Capcom Annual Report to Shareholders 2006: Continuing to Create 'Entertainment Culture'.

Tokyo, Japan, Oct 31, 2006 - (JCN Newswire) - Capcom Co., Ltd. (TSE: 9697), a leading game software developer, is pleased to present its Annual Report to Shareholders for the year ended March 31, 2006. In his message to shareholders, Kenzo Tsujimoto, president and CEO of Capcom, offered the following remarks:

Capcom embarked on a series of Group-wide structural reforms starting in fiscal 2002 (year ended March 31, 2003). The effect of these reinforcements to our earning structure became apparent during fiscal 2004 and 2005 (years ended March 31, 2005 and 2006, respectively).

The global market for game software is worth $16.3 billion, with Europe and North America accounting for more than 80% of the total market. Since this sales segment continues to increase every year, expanding overseas market share in this area has become a major focus for all game software publishers. Since fiscal 2002, Capcom has strengthened its sales in the global home video game software market in line with our medium-term objective of enhancing sales and profits based on the size of each market. As a result of Capcom's dedication of personnel to the development process, we achieved huge successes in the current fiscal year with such hits as 'Monster Hunter Freedom' and 'Resident Evil 4'. We have also strengthened the structure of our direct distribution system through a review of sales representatives in North America and enhancements to our marketing structure. The success of these efforts has been reflected in a decrease in product inventory, sales expenses and market distribution inventory levels, and improved recognition of our software titles among customers and retailers.

While achieving success in the home video game software business, Capcom has, at the same time, promoted the utilization of its intellectual properties, including its brand name, in other fields of business as well. As a result of these efforts, the resulting consolidated net sales increased to 70,254 million yen (up 6.6% from the previous year). In terms of profits, however, Capcom recorded a consolidated operating income of 6,580 million yen (down 15.1% from the previous year) due largely to sluggish growth in North America.

We reviewed the valuation reserve on deferred tax assets and recorded adjustments in related accounts including corporate taxes. However, due to tax correction based on transfer price taxation by related authorities, the resulting net income for the current fiscal year was 6,941 million yen (up 91.6% from the previous year). Historically, new game consoles are released in the market every four to six years, and during the transitional phase customers tend to refrain from purchasing new software. For this reason, we predict that the market for software in 2006, a transitional year, will shrink to $15.8 billion. However, we expect a full line-up of next-generation game consoles to be commercially released by the end of the year and the market to slowly rebound. Consequently, we are projecting sustained market growth of more than 10% from 2007 onwards. We also anticipate the market size of online games to expand mainly in Asia, namely in South Korea and China. Capcom intends to embark on full-scale development of software for next-generation game consoles. We plan to upgrade our product series by focusing development on software and online games for the global market, while teaming up with other companies for product development.

As for our performance projections for the next fiscal year, we anticipate net sales of 68,400 million yen, operating income of 7,000 million yen and net income of 3,900 million yen. Capcom places great importance on real cash flow management, with cash generation - as opposed to financial profits - as the primary criteria in making management decisions and assessing enterprise value.

Cash flow from operating activities was 13,922 million yen, up 5,945 million yen from the previous fiscal year. This was due mainly to income before income taxes of 6,912 million yen, a decrease in capitalized development costs by 3,051 million yen, and a decrease in notes and accounts receivable by 1,795 million yen. Capcom will continue to work on increasing cash flow.

In addition to the Xbox 360, which has already been released, PlayStation 3 ('PS3') and Wii will be introduced in the fall of 2006. Although these consoles will offer new ways of playing games and breathtaking graphics, there is some fear of diminished profitability due to the high development cost of these advanced systems. In view of the anticipated market growth beginning in 2007, we have initiated the development of several new titles including the latest in the 'Resident Evil' and 'Devil May Cry' series intended for next-generation game consoles. We are fully aware that the main market during the next fiscal year will be for current-generation game consoles and portable game consoles. For that reason, we are maintaining earnings based on the sales of our game titles intended for current-generation game consoles, which boast established and prolonged popularity, while making advance investments in the development of software for next-generation consoles.

In order to curtail development costs, we intend to implement a multi-platform strategy, marketing a single title for a number of different types of game consoles, thereby expanding sales and optimizing our profits. Furthermore, we expect to compensate for rising development costs incurred in the transition to next-generation consoles by revising our development process and cost management structure, which we have done a number of times in the past. In addition, by creating a new development engine that can be commonly used by all next-generation consoles, we are confident we can further improve the efficiency of our development.

Despite mounting anticipation for the introduction of next-generation game consoles, the market, which is in a transitional period, appears to be in a stage of temporary decline. The online game market, on the other hand, has undergone rapid expansion thanks to the proliferation of personal home computers and broadband.

We have been particularly successful with our 'Monster Hunter' series game consoles and online play. Since we consider online games for PCs to be a growing market, we fully intend to pursue further business expansion in this field. An Online Business Division was established in April 2006, and in October 2006, in conjunction with the Dwango Group, we will establish a new company to operate a comprehensive communication portal site and construct a new business model based on the Japanese market. Later we plan to pursue this business in Europe and North America while forming business partnerships with leading local companies to expand our business in Asia, thus making this segment one of the pillars of Capcom.

[Excerpt from President and CEO Kenzo Tsujimoto's message to shareholders in the Capcom Annual Report 2006]

To download the full report, please visit the Capcom IR website at http://ir.capcom.co.jp/english/ or the JCN Annual Report gallery at http://www.japancorp.net/reports.asp .

About Capcom Co., Ltd.

Capcom is a leading worldwide developer, publisher and distributor of interactive entertainment. Founded in 1983, the company has created world renowned franchises including Resident Evil, Street Fighter, Mega Man, Devil May Cry and the Onimusha series. Headquartered in Osaka, Japan, the company maintains operations in the United States, United Kingdom, Germany, Tokyo and Hong Kong. More information about Capcom and its products can be found on the company's web site at www.capcom.com.

Source: Capcom Co., Ltd.

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