forward contracts:

Contractual amount 178 1,027 8,743Fair value 0 11 97

5. INVESTMENT SECURITIES

Investment securities at 31st March, 2005 and 2006 consisted of the following:


2005 2006 2006

Available-for-sale securities:Marketable equity securities ¥ 369 ¥1,292 $10,990Non-marketable equity securities 268 267 2,276Investment in funds 1,078 3,564 30,338Non-marketable foreign bonds 6 6 54

Total ¥1,721 ¥5,129 $43,658


Investment in Nexyz Trade Inc. was accounted for as an equity-method affiliate at 31st March, 2005, but as certain shares weresold during the year ended 31st March 2006, it was excluded from an equity-method affiliate and classified as available-for-securi-ties at 31st March, 2006.

The carrying amounts and aggregate fair value of marketable equity securities at 31st March, 2005 and 2006 were as follows:

Millions of yen

Unrealized Unrealized Fair Cost Gains Losses Value

31st March, 2005Securities classified as available-for-sale:

Equity securities ¥ 85 ¥ 284 ¥ 36931st March, 2006Securities classified as available-for-sale:

Equity securities ¥106 ¥1,186 ¥1,292

Thousands of U.S. Dollars

Unrealized Unrealized Fair Cost Gains Losses Value

31st March, 2006Securities classified as available-for-sale:

Equity securities $906 $10,084 $10,990

Available-for-sale securities whose fair value is not readily determinable at 31st March, 2005 and 2006 were as follows:

Carrying Amount


2005 2006 2006

Available-for-sale:Unlisted equity securities ¥ 268 ¥ 267 $ 2,276Investment in funds 1,078 3,564 30,338Unlisted foreign bonds 6 6 54

Total ¥1,352 ¥3,837 $32,668

Proceeds from sales of available-for-sale securities for the years ended 31st March, 2005 and 2006 were ¥636 million and¥4,748 million ($40,421 thousand), respectively. Gross realized gains and losses on these sales, computed on the moving averagecost basis, were nil and ¥6 million, respectively, for the year ended 31st March, 2005 and ¥213 million ($1,809 thousand) and ¥2million ($17 thousand), respectively, for the year ended 31st March, 2006.

The carrying values of debt securities by contractual maturities for securities classified as available-for-sale at 31st March, 2006are as follows:


Due in one year or less ¥2 $15Due after one year through five years 3 25Due after five years through ten years 1 14


7. PROPERTY AND EQUIPMENT

Property and equipment at 31st March, 2005 and 2006 consisted of the following:


2005 2006 2006

Land ¥ 147 ¥ 147 $ 1,254Buildings and leasehold improvements 263 266 2,263Furniture and equipment 1,404 1,601 13,628

Total 1,814 2,014 17,145Less accumulated depreciation (1,230) (1,319) (11,228)Property and equipment-net ¥ 584 ¥ 695 $ 5,917

8. SHORT-TERM BORROWINGS, CORPORATE BONDS AND LONG-TERM DEBT

Short-term borrowings, corporate bonds and long-term debt at 31st March, 2005 and 2006 were as follows:

AverageThousands of interest Repayment

Millions of Yen U.S. Dollars rate(%) term

2005 2006 2006 2006 2006

Short-term borrowings ¥ 40 ¥ 4,258 $ 36,243 4.714%Current portion of long-term debt 10,400Long-term debt 20,000 170,256 0.400 March, 2008Other interest bearing liabilities:

Loans payable on margin transactions 192,508 269,977 2,298,262 0.632Loans payable on repurchase agreement transactions 2,105 1,206 10,266 0.600

Total ¥205,053 ¥295,441 $2,515,027Unsecured corporate bonds, issued on 10th March, 2006 ¥ 50,000 $ 425,641 1.24% March, 2009

6. SECURITIES DEPOSITED AND RECEIVED

Fair value of the securities deposited by the Group in securities-related businesses at 31st March, 2005 and 2006 were as follows:


2005 2006 2006

Securities loaned on margin transactions ¥ 46,051 ¥ 68,037 $ 579,190Securities pledged for loans payable for margin transactions 189,661 279,796 2,381,855Securities loaned by loan agreements 61 53,796 457,955Securities sold in resale agreement transactions 2,117 1,211 10,311Substitute securities for guarantee money paid 94,927 161,916 1,378,362Others 730 907 7,718

Fair value of the securities received by the Group in securities-related businesses at 31st March, 2005 and 2006 were as follows:


2005 2006 2006

Securities pledged for loans receivable for margin transactions ¥253,372 ¥500,031 $4,256,668Securities borrowed on margin transactions 14,542 18,476 157,284Securities borrowed by loan agreements 13 154 1,311Securities purchased on repurchase agreement transactions 13,580 8,176 69,601Substitute securities for guarantee money received 152,916 278,600 2,371,670


9. PLEDGED ASSETS

The equity securities in the amounts of ¥6,255 million and ¥19,098 million ($162,574 thousand) were pledged as collateral forpayables on margin transactions at 31st March, 2005 and 2006, respectively.

10. LIABILITY FOR EMPLOYEES’ RETIREMENT BENEFITS

The Company has a defined contribution pension plan and its subsidiary has a defined benefit lump-sum payment plan. The sub-sidiary adopts a simplified method in computing its liability for employees’ retirement benefits. The liability for employees’ retire-ment benefits is computed as follows:


2005 2006 2006

Projected benefits obligations ¥61 ¥73 $619Plan assets (47) (400)Liability for employees’ retirement benefits ¥61 ¥26 $219

Plan assets represent accumulated fund of insurance paid by the subsidiary to cover the retirement benefits.Retirement benefit expenses for the years ended 31st March, 2005 and 2006 consist of the following:


2005 2006 2006

Contribution to the defined contribution pension plan ¥17 ¥31 $266Contribution to the welfare pension fund 11Provision for the reserve 40 342Retirement benefit expenses ¥28 ¥71 $608

Annual maturities and long-term debt (excluding current portion) at 31st March, 2006 were as follows:

Thousands ofYear Ending 31st March Millions of yen U.S. dollars

2008 ¥ 20,000 $170,256

11. STATUTORY RESERVE

According to the Securities and Exchange Law, a securities company is required to set aside a reserve in proportion to its securi-ties and other related trading to cover possible customer losses incurred by default of the securities company on securities trans-actions.

12. SHAREHOLDERS’ EQUITY

Through 1st May, 2006, Japanese companies are subject to the Commercial Code of Japan (the “Code”). The Code requires thatall shares of common stock be issued with no par value and at least 50 percent of the issue price of new shares is required to berecorded as common stock and the remaining net proceeds are required to be as additional paid-in capital, which is included incapital surplus. The Code permits Japanese companies, upon approval of the Board of Directors, to issue shares to existingshareholders without consideration by way of a stock split. Such issuance of shares generally does not give rise to changes withinthe shareholders’ accounts.

The Code also provides that an amount of 10 percent or more of the aggregate amount of cash dividends and certain otherappropriations of retained earnings associated with cash outlays applicable to each period (such as bonuses to directors) shall beappropriated as a legal reserve (a component of retained earnings) until the total of such reserve and additional paid-in capital


equals 25 percent of the balance of common stock. The amount of total additional paid-in capital and legal reserve that exceeds25 percent of the common stock balance may be available for dividends by resolution of the shareholders after transferring suchexcess in accordance with the Code. In addition, the Code permits the transfer of a portion of additional paid-in capital and legalreserve to the common stock by resolution of the Board of Directors.

In addition to the provision that requires an appropriation for a legal reserve in connection with the cash outlays, the Codeimposes certain limitations on the amount of capital surplus and retained earnings available for dividends.

Dividends are approved by the shareholders at a meeting held subsequent to the end of the fiscal year to which the dividendsare applicable. Semi-annual interim dividends may also be paid upon resolution of the Board of Directors, subject to certain limita-tions imposed by the Code.

Upon resolution and approval of the Board of Directors on 26th October, 2004, the Company issued 55,000 new shares ofcommon stock through public offering on 29th November, 2004. The Company’s common stock and capital surplus increased by¥7,013 million and ¥13,668 million, respectively.

Upon resolution and approval of the Board of Directors on 26th October, 2004, the Company issued 8,250 new shares of com-mon stock through private placement on 28th December, 2004. The Company’s common stock and capital surplus increased by¥1,052 million and ¥2,050 million, respectively.

On 1st March, 2005, the Company made a stock split by way of a free share distribution at the ratio of 3 shares for each out-standing share, and 635,344 shares of the Company’s common stock were issued to shareholders of record on 11th January,2005. Dividends for newly issued shares in relation to this stock split were computed from 1st October, 2004. In addition, on 1stMarch, 2005, the Company increased the number of authorised shares by 2,000,000 shares to 3,000,000 shares throughamendment of articles of incorporation.

During the year ended 31st March, 2005, the Company issued 3,882 shares of its common stock pursuant to the exercise ofoptions granted based on the stock option plans. As a result, common stock and capital surplus increased by ¥264 million and¥264 million, respectively.

On 1st April, 2005, due to the merger with Fides Securities Corporation (“Fides”) the Company issued 5,500 shares of its com-mon stock to Fides’s shareholders listed in shareholder list as at 31st March, 2005 at an exchange ratio of 0.275 shares for eachoutstanding share of Fides’s common stock. Dividends for newly issued shares in relation to this merger were computed from 1stApril, 2005. As a result, the Company’s capital surplus increased by ¥1,120 million ($9,532 thousand).

Upon resolution and approval of the Board of Directors on 29th November, 2005, the Company issued 66,000 new shares ofcommon stock through public offering on 16th December, 2005. The Company’s common stock and capital surplus increased by¥22,552 million ($191,977 thousand) and ¥22,552 million ($191,977 thousand), respectively.

Upon resolution and approval of the Board of Directors on 29th November, 2005, the Company issued 6,000 new shares ofcommon stock through private placement on 16th January, 2006. The Company’s common stock and capital surplus increasedby ¥2,050 million ($17,452 thousand) and ¥2,050 million ($17,452 thousand), respectively.

On 1st February, 2006, the Company made a stock split by way of a free share distribution at the ratio of 3 shares for each out-standing share, and 2,082,718 shares of the Company’s common stock were issued to shareholders of record on 31st January,2006. Dividends for newly issued shares in relation to this stock split were computed from 1st October, 2005. In addition, on 1stFebruary, 2006, the Company increased the number of authorised shares by 7,600,000 shares to 11,400,000 shares throughamendment of articles of incorporation.

During the year ended 31st March, 2006, the Company issued 26,743 shares of its common stock pursuant to the exercise ofoptions granted based on the stock option plans. As a result, common stock and capital surplus increased by ¥943 million($8,031 thousand) and ¥943 million ($8,031 thousand), respectively.

On 1st May, 2006, a new corporate law (the “Corporate Law”) became effective, which reformed and replaced the Code withvarious revisions that would, for the most part, be applicable to events or transactions which occur on or after 1st May, 2006 andfor the fiscal years ending on or after 1st May, 2006. The significant changes in the Corporate Law that affect financial andaccounting matters are summarized below;

(a) DividendsUnder the Corporate Law, companies can pay dividends at any time during the fiscal year in addition to the year-end dividendupon resolution at the shareholders meeting. For companies that meet certain criteria such as; (1) having the Board of Directors,(2) having independent auditors, (3) having the Board of Corporate Auditors, and (4) the term of service of the directors is pre-scribed as one year rather than two years of normal term by its articles of incorporation, the Board of Directors may declare divi-dends (except for dividends in kind) if the company has prescribed so in its articles of incorporation.


The Corporate Law permits companies to distribute dividends-in-kind (non-cash assets) to shareholders subject to a certain lim-itation and additional requirements.

Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorpora-tion of the company so stipulate. Under the Code, certain limitations were imposed on the amount of capital surplus and retainedearnings available for dividends. The Corporate Law also provides certain limitations on the amounts available for dividends or thepurchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount ofnet assets after dividends must be maintained at no less than ¥3 million.

(b) Increases / decreases and transfer of common stock, reserve and surplusThe Corporate Law requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a component ofretained earnings) or as additional paid-in capital (a component of capital surplus) depending on the equity account charged uponthe payment of such dividends until the total of aggregate amount of legal reserve and additional paid-in capital equals 25% of thecommon stock. Under the Code, the aggregate amount of additional paid-in capital and legal reserve that exceeds 25% of thecommon stock may be made available for dividends by resolution of the shareholders. Under the Corporate Law, the total amountof additional paid-in capital and legal reserve may be reversed without limitation of such threshold. The Corporate Law also pro-vides that common stock, legal reserve, additional paid-in capital, other capital surplus and retained earnings can be transferredamong the accounts under certain conditions upon resolution of the shareholders.

(c) Treasury stock and treasury stock acquisition rightsThe Corporate Law also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution ofthe Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the share-holders which is determined by specific formula.

Under the Corporate Law, stock acquisition rights, which were previously presented as a liability, are now presented as a sepa-rate component of shareholders’ equity.

The Corporate Law also provides that companies can purchase both treasury stock acquisition rights and treasury stock. Suchtreasury stock acquisition rights are presented as a separate component of shareholders’ equity or deducted directly from stockacquisition rights.

13. STOCK OPTION PLAN

At the Board of Directors meeting on 8th July, 2004, details of the stock option plan which had been approved by the Company’sshareholders at the general shareholders meeting on 21st June, 2004 were determined. According to the resolution, this stockoption plan provides for issuing options to 7 directors and 88 key employees of the Company and 6 key employees of parentcompany to purchase the Company’s common stock at an exercise price of ¥44,290 per share as of 31st March, 2006 during theperiod from 22nd December, 2004 to 21st June, 2010. The maximum number of shares to be issued upon exercise of theoptions was 63,351 shares.

At the Board of Directors meeting on 21st July, 2004, details of the stock option plan which had been approved by theCompany’s shareholders at the general shareholders meeting on 21st June, 2004 were determined. According to the resolution,this stock option plan provides for issuing options to 1 director of the Company to purchase the Company’s common stock at anexercise price of ¥44,290 per share as of 31st March, 2006 during the period from 22nd December, 2004 to 21st June, 2010.The maximum number of shares to be issued upon exercise of the options was 2,250 shares.

At the Board of Directors meeting on 3rd August, 2004, details of the stock option plan which had been approved by theCompany’s shareholders at the general shareholders meeting on 21st June, 2004 were determined. According to the resolution,this stock option plan provides for issuing options to 2 key employees of the Company to purchase the Company’s commonstock at an exercise price of ¥44,290 per share as of 31st March, 2006 during the period from 22nd December, 2004 to 21stJune, 2010. The maximum number of shares to be issued upon exercise of the options was 63 shares.

At the Board of Directors meeting on 29th November, 2005, details of the stock option plan which had been approved by theCompany’s shareholders at the general shareholders meeting on 23rd June, 2005 were determined. According to the resolution,this stock option plan provides for issuing options to 40 key employees of the Company to purchase the Company’s commonstock at an exercise price of ¥171,417 per share as of 31st March, 2006 during the period from 1st January, 2006 to 23rd June,2013. The maximum number of shares to be issued upon exercise of the options was 5,007 shares.

At the Board of Directors meeting on 30th December, 2005, details of the stock option plan which had been approved by theCompany’s shareholders at the general shareholders meeting on 23rd June, 2005 were determined. According to the resolution,this stock option plan provides for issuing options to 12 key employees of the Company to purchase the Company’s common


stock at an exercise price of ¥200,638 per share as of 31st March, 2006 during the period from 1st January, 2006 to 23rd June,2013. The maximum number of shares to be issued upon exercise of the options was 699 shares.

The exercise prices of the above options will be adjusted for subsequent transactions such as stock splits, stock consolidations,or stock issuances or disposal of treasury stock with a lower price than market value, based upon certain formulas, as defined.There are also certain restrictions in exercising the stock option rights.

14. INCOME TAXES

The Company is subject to Japanese national and local income taxes which, in the aggregate, resulted in normal effective statuto-ry tax rate of 40.69 percent for the years ended 31st March, 2005 and 2006.

The tax effects of significant temporary differences and loss carryforwards which resulted in deferred tax assets and liabilities at31st March, 2005 and 2006 were as follows:


2005 2006 2006

Deferred tax assets:Current:

Allowance for doubtful accounts ¥ 17 ¥ 54 $ 459Write-down of trading securities 82 82 697Accrued enterprise tax and business place tax 291 803 6,834Advertising expenses 36 112 954Other 31 11 96Less valuation allowance (6) (10) (81)

Net deferred tax assets – current ¥ 451 ¥1,052 $ 8,959Non-current:

Allowance for doubtful accounts ¥ 9 ¥ 33 $ 280Tax loss carryforwards 37 Reserve for liability for securities transactions 925 1,857 15,805Write-down of investment securities 28 12 98Depreciation 22 19 164Loss on impairment of land 62 62 524Other 26 10 92Less valuation allowance (71) (0) (1)

Deferred tax assets – non-current 1,038 1,993 16,962

Deferred tax liabilities:Non-current:

Deferred revenue on fixed assets 80 79 674Unrealized gain on available-for-sale securities 199 532 4,526

Deferred tax liabilities – non-current 279 611 5,200 Net deferred tax assets – non-current ¥ 759 ¥1,382 $11,762

The analysis of the reconciliation between the normal effective statutory tax rate and the actual effective tax rate is omitted sincethe difference is less than 5% of the normal effective statutory tax rate.


15. LEASES

The following pro forma amounts represent the acquisition cost, accumulated depreciation and net book value of leased assets at31st March, 2005 and 2006, which would have been reflected in the consolidated balance sheets if finance lease accounting hadbeen applied to the finance leases currently accounted for as operating leases as allowed under Japanese GAAP.

2005

Millions of yen

Furniture andEquipment Software Total

Acquisition cost ¥3,871 ¥989 ¥4,860Accumulated depreciation 806 239 1,045

Net book value ¥3,065 ¥750 ¥3,815

2006

Millions of yen Thousands of U.S. dollars

Furniture and Furniture andEquipment Software Total Equipment Software Total

Acquisition cost ¥6,051 ¥1,276 ¥7,327 $51,512 $10,866 $62,378Accumulated depreciation 1,663 476 2,139 14,154 4,055 18,209

Net book value ¥4,388 ¥ 800 ¥5,188 $37,358 $ 6,811 $44,169

Obligations under finance leases at 31st March, 2005 and 2006 were as follows:


2005 2006 2006

Due within one year ¥ 880 ¥1,386 $11,796Due after one year 2,995 3,898 33,182

Total ¥3,875 ¥5,284 $44,978

Lease payments related to finance leases accounted for as operating leases in the accompanying consolidated financial state-ments and the related depreciation expense and interest expense for the years ended 31st March, 2005 and 2006 were as follows:


2005 2006 2006

Lease payments ¥704 ¥1,182 $10,062Depreciation expense 655 1,098 9,346Interest expense 86 119 1,012

Depreciation expense is computed by the straight-line method over the respective lease terms assuming no residual value. Theexcess of total lease payments over acquisition cost equivalent is regarded as amounts representing interest expense and is allo-cated to each period using the interest method.

The future minimum lease payments under noncancellable operating leases at 31st March, 2005 and 2006 were as follows:


2005 2006 2006

Due within one year ¥53Due after one year

Total ¥53


16. OPERATING REVENUES

Operating revenues for the years ended 31st March, 2005 and 2006 consisted of the following:


2005 2006 2006

Commissions:Brokerage commissions ¥18,689 ¥40,175 $341,999Underwriting and selling commissions 308 492 4,187Offering and selling commissions 614 1,511 12,860Other commissions 1,032 1,881 16,018

Total 20,643 44,059 375,064Trading profit 674 2,666 22,694Financial revenues 5,803 13,231 112,633Other 55 258 2,199

Total operating revenues ¥27,175 ¥60,214 $512,590

Net gain (loss) on trading for the years ended 31st March, 2005 and 2006 consisted of the following:

Millions of yen Thousands of U.S. dollars

2005 2006 2006

Realized Unrealized Realized Unrealized Realized Unrealized Gain Gain(Loss) Total Gain Gain (Loss) Total Gain Gain (Loss) Total

Equity securities ¥ 96 ¥(25) ¥ 71 ¥ 333 ¥(5) ¥ 328 $ 2,836 $(44) $ 2,792Debt securities 410 (2) 408 1,456 9 1,465 12,395 78 12,473Others 174 21 195 875 (2) 873 7,449 (20) 7,429

Total ¥680 ¥ (6) ¥674 ¥2,664 ¥ 2 ¥2,666 $22,680 $ 14 $22,694

Financial revenues for the years ended 31st March, 2005 and 2006 consisted of the following:


2005 2006 2006

Revenues from margin transactions ¥5,673 ¥11,319 $ 96,353Interest income on bonds 1 77 659Revenues from repo transactions 98 101 858Interest income 17 1,336 11,372Others 14 398 3,391

Total ¥5,803 ¥13,231 $112,633


18. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the years ended 31st March, 2005 and 2006 consisted of the following:


2005 2006 2006

Trading related costs ¥ 3,639 ¥ 9,189 $ 78,224Personnel costs 1,574 2,850 24,263Real estate related expenses 2,431 3,521 29,971Administrative expenses 4,165 6,837 58,202Depreciation expense 851 1,314 11,187Taxes and dues 158 440 3,742Provision for allowance for doubtful accounts 32 207 1,766Others 1,218 1,947 16,576

Total ¥14,068 ¥26,305 $223,931

19. RESEARCH AND DEVELOPMENT COSTS

Research and development costs charged to income were ¥1 million and ¥13 million ($114 thousand) for the years ended 31stMarch, 2005 and 2006, respectively.

17. FINANCIAL COSTS

Financial costs for the years ended 31st March, 2005 and 2006 consisted of the following:


2005 2006 2006

Cost of margin transactions ¥1,817 ¥3,430 $29,197Interest expense on bonds 36 304Interest expense 139 306 2,609Cost of repo transactions 26 29 250Others 12 96 813

Total ¥1,994 ¥3,897 $33,173


20. NON-CASH TRANSACTIONS

The Company acquired the shares in E*Trade Korea Co., Ltd. and consequently, it became a consolidated subsidiary during theyear ended 31st March, 2005.

The assets and liabilities at the beginning of consolidation and the relationship between the acquisition cost of the shares ofE*Trade Korea Co., Ltd. and payment for its acquisition were as follows:

Millions of yen

Current assets ¥12,533Fixed assets 1,044Current liabilities (7,932)Non-current liabilities (106)Goodwill on consolidation (117)Minority interests (720)

Acquisition cost ¥ 4,702Cash and cash equivalents (92)

Payment for shares of E*Trade Korea Co., Ltd. ¥ 4,610

Effective 1st April, 2005, the Company and Fides merged and major components of the assets and liabilities succeeded fromFides were as follows:


Current assets ¥ 679 $ 5,784Fixed assets 498 4,241

Total assets ¥1,177 $10,025

Current liabilities ¥ (57) $ (484)Statutory reserve (4) (32)

Total liabilities ¥ (61) $ (516)

Capital reserve increased by ¥1,120 million ($9,532 thousand) due to the merger, while the capital was not increased.


22. SUBSEQUENT EVENTS

Appropriations of Retained Earnings

The following appropriations of retained earnings at March 31, 2006 were approved at the Company’s shareholders meeting heldon June 27, 2006:


Year-end cash dividends, ¥1,600 ($13.62) per share ¥5,030 $42,820Bonuses to directors 225 1,915

21. PER SHARE INFORMATION

Basic net income and diluted net income for the years ended 31st March, 2005 and 2006 were computed based on the followingdata:


2005 2006 2006

Net income ¥ 6,179 ¥ 16,971 $144,470Amount not attributable to common shareholders 170 225 1,915

(of which, directors’ bonuses by appropriation of earnings) (170) (225) (1,915)Net income available to common shareholders 6,009 16,746 142,555

Average number of common stocks 2,477,274 2,964,298Effect of dilutive shares 49,416 68,652(Of which, warrants) (49,416) (68,652)

The Company executed stock splits of three shares for one share on 1st March, 2005 and 1st February, 2006. The average num-ber of common stocks and effect of dilutive shares are adjusted on the assumption that these stock splits were executed at thebeginning of the fiscal year ended 31st March, 2005.


24. RELATED PARTY TRANSACTIONS

Transactions with related parties for the years ended 31st March, 2005 and 2006 and account balances outstanding at each yearend by related parties were as follows:


2005 2006 2006

SBI Holdings, Inc. System development ¥ 81 ¥ 70 $ 598System maintenance 92 45 381Purchase of shares 4,702Borrowing on repos 14,792 125,917Other payables 7 2 18Accrued expenses 3 3 27

WORLD NICHIEI FRONTIER Borrowing on repos 13,428Securities Co., Ltd. (now SBI Securities Co., Ltd.) Payables on resale

Agreements 702

SBI Holdings, Inc. is a major shareholder owning 51.2% of voting rights of the Company.WORLD NICHIEI FRONTIER Securities Co., Ltd. (now SBI Securities Co., Ltd.) is a subsidiary of SBI Holdings, Inc.

23. SEGMENT INFORMATION

The Group is engaged in securities related services including trading of securities, brokerage services, underwriting and selling ofsecurities, offering and selling of securities and private placement of securities. These activities are accompanied by financial andother services and the business segment of the Company and its consolidated subsidiary is within one business segment that is“Investment and Financial Services.”

In addition, geographical segment information is omitted since total operating revenues and total assets of the overseas sub-sidiary are less than 10 percent of the total operating revenues and total assets of the consolidated group. Overseas sales infor-mation is also omitted since the overseas revenue is less than 10 percent of the consolidated revenue.


INDEPENDENT AUDITORS’ REPORT

To the Board of Directors of SBI E*TRADE Securities Co., Ltd.:

We have audited the accompanying consolidated balance sheets of SBI E*TRADE Securities Co., Ltd. (the former E*TRADE

Securities Co., Ltd., the “Company”) and a consolidated subsidiary (together, the “Group”) as of March 31, 2005 and 2006, and

the related consolidated statements of income, shareholders’ equity, and cash flows for the years then ended, all expressed in

Japanese yen. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is

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

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

plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstate-

ment. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evalu-

ating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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

financial position of SBI E*TRADE Securities Co., Ltd. and a consolidated subsidiary as of March 31, 2005 and 2006, and the

consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles gen-

erally accepted in Japan.

Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion, such trans-

lation has been made in conformity with the basis stated in Note 1. Such U.S. dollar amounts are presented solely for the conven-

ience of readers outside Japan.

June 27, 2006


Directors and Executive Officers

Yoshitaka Kitao Chairman of the Board

Norikazu Nakagawa Vice Chairman of the Board

Taro Izuchi Representative Director and CEO

Yoshihito Sato Director and Managing Executive Officer

Koshiro Sakamoto Executive Officer

Takeki Saito Executive Officer

Hiroyuki Kamata Executive Officer

Kyoji Noma Executive Officer

Naoki Iwayoshi Executive Officer

Tokihito Yamada Executive Officer

Kazumori Morita Executive Officer

Masato Takamura Executive Officer

Corporate Auditors

Isao Korenaga Managing Corporate Auditor

Kenishi Hirabayashi Corporate Auditor

Minoru Tada Corporate Auditor

Atsushi Fujii Corporate Auditor

October 1998E*TRADE Japan K.K., which was formed through the jointinvestments of Softbank Corp. and E*TRADE Group, Inc. (aU.S. corporation, currently E*TRADE Financial Corporation),acquired Osawa Securities Co., Ltd., as a wholly owned sub-sidiary. (Osawa Securities was founded in March 1944 andbecame a regular member of the Tokyo Stock Exchange inApril 1949.)

December 1998Accompanying the transition in Japan’s securities industry to aregistered company system, the Company received an officialregistration.

April 1999The Company began call center operations.The Company name was changed from Osawa Securities toE*TRADE SECURITIES Co., Ltd.

October 1999E*TRADE SECURITIES began Internet transactions services.

April 2000The Company became a regular member of the OsakaSecurities Exchange.

March 2003The Company became a special regular member of theFukuoka Stock Exchange.

April 2003The Company became a full-service, regular member of theNagoya Stock Exchange.

November 2004E*TRADE SECURITIES listed on the JASDAQ exchange (company code: 8701).

December 2004Nine companies of the SBI Group formed the SBI ChildWelfare Limited Liability Intermediate Corporation (SBI Children’sHope Foundation).The Company became a participating member of the JASDAQStock Exchange.

March 2005E*TRADE Financial Corporation, of the United States, investedin the Company.E*Trade Korea Co., Ltd., became a subsidiary of the Company.

April 2005E*TRADE SECURITIES merged with Fides SecuritiesCorporation.

August 2005The Company became a special regular member of theSapporo Stock Exchange.The Company began underwriting activities for initial publicofferings (IPOs).

January 2006 E*TRADE SECURITIES became the first specialized on-linesecurities company to attain one million full-service customeraccounts.

March 2006 The Company’s first unsecured bonds were issued.

July 2006 The Company name was changed from E*TRADE SECURITIESCO., LTD. to SBI E*TRADE SECURITIES Co., Ltd.The Company introduced a large-scale, on-line trading systemcapable of handing two million customer accounts.

August 2006 SBI Benefit Systems Co., Ltd., became a subsidiary.

H I S T O R Y

C O R P O R A T E O F F I C E R S

a core securities company in the SBI Group, which manages Japan’s largest venture capital fund and

is expanding a broad array of financial businesses.

SBI E*TRADE SECURITIES’ operations include the on-line brokerage of transactions in stocks

and other securities, securities underwriting, public subscriptions and secondary offerings of securi-

ties, as well as private placements of securities. Through these and other securities company opera-

tions, the Company seeks to provide financial services that are finely tailored to match customers’

needs.

A pioneer of on-line brokerage business in Japan, SBI E*TRADE SECURITIES has a customer-

oriented business philosophy that is reflected in the Company’s goal of offering the industry’s

highest-quality services as well as the industry’s lowest commissions.

On July 1, 2006, the Company changed its name from E*TRADE SECURITIES Co., Ltd., to SBI

E*TRADE SECURITIES Co., Ltd. Besides enabling the Company to better leverage the power of the

SBI brand, the addition of “SBI” to the Company name is promoting awareness of the concerted

nature of the operations of SBI Group companies and facilitating efforts to generate still-greater

synergies within the Group.

In the future, SBI E*TRADE SECURITIES intends to respond to customers’ needs by providing

an increasingly diverse array of financial services and thereby realize a sustained increase in its

corporate value.

SECURITIES IS

Financial Highlights 1

To Our Shareholders 2

Overview of Operations 4

An Interview with the President 6

New Initiatives to Further

Increase Customer Convenience 12

Corporate Governance

and Social Contribution 14

Management’s Discussion and Analysis 16

Financial Statements 22

Corporate Officers/History 44

Corporate Data/Investor Information 45

Forward-looking statements

This annual report contains statements about such topics

as the Company’s current plans, outlook, and strategies,

and the portions of those statements that are not histori-

cal facts are forward-looking statements. In accordance

with the Company’s current management policies, these

forward-looking statements are made based on currently

available information and on assumptions that the

Company judges to be rational. Consequently, the for-

ward-looking statements are subject to diverse risks,

including, but not limited to, risks related to economic

trends in principal markets, trends in demand for ser-

vices, and fluctuations in currency exchange rates.

Because of these factors, actual results may differ greatly

from those projected in this annual report.

CONTENTS

SBI E*TRADE


I N V E S T O R I N F O R M AT I O N (As of March 31, 2006)

Shares Authorized 11,400,000 shares

Shares Issued 3,143,817 shares

Number of Shareholders 95,014

Principal Shareholders

Share of Number of shares voting rights (%)

SBI Holdings, Inc. 1,608,465 51.16SOFTBANK INTERNET TECHNOLOGY FUND No. 2 451,356 14.35 SOFTBANK INTERNET TECHNOLOGY FUND No. 1 112,839 3.58 Japan Securities Finance Co., Ltd. 47,207 1.50 SOFTBANK INTERNET TECHNOLOGY FUND No. 3 30,729 0.97 The Master Trust Bank of Japan, Ltd. (Trust Account) 29,803 0.94 Trust & Custody Services Bank, Ltd. (Trust Account B) 21,084 0.67

* Shareholding and voting rights figures for Japan Securities Finance Co., Ltd., include figures for 1,050 shares held in that company’scommercial account.

Shareholder Information (As of March 31, 2006)

Number of shares heldPercentage of total shares issued (%)

Financial Institutions144,940 (4.61%)

Securities Companies30,120 (0.96%)

Other Japanese Companies1,629,766 (51.84%)

Foreign Companies, Etc.133,064 (4.23%)

Individuals and Others1,205,927 (38.36%)

C O R P O R AT E D ATACorporate Name SBI E*TRADE SECURITIES Co., Ltd.

(Name changed from E*TRADE SECURITIES Co., Ltd., as of July 1, 2006)

Location 1-6-1, Roppongi, Minato-ku, Tokyo

Tel. (81) 3-5562-7210

Established March 30, 1944

Paid-in Capital ¥46,874,835,631 (As of March 31, 2006)

Number of Employees 129 (As of March 31, 2006)

Consolidated Subsidiary E*Trade Korea Co., Ltd.

URL http://www.etrade.ne.jp/

A N N U A L R E P O RT 2006SBI E *TRADE SECURIT IES Co . , L td .

For the Year Ended March 31, 2006

Printed in Japan

SBI E*TRADE SECURITIES Co., Ltd.

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SBI E*TRADE SECURITIES Co., Ltd.search.sbisec.co.jp/v2/popwin/info/home/corporate/annualreport2005... · a core securities company in the SBI Group, ... banking segment by operating