Forward and Upward by linxiaoqin


									                                Forward and Upward

Annual Report 2006
Fiscal Year Ended December 31, 2006
Lion Corporation
As a provider of quality, highly functional home and pharmaceutical products,
Lion Corporation has established a long-standing reputation as a company
committed to enriching people’s lives. In bringing to individuals and communities
improved hygiene, health and quality of life, we endeavor to accurately anticipate
consumer needs in an effort to keep one step ahead of our competitors.
        Looking ahead, we will incorporate mounting awareness of environmental
concerns in every facet of our business activities and actively conduct oral care
educational activities as part of our corporate social responsibility.

Consolidated Financial Highlights                                         1          Research and Development                                                  28
Special Feature                                                           2          Corporate Social Responsibility                                           32
A Message from the President                                              8          Corporate Governance                                                      36
    Top Interview                                                         9          Directors, Executive Officers and Corporate
Lion at a Glance                                                         14          Auditors                                                                  38
Review of Operations                                                     16          11-Year Selected Consolidated Financial Data                              40
    Home Products                                                        16          Management’s Discussion and Analysis                                      42
         Health Care Products                                            18          Consolidated Balance Sheets                                               52
              Oral Care                                                  18          Consolidated Statements of Income                                         54
              Beauty Care                                                19          Consolidated Statements of Shareholders’ Equity                           55
         Household Products                                              20          Consolidated Statements of Cash Flows                                     57
              Fabric Care                                                20          Notes to Consolidated Financial Statements                                58
              Living Care                                                21          Independent Auditors’ Report                                              69
    Pharmaceutical Products                                              22          Major Subsidiaries, Affiliates and
    Chemical Products                                                    24          Non-Profit Organization                                                   70
    International Division                                               26          Investor Information                                                      71

This annual report contains information about forward-looking statements related to such matters as the Company’s plans, strategies and business results. These forward-looking statements represent
judgments made by the Company based on information available at present and are inherently subject to a variety of risks and uncertainties. The Company’s actual activities and business results could
differ significantly from the forward-looking statements due to changes including, but not limited to, those in the economic environment, business environment, demand and exchange rates.

                                                                                                                                                  Thousands of
                                                                              Millions of yen (Except per share date)         % change            U.S. dollars (Note 2)

                                                                                       2006                  2005               2006/2005                2006
Net sales                                                                          ¥330,380              ¥331,798                        (0.4)%     $ 2,773,745
Operating income                                                                              343              6,066                (94.3)                   2,881
Net income                                                                               5,540                 5,473                     1.2               46,514

    Per share date: (yen)
    Net income                                                                     ¥     19.60           ¥     19.10                     2.6%       $          0.16
    Cash dividends                                                                       10.00                   9.00                   11.1                   0.08

Total net assets (Note 1)                                                          ¥105,133              ¥111,892                        (6.0)%     $    882,660
Total liabilities and net assets                                                       246,327               249,303                     (1.2)          2,068,068

Notes: 1. Sections under “Total net assets” are newly provided to conform to Japanese accounting regulation revisions. The fiscal 2005 figures have also
          been restated to reflect this change. See note 3(a) of the Notes to Consolidated Financial Statements for details.
       2. U.S. dollar amounts above and elsewhere in this annual report are converted from Japanese yen for convenience only at the rate of ¥119.11=U.S.$1.

       Net Sales                                          Operating Income                                          Net Income (Loss)
       (Millions of yen)                                  (Millions of yen)                                         (Millions of yen)

      350,000                                              10,000                                                   12,000

      200,000                                                                                                         4,000

      150,000                                                                                                         2,000

             0                                                  0                                                    -6,000
                       02 03 04 05 06                                     02 03 04 05 06                                            02 03 04 05 06

                                                                                                                               ANNUAL REPORT 2006                         1

    Lion’s Winning Formulas
    Caring for individual lifestyle needs, Lion has consistently delivered products that
    contribute to a better quality of life. In broadening people’s horizons, we have provided a
    product range that creates new lifestyle value, the key to enhancing corporate worth. In
    the face of change, new demands and challenges, Lion has adopted the medium-term

                 ¥3.0 trillion                                         market

strategy to bolster its existing core businesses while cultivating new businesses and
markets. At the same time, we have continued to address environmental concerns that
are attracting growing attention. In the fiscal year under review, Lion has achieved
concrete results in each of these endeavors.

          Over       70%                 plant-based ingredients

                                                                    ANNUAL REPORT 2006   3
               New Market Formula
               As individual needs for improved health and a comfortable lifestyle become
               increasingly acute, Lion has recognized the potentially significant opportunities in
               developing a new comfortable lifestyle support industry. This new industry, which
               is comprised of toiletries, over-the-counter (OTC) drugs and functional food
               products, has an estimated market scale of ¥3 trillion. In fiscal 2006, Lion
               commenced full-fledged development of functional food and medical health care
               products with the aim of securing a dominant position in the new industry.
                    Making the most of its expertise in home and pharmaceutical products,
               nurtured over many years, Lion is committed to releasing a succession of new
               products resulting in business expansion.

        Targeting a
                         ¥3.0 trillion                                                 market

               ENTRY INTO FUNCTIONAL FOOD                   well received by the market, with sales
               PRODUCTS FIELD                               reaching four million bottles by the end of
                                                            December 2006. Buoyed by robust
               Seizing the opportunity that has presented   consumer support, we added a concentrated
               itself, Lion entered the functional food     liquid version of Gussumin in a lightweight
               products market in fiscal 2006. Based on     travel pack and continue to enjoy firm sales.
               two decades of intensive research into            Lion will pursue further business
               tomato vinegar, we launched Gussumin, a      growth through new endeavors that include
               life support drink blending tomato vinegar   foods for specified health use.
               and γ-amino butylic acid (GABA), and
               Kyupurun, a beauty support drink that
               combines low-molecular-weight collagen
               and flavangenol. Gussumin was particularly

NEW DEVELOPMENTS IN MEDICAL                     gingivitis and pyorrhea by introducing a
HEALTH CARE PRODUCTS                            medicated toothpaste, toothbrush,
                                                medicated dental rinse, etc. We also
Against the backdrop of an aging society,       launched two new complexion care creams
Lion is developing a total product range        under the Pair brand name, in addition to
based on a self-medication concept. As          our existing acne medication product.
individuals are showing increased interest in        Lion will promote business growth by
illness prevention and health management,       bolstering its lineup of medical health care
Lion is developing a mixture of toiletries,     products.
OTC drugs and functional food products
under the medical health care banner. In the
fiscal year under review, we expanded the
existing Dent Health treatment brand to
encompass products that help to prevent

                                                                                    ANNUAL REPORT 2006   5
    ■ CARBON-NEUTRAL EFFECT                                    CO2                                Offset total amount of CO 2
    Plant photosynthesis uses light and CO2 to                       CO2                                                                               CO2
    produce organic substances. CO2 emitted
    through the use of organic substances               O2                       O2
    produced by photosynthesis is offset by the CO2
    absorbed by plants. This effectively cancels out                                                                            Disposal
    the total amount of CO2 emitted into the                      Plants                                Plant-Based             after use     Biodegradation
                                                                                      Vegetable          Detergent                                (Decomposes into
    atmosphere, a phenomenon called the                        (Palms, etc.)             oil
                                                                                                         (Surfactant)                               CO2 and H2O)
    “carbon-neutral effect.” Based on this principle,
    in March 2006, Lion launched an improved Top
    laundry detergent, the overall product lifecycle    O2                       O2                                                         H2O                      H2O
    of which reduces CO2 emissions by 47%                     Photosynthesis
                                                             (Carbon fixation)
    compared with 1990 product levels.

Classic Formula
As a provider of home products essential to consumers’ everyday lives, Lion
recognizes global environmental protection as its most important corporate
social responsibility. For a long period, we have focused on supplying
environmentally friendly products incorporating ecological concerns in every
facet of our business operations—from product development to product
disposal and recycling. In an effort to reinforce our commitment in this area,
we formulated the ECO LION declaration in fiscal 2006 and commenced
Company-wide environmental protection activities with the aim of becoming a
leading company in environmental friendliness.

       Created with over
                                       70%                     plant-based ingredients

TOP BRAND LAUNDRY DETERGENT                     petroleum and fossil materials, MES is
RENEWED TO MARK 50 YEARS OF                     composed of plant-based ingredients derived
CONTINUOUS SALES                                from palm and coconut that absorb CO2
                                                present in the air. Accordingly, from the
In fiscal 2006, Lion renewed its mainstay       planting of these trees to end products and
Top brand laundry detergent. Conventional       biodegradation, Top helps to minimize total
Top utilizes the washing component methyl       CO2 emissions. Complementing its high
ester sulfonate (MES) as its main ingredient,   detergency properties, the biodegradable
which was developed by Lion from such           qualities of MES ensure improved protection
plant-based materials as palm and coconut       of aquatic environments. Leveraging its
oils. The plant-based composition ratio of      success with Top laundry detergent, Lion
MES and other plant-based ingredients to        continues its efforts to ensure environmental
total cleaning ingredients in new Top is        friendliness from product development
now over 70%. MES is biodegradable and          through disposal and recycling after use for
drains away with water after use. Unlike        its entire product range.

                                                                                    ANNUAL REPORT 2006   7

    Moving Ahead with a Strategy
    for Upward Performance
    In fiscal 2006, the second year of Lion’s current Value Innovation Plan Part II (VIP II 09) medium-
    term management plan, we continued to develop activities in new business categories and establish
    the required infrastructure to secure a solid platform for growth. Operating from a firm business
    base, we are pursuing synergies between Home and Pharmaceutical operations to provide unique
    products that enable customers to lead healthier and more comfortable lives. At the same time,
    Lion is committed to becoming a leading company in environmental responsiveness as the means
    to fulfill its corporate social responsibility. Collectively, through each of these means, we will
    steadfastly increase the Group’s corporate value.

                                                                                      Sadayoshi Fujishige
                                                                       President and Chief Executive Officer


Q       The business environment throughout 2006 in Lion’s principal toiletries market was
        characterized by the high level of raw material prices, primarily crude oil, and intense
        competition. Under these circumstances, Lion has commenced activities in new business
        categories taking full advantage of its business strengths. Can you elaborate?

A       As concerns surrounding Japan’s declining
        birthrate and aging population take center stage,
                                                                years from 2005 through 2009, Lion will endeavor
                                                                to secure a dominant position in this lucrative new
        the concept of self-medication grows in relative        market.
        proportion, prompting shifts in consumer                     o
                                                                    T this end, Lion worked diligently
        awareness and behavior patterns. For a company          throughout 2006 to establish a strong foothold in
        such as Lion, whose strengths rest in its               the medical health care market, a combination of
        technological and marketing expertise in the            its pharmaceutical, oral care and beauty care
        mainstay toiletries and over-the-counter (OTC)          activities. At the same time, we completed steps
        drugs fields, we recognize that these shifts provide    toward a full-fledged entry into the functional food
        an enormous business opportunity.                       products field.
             Accordingly, Lion has positioned the new               A second and equally important issue for the
        comfortable lifestyle support industry as a target      Lion Group is environmental protection.
        market for future business development. Estimated       Throughout 2006, we also continued efforts to
        at approximately ¥3 trillion, the new comfortable       become a leader in corporate environmental
        lifestyle support industry is comprised of toiletries   responsiveness and to fulfill our corporate social
        (approximately ¥1.5 trillion), OTC drugs                responsibility. Lion was particularly quick to
        (approximately ¥0.8 trillion) and functional foods      incorporate concerns for the aquatic environment
        (approximately ¥0.7 trillion). Guided by VIP II 09,     in many aspects of its business activities. We have a
        the medium-term management plan covering the            long history of developing products that prevent
                                                                water pollution and are recognized as a leading
■ NEW COMFORTABLE LIFESTYLE SUPPORT INDUSTRY                    company in this field. A milestone in its product
                                                                development activities, Lion was successful in
                                                                raising the composition ratio of methyl ester
                                   Foods                        sulfonate (MES) in its powder-type detergent
  ¥3 trillion market
                                 ¥0.7 trillion
                                                                product lineup. In 2006, for example, we renewed
                                                                our mainstay Top laundry detergent, which now
                       Toiletries          OTC Drugs
                                           ¥0.8 trillion
                                                                boasts a plant-based composition ratio to total
                       ¥1.5 trillion
                                                                cleaning agent of over 70%. With its principal
                                                                ingredients comprising recyclable palm and coconut
                                                                oils, MES offers higher detergency and

                                                                                         ANNUAL REPORT 2006             9
          biodegradability as well as environmentally friendly    the ECO LION activities, a set of environmentally
          surfactant properties. In addition to its product       friendly initiatives that are incorporated into every
          development activities, we have also formulated         facet of the Group’s operations.

     Q    Lion has completed the second year of VIP II 09, a plan that began in fiscal 2005.
          What have been the results to date?

     A    Under the KENBISOUKEN brand, a newly
          created product lineup within the Pharmaceutical
                                                                  chemical substances; and fostering environmental
                                                                  consciousness within the Lion Group. As a part of
          business field, we launched two new products in         these activities, Lion established Lion Eco
          fiscal 2006: Gussumin, a lifestyle support beverage     standards, a set of guidelines to evaluate the degree
          that leverages two decades of tomato vinegar            to which its products impact the environment and
          research; and Kyupurun, a compound collagen and         incorporate environmental consciousness. Lion
          flavangenol beauty support drink. These products        Eco standards are based on Life Cycle Assessment
          represent Lion’s full-fledged entry into the            (LCA) criteria, which evaluate environmental
          functional food products market. Both Gussumin          burden across a product’s entire life cycle, from the
          and Kyupurun have been extremely well received by       procurement of raw materials through
          consumers with sales of Gussumin particularly           manufacturing, logistics and disposal after
          strong, exceeding four million bottles in the first     household use. On this basis, products are
          seven months since its launch. Lion has also            evaluated in accordance with a quantitative points
          commenced sales of medical health care products,        system and measured against established indicators.
          taking full advantage of its toiletries and OTC drugs   Products are defined as “Eco Products” when they
          expertise, to address the growing trend toward self-    meet certain criteria. In this context, Lion is
          medication. As we target the new comfortable            working to expand its lineup of “Eco Products.”
          lifestyle support industry, we anticipate that               From an organizational perspective, Lion
          functional foods and medical health care products       continued efforts to revitalize a corporate culture of
          will provide significant impetus for future growth.     tenacity, creativity and learning, one of three core
               From an environmental protection                                                          o
                                                                  visions that underpin the Lion Group. T this end,
          perspective, Lion formulated the ECO LION               we implemented organizational reforms, effective
          activities, a set of Company-wide initiatives that      April 2006, in which the Home Products Business
          target five core objectives: reducing greenhouse gas    shifted to a two-business division structure, namely
          emissions; effectively using recycling resources;       the Health Care Products Division and the
          considering the environment from a product-             Household Products Division. The Health Care
          oriented perspective; appropriately handling            Products Division integrates the Oral Care

    Business Department and the Beauty Care Business
    Department, while the Household Products
    Division comprises the newly established Fabric
    Care and Living Care Business Departments.
    Realizing a third pillar of core business activities,
    Lion also upgraded the Gift and Channel-Specific
    Products department to a division. From a research
    and development perspective, Lion had previously
    maintained research laboratories in each of its
    Home Products Business as well as in its
    Pharmaceutical Products and Chemicals Divisions.
    Under the aforementioned organizational reform,
    the R&D function has been centralized at the head
    office level to better create and enhance               relating to McCormick-Lion Limited and
    development synergies and bolster the Group’s           transferred all of its shareholding in Lion Building
    product development capabilities.                       Maintenance Co., Ltd. From an operating
         Placing the utmost importance on increasing        perspective, Lion introduced a trust-type rights
    efficiency, Lion implemented additional reforms in      plan to protect the Company’s best interests and
    its production structure and systems. These             provide safeguards against future loss or damage.
    entailed closing the Tokyo Plant and shifting the       Leaving no stone unturned, Lion also appointed
    production function to subsidiary and other             two external directors to its Board in an effort to
    companies. As a part of the Group’s overall efforts     enhance clarity and objectivity in its management
    to secure fundamental improvements in its profit        processes and systems and to ensure a high level of
    structure, Lion completed a business transfer           corporate governance.

Q   Within the context of the reforms you have outlined, can you summarize the Group’s results
    for the fiscal year ended December 31, 2006?

A   For the fiscal year under review, the Lion Group
    reported consolidated net sales of ¥330.3 billion, a
                                                            pharmaceutical products. Results in the domestic
                                                            market were bolstered by functional foods,
    slight decline of 0.4% compared with the previous       contributions from new hit products such as the
    fiscal year. In general terms, overseas sales of        Look Kirei no Mist series, which reported sales in
    toiletries remained steady, while the Group             excess of 10 million units, and existing product
    enjoyed moderate success in Japan in toiletries and     renewals, particularly of Lion’s mainstay Top

                                                                                      ANNUAL REPORT 2006           11
          laundry detergent. On a negative note, however,          administrative (SG&A) expenses due to aggressive
          overall sales of existing products declined,             sales promotion activities.
          impacted by intense market competition. The                  In December 2006, Lion terminated its cross
          year-on-year drop in consolidated net sales is also      shareholdings with Henkel KGaA of Germany. As
          attributed to contraction in the OTC drug market         a result, we recorded a gain on the sale of investment
          and the reduction of shipments to standardize sales      securities. Accounting for this and other factors,
          and improve cost efficiency, which led to a              net income for the period was ¥5.5 billion,
          substantial decline in wholesale inventories from        essentially unchanged from the previous fiscal year.
          1.0-1.2 months to 0.5-0.6 months.                            While the results for fiscal 2006 were less than
               On the earnings front, ordinary income              satisfactory, we are confident that our efforts to
          totaled ¥2.4 billion, a decrease of ¥6.0 billion         establish new businesses and a solid infrastructure
          compared with the previous fiscal year. Despite          will contribute to a turnaround in fiscal 2007.
          our continued focus on cost-reduction measures               Consistent with management’s priority focus
          and the positive impact on manufacturing costs,          to return an adequate level of profits to
          the significant decline in profits reflects changes in   shareholders, Lion has declared an increase in its
          the overall composition of sales, a drop in gross        annual divided to ¥10. At the same time, we have
          profit attributed to the sharp increase in raw           decided to retire 14.4 million shares of treasury
          material costs and crude oil prices hovering at a        stock, equivalent to the number of shares held by
          high level, and an increase in selling, general and      Henkel prior to the stock cross shareholding sale.

     Q    Clearly fiscal 2007 marks a turning point in the Company’s efforts to effect a V-shaped
          recovery. Please outline the specific measures Lion plans to implement.

     A    The first initiative is to increase market share in
          mainstay categories. Throughout fiscal 2007, we
                                                                   including Top Fuai-Kan (Fresh Touch and Color).
                                                                   Our success in this endeavor will contribute to
          will release innovative products in the toothpaste,      increased market share in the mainstay Top brand.
          laundry detergent and dishwashing categories with        Targeting a market share recovery in the general-
          a focus on functionality and high value-added. In        purpose Dentor toothpaste brand, Lion will
          specific terms, Lion will release Charmy Awa no          launch Dentor Clear Max with the aim of securing
          Chikara (Power of Suds) in March 2007 in an              the top share in the general-purpose price range.
          effort to secure the No. 1 share of any single               A second initiative is to cultivate new
          product in the dishwashing detergent market. In          categories. Building on our entry into the
          the premium laundry detergent market, we will            functional food products category in 2006, we will
          pursue a leading position through new products           further reinforce efforts involving foods for


       specified health use while expanding our product      March 29, 2007, we will also integrate the
       lineup of medical health care products.               Pharmaceutical Products Division with the Health
            From an overseas business development            Care Products Division to establish a new
       perspective, we will further bolster marketing        structure at the head office level. In creating
       activities in the ASEAN region and strengthen the     improved balance among oral care, beauty care
       Group’s production capabilities. Through these        and pharmaceuticals, we will ensure increased
       means, we intend to maintain double-digit year-on-    synergies in each of the technology, brand and
       year percentage growth in net sales. Complementing    logistics functions and enhance our abilities to
       our activities throughout the region, we will also    address growing demand in the self-medication
       assess opportunities for OTC drug business            field. Focusing our efforts in the areas of health
       development primarily in Northeast Asia.              care and household products, we will secure
            In the Chemicals Division, Lion is committed     consistency in product planning, sales and
       to reviewing and withdrawing unprofitable             promotion and reinforce brand power across the
       products. At the same time, we will foster and        board.
       expand activities in new business categories.              In summary, 2007 is a turning point for the
       Following on from research into the plant-based       Lion Group. It is a year in which we will not only
       raw material MES for external sales, Lion has         secure a V-shaped recovery both in revenue and
       completed the required production technology          earnings, but also ensure increased corporate
       assessment and plans to commence commercial           value. In an effort to fulfill our corporate social
       production in one to two years.                       responsibilities, we will raise the level of
            Finally, in its endeavors to strengthen the      information disclosure. Looking ahead, we kindly
       collective prowess of the Group, Lion is              request the continued support and understanding
       implementing strategic organizational reform. As a    of all stakeholders as we move forward to achieve
       part of these efforts, we will continue to            our many endeavors.
       restructure the Home Products Business, an
       initiative that first took shape in 2006. Effective   March 29, 2007

                                                                                        ANNUAL REPORT 2006         13

     BUSINESS SEGMENT                                             BUSINESS OUTLINE

                                                                   Centered on toothpastes and detergents, the Home
      Home Products                                                Products Business—which encompasses the Health Care
                                                                   Products Division (Oral Care and Beauty Care Business
                                         Health Care Products
      71.1%                                 Oral Care   15.8%
                                                                   Departments) and the Household Products Division
                                                                   (Fabric Care and Living Care Business Departments)—has
                                              Beauty Care 10.1%    served as the central pillar of Lion Corporation’s business
                                                                   activities since its foundation. Lion strives to enhance
                                                                   profitability by developing products that contribute to
                                                                   consumer health and quality of life while emphasizing
            Household                                              efforts that cultivate major brands.
            Products 45.2%
           Fabric Care
           Living Care

                   Net Sales ¥235,020 million

                                                                   Lion is committed to helping people lead healthy and
      Pharmaceutical                                               comfortable lives. From both a physical and mental
                                                                   perspective, we deliver products that encompass illness
      Products                                                     treatment and prevention. In addition to over-the-counter
                                                                   (OTC) drugs, we have newly entered the functional food
      14.5%                                                        products field. Looking ahead, we will continue to foster
                                                                   the pharmaceutical products business as a core Group

                         Net Sales ¥47,981 million

                                                                   Lion is engaged in the manufacture and sale of natural oil
      Chemical Products                                            and fat derivatives, surfactants and electro-conductive
                                                                   carbon. Complementing these activities, we also develop
      9.8%                                                         environmentally friendly industrial products utilizing
                                                                   surface science technology. In specific terms, Lion has
                                                                   reported significant success in the application of water-
                                                                   based detergents in place of chlorofluorocarbon and
                                                                   chlorinated solvents, a factor in global warming, as well as
                                                                   de-inking agents for recycled paper.
                         Net Sales ¥32,334 million

     GEOGRAPHIC SEGMENT                                           BUSINESS OUTLINE

                                                                   Focusing on Asia and business development across eight
      International Division                                       countries and administrative regions, Lion places significant
                                                                   importance on the ASEAN region. Against this backdrop, and in

      13.8%                       Asia                             an effort to secure stable growth, Lion strives to cultivate common
                                                                   global brands while engaging in joint-development projects to
                                                                   produce local brands that meet individual market needs.
                                    Japan                          Targeting South Korea, where activities commenced in earnest
                                                                   in 2005, and China, a market experiencing significant growth,
                                                                   Lion is also actively expanding its business in Northeast Asia.


 Health Care Products                                              Household Products
 Oral Care Toothpastes, toothbrushes, mouthwashes,                 Fabric Care Laundry detergents, delicate laundry care
 breath fresheners, interdental products, functional foods, etc.   products, stain removers, bleach, fabric softeners, wrinkle
                                                                   relaxer, etc.

 Beauty Care Shampoos, conditioners, hair-styling                  Living Care Dishwashing detergents, household cleaners,
 products, hair-nourishment treatments, beauty soaps,              kitchen-related products, cooking-aid products, industrial
 liquid hand soaps, body washes, facial cleaning products,         cleaners, etc.
 skin care products, antiperspirant deodorants, etc.

 Analgesics, cold medicines, eyedrops, gum-disease
 products, analgesic and anti-inflammatory poultices,
 gastrointestinal medicines, health tonic drinks, allergy-
 care products, semi-adhesive cooling pads for fevers,
 medicinal skin care products, insecticides, health and
 beauty drinks, prescription drugs (antiplatelet drugs and
 analgesics), etc.

 Natural fat and oil derivatives (glycerin, fatty esters, fatty
 amines, fatty amides), specialty chemicals and chelating
 agents, electro-conductive carbon and carbon-related
 products, surface active agents (anionic, nonionic,
 cationic, amphoteric, polymer surfactants), etc.

                                                                         Ketjenblack application       Water-based scouring agent
                                                                                                       used in electronics products


 Toothpastes, toothbrushes, shampoos, conditioners, hair-
 nourishment treatments, beauty soaps, body washes,
 facial cleansing products, laundry detergents, bleaches,
 fabric softeners, dishwashing detergents, household
 cleaners, eye care products, baby care products, etc.

                                                                                                    ANNUAL REPORT 2006                15


     The core Home Products Business encompasses Lion’s Health Care Products Division,
     incorporating Oral and Beauty Care Business Departments, and Household Products Division,
     comprising Fabric and Living Care Business Departments. Focusing on these businesses, Lion
     pursues increased profitability through the development of products with new concept proposals
     that address the self-care needs of its customers, and dynamic promotions at the retail store level.

     Net Segment Sales              Sales by Category
     (Millions of yen)              (Millions of yen)

     Home Products                  Oral Care                    Beauty Care               Household Products

     250,000                        60,000                       50,000                    200,000

     200,000                                                     40,000
     150,000                                                     30,000
                                    30,000                                                 100,000
     100,000                                                     20,000
      50,000                                                     10,000

           0                             0                           0                          0
                   02 03 04 05 06               02 03 04 05 06            02 03 04 05 06             02 03 04 05 06

RESULTS                                                     series of disinfectant sprays that prevent slimy surfaces
The sharp increase in raw material costs particularly       and odors; and the Care Veil series of laundry
for crude oil and the drop in retail unit prices were       detergent and fabric softener introduced in October
contributing factors to intense competition within the      2006 for those with dry and sensitive skin. From a
home products market in Japan. Against this backdrop,       marketing perspective, Lion selectively targeted drug
and guided by the basic policy of creating No. 1            stores for the sale of its medical health care products
selling, ¥10 billion megabrands* while boosting growth      such as Dent Health, PAIR and Alfresh.
potential through selective core brand development,             Lion also took steps to rectify persistent concerns
Lion has worked to strengthen and develop its brand         surrounding excessive wholesale inventories. In
power through focused marketing investment. In              implementing the necessary adjustments, we secured
addition, the Oral Care and Beauty Care Business            improved product shipment efficiency, resulting in
Departments were integrated into the Health Care            balanced production and procurement as well as
Products Division as an initial step in strengthening       reductions in overhead costs.
the development of medical health care products.                Practicing strong retail store management, Lion
    From a retail sales development perspective, Lion       took full advantage of prompt retail store
has received invaluable support from its specialist         development and strong links between store
subsidiary, Lion Field Marketing Co., Ltd. (LFM).           promotions and advertising campaigns. Through
Throughout the fiscal year under review, LFM                these means, we secured greater efficiencies in the
continued efforts to promote effective retail store         development of core brands.
management and rapidly introduce high-value-added
products, accelerating retail store promotion. In           * No. 1 selling, ¥10 billion megabrands: major brands in each of
specific terms, we enjoyed particular success in sales of     Lion’s business segments that hold a leading position or
                                                              maintain sales of ¥10 billion.
Top, our mainstay laundry detergent that addresses the
twin demands for higher detergency and
environmental friendliness; Look Kirei no Mist, a

                                                                                             ANNUAL REPORT 2006                17
     Health Care Products
     Oral Care

                 Dentor Systema                             Dentor Systema EX
                 Toothbrush (Compact)                       A periodontal disease                           Clinica Dental Rinse –
                 The super-tapered bristles of              prevention toothpaste that                      Quick Care
                 this toothbrush penetrate the              enters the gaps between                         When there’s no time or
                 narrow crevices between                    teeth to cleanse and                            place to brush teeth, just a
                 teeth and gums to remove                   sanitize each community                         simple rinse with Clinica
                 “biofilm,” the communities of              of periodontal bacteria and                     Dental Rinse – Quick Care
                 bacteria that cause                        can also prevent bad                            helps to prevent cavities
                 periodontal disease*.                      breath and cavities.                            and bad breath.

     RESULTS                                                         guards against bad breath and cavities.
     Japan’s oral care market continued to experience overall           Reflecting the pronounced trend toward an aging
     growth spurred by increased demand for premium                  society in Japan, signs are increasingly emerging of
     toothpastes, toothbrushes, dental rinses and other dental       growth in the seniors market. Taking full advantage of
     care products.                                                  the opportunities at hand, Lion launched a series
         Celebrating its 110th anniversary of toothpaste sales,      comprising medicated toothpastes, toothbrushes,
     Lion worked diligently to promote oral care throughout          medicated liquid care and oral health tablets under the
     2006. In addition to providing oral care information, we        Dent Health brand in November 2006. Designed to
     actively renewed our mainstay Clinica, Dentor Systema           prevent periodontal disease, Dent Health products are
     and Between brands to reinforce our position as the             marketed mainly through drugstore sales channels.
     leading oral care product company in Japan. As a result,        Going forward, we will foster Dent Health into a
     domestic sales exceeded those of the previous fiscal year.      comprehensive, highly functional gum care brand.
         In specific terms, Lion enjoyed substantial growth in       * Periodontal disease: The general term for a group of diseases
     dental rinse sales of Clinica, its premier brand in tooth         that includes pyorrhea and gingivitis.
     decay prevention. The release of Clinica Dental Rinse –
     Quick Care, a convenient cavity and bad breath
                                                                         NURTURING THE DENT HEALTH BRAND — A SERIES
     prevention alternative that was particularly well
                                                                         OF GUM CARE PRODUCTS FOR THE ELDERLY
     accepted by people on the go with no time or place to               Traditionally, Lion’s Medical Oral Care brand medicated
     brush their teeth, contributed significantly to favorable           salve for preventing and combating gum disease has
     results. In addition, Lion expanded its toothpaste and              attracted a broad and loyal customer base. Responding to
                                                                         the demands of an increasingly aging society and changes
     toothbrush lineups to make steady progress in
                                                                         in the environment for oral and cavity care, Lion has
     positioning Clinica as a comprehensive oral care brand.             introduced the Dent
         In the Dentor Systema comprehensive periodontal                 Health series of products
     disease* prevention brand, Lion also reported an                    that serve to fight gum
                                                                         disease, including
     upswing in overall sales. This was attributed to strong
                                                                         toothpastes, toothbrushes,
     contributions from its non-alcohol dental rinse and                 mouthwashes and
     Dentor Systema EX, a toothpaste that also totally                   functional food products.

Beauty Care

                                                             Kireikirei Medicated                        Free & Free Damage Aid
                  Soft-in-One                                Foaming Hand Soap                           Hair Treatment
                  This two-in-one                            A medicated antibacterial                   A functional hair treatment
                  conditioning shampoo                       soap that emerges from the                  series that tends to every
                  for speedy washing gives                   bottle as foam so that even                 strand of hair both inside
                  a brand new feel to the                    young children can wash                     and out, depending on the
                  lather and finish.                         their hands thoroughly.                     type of damage.

RESULTS                                                         Wrinkle Cream to counter dryness in focus areas around
The overall scale of beauty care product fields that Lion       the eyes and mouth. Lion will continue to deliver highly
participates in was on par with the previous fiscal year.       functional products in its Pair complexion trouble care
Amid these circumstances, Lion continued to promote             brand for women, and leverage the synergistic effects
“selection and concentration” initiatives for its brand         with the Pairacne W Cream pharmaceutical product,
and items, and particularly focused on upgrading                which boasts the top market share in the acne care
mainstay hand soaps, antiperspirants and deodorants             medication field, to secure a full-fledged entry into the
while participating in new sectors to improve earning           medical skin care market. With these endeavors, Lion
power. Confronted by intense competition and stagnant           will take new approaches to this category to develop its
conditions in its particular fields of operation, however,      business model at drug stores.
Lion incurred a year-on-year decline in overall beauty
care product sales.
                                                                    KIREIKIREI SERIES
    In hand soaps, Lion recorded robust sales of its
                                                                    The Kireikirei series encompasses medicated hand soaps,
market-leading Kireikirei Medicated Foaming Hand
                                                                    beauty soaps, body wash and gargle products supporting
Soap. Combined with liquid hand soaps, Lion saw a                   general family cleanliness and health. In 2006, Lion
slight gain in its overall market share. Owing to growth            introduced a large-size hand soap refill product in response
of the overall hand soap market, sales increased over the           to demands for greater value for money and issues relating
                                                                    to environmental protection. Spurred by norovirus concerns
previous fiscal year.                                               at the end of the year, sales of hand soaps outstripped the
    The antiperspirants and deodorants market showed                previous year.
significant growth due to robust demand for rival
products with high deodorant effect, which intensified
competition. However, Lion was slow in responding to
changing market needs. Despite the renewal of the Ban
series and efforts to intensify promotions and
advertising, sales in this category declined year on year.
    In November 2006, Lion released Pair Melano
Cream, which prevent spots and freckles, and Pair

                                                                                                   ANNUAL REPORT 2006                  19
     Household Products
     Fabric Care
                                                                                                              Care Veil Laundry Detergent
                                                                                                              Because its ingredients are not
                                                      Kaori to Deodorant no                                   absorbed into fibers, this powerful
                                                      Soflan (Soflan with                                     laundry detergent leaves clothes
                                                      Fragrance and                                           with a fresh, clean feel.
                                                      Deodorant)                                              Care Veil Fabric Softener
                                                      This fabric softener                                    (Right)
     Top Laundry Detergent                            provides superlative                                    This softener employs a
     A laundry detergent combines a plant-            protection against odors                                proprietary Lion agent to
     based MES with three enzymes to                  on clothing and leaves a                                suppress friction between the
     deliver high-performance in scouring             pleasant, long-lasting                                  skin and clothing to ease the
     even the most stubborn of stains.                fragrance.                                              irritation that clothes can cause.

     RESULTS                                                             October 2006, Lion added a new soap fragrance to its Kaori
     Over the past few years, the fabric care market has suffered        to Deodorant no Soflan (Soflan with Fragrance and
     from intense competition. Market participants have tended           Deodorant) product range, a fabric softener that provides
     to pursue volume sales in response to the yearly decline in         superlative protection against odors and leaves a pleasant,
     unit prices. While Lion worked diligently to secure sales           long-lasting scent. Attracting wide market acclaim, Lion is
     growth and enhance brand prowess through the release of             poised to recover market share.
     new products in mainstay laundry detergents and aggressive              In the same month, Lion released the new Care Veil
     promotion campaigns, overall fabric care product sales              series of laundry detergents and fabric softeners, a high-
     declined year on year due to efforts to correct inventory           value-added lineup of products that incorporate concerns for
     balances that has been a task over the last few years.              skin care. Designed especially for people who suffer from
         In the laundry detergent domain, we launched improved           dry, sensitive skin, each product in the Care Veil series was
     Top, the overall product lifecycle of which reduces CO2             tested for its effects on the skin in studies supervised by
     emissions by 47% compared with 1990 levels. This is                 dermatologists. As these products require recommendation
     attributed to the significant increase of plant-based               and guidance regarding their use, we are promoting the Care
     ingredients to over 70% of its total cleansing ingredients.         Veil series through drugstores. Marketing initiatives focus on
     We also conducted an aggressive advertising campaign to             generating appeal among those with dry and sensitive skin.
     simultaneously highlight the increased detergency and
     environmentally friendly aspects of this newly released
                                                                             TOP FUAI-KAN (FRESH TOUCH AND COLOR)
     product. As a result, market share was on an overall upward             For their everyday washing of clothes, linen and related
     trend in the post-summer period. In the liquid detergent                items, consumers demand more than just the complete
     market, which has enjoyed persistent growth in recent years,            removal of stains. For that definitive edge, users require a
                                                                             wash that stays fresh and soft to the touch. To meet these
     Lion introduced new Liquid Top, effective for hard-to-
                                                                             demands, Lion added plant-based cellulose powder to the
     remove dirt and mud. Collectively, these initiatives have               existing plant-based ingredients used in its high-detergency
     contributed to an increase in total Top brand market share              laundry products. Top Fuai-Kan reduces
     and bolstered brand prowess.                                            friction between garments when they are
                                                                             washed, prevents damage to fabric,
         The market for fabric softeners continues to expand,                preserves original colors and gives clothing
     driven by the successive release of competing products. In              a sensational feel. (Launched on March 21, 2007)

Living Care
                                                                                                     Look Kirei no Mist for
                                                                                                     The silver ion ingredient in
            Charmy V Quick                      Charmy Crysta Gel                                    this disinfectant/deodorizer
            Dishwashing                         for Dishwashers                                      spray prevents odor and
            Detergent                           A gel-type dishwasher                                eliminates bacteria. It can be
            This detergent speeds               detergent that removes                               sprayed on bedding that
            up scouring, rinsing                the hard-to-clean                                    cannot be aired out or on
            and drying, making                  grime and makes                                      fabric products that are
            dishwashing a snap.                 glasses sparkle.                                     difficult to wash.

RESULTS                                                             Confronted by consumer lifestyles that demand
In the fiscal year under review, the living care market         cleanliness with a minimum of effort, Lion was
enjoyed slight year-on-year growth on the back of               successful in creating a new market niche with the
increased demand for odor suppression-related                   release of Look Kirei no Mist. A series of disinfectant
products. Despite efforts to bolster sales in the               sprays for the kitchen, bathroom and toilet, Look Kirei
household cleaner market through the launch of new              no Mist contains a silver ion antibacterial ingredient to
proposal-based products and success in the creation of          prevent slimy surfaces and odors. In August 2006, Lion
new markets in this field, overall living care product          introduced Look Kirei no Mist for Fabrics, a
sales were down compared with the previous fiscal year,         disinfectant spray that eliminates unpleasant odors from
impacted by the drop in dishwashing detergents and              fabrics. A runaway hit, approximately 10 million spray
cooking-aid products.                                           bottles within the Look Kirei no Mist series had been
    In dishwashing detergents, Lion renewed its Charmy          sold by the end of December 2006. As a result, Lion
V Quick product range incorporating a refreshing new            recorded double-digit year-on-year percentage growth
fragrance. This new product responds to the demands of          in household cleaner products.
the young housewife segment. As of March 2006,
dishwashing machines had expanded to 18.6% of                       CHARMY AWA NO CHIKARA (POWER OF SUDS)
households. Recognizing this rapid growth as a                      As consumer attitudes toward dishwashing change,
significant business opportunity, Lion introduced                   demand for increased convenience and comfort impact the
Powerful Charmy, a detergent specifically for use with              development of dishwashing detergents. Utilizing mineral
                                                                    ions and a new SAS surfactant, Charmy Awa no
dishwashers that lifts off hard-to-remove, dried-on food
                                                                    Chikara incorporates advanced foaming
remnants, and Charmy Crysta Gel for dishwashers, a                  technology, creating rich, long-lasting suds that
gel-type detergent that removes the hard-to-clean grime             effectively remove greasy grime and enhance
that makes glass surfaces dim. Buffeted by the release of           high detergency. With the refreshing fragrance
                                                                    of apple cider, Charmy Awa no Chikara fulfills
a succession of competing products, however, overall                consumer demands for sparkling clean dishes
sales of dishwashing detergents declined compared with              and provides a more comfortable experience.
the previous fiscal year.                                           (Launched on March 21, 2007)

                                                                                                   ANNUAL REPORT 2006                 21
     Products                                                      Bufferin Luna
                                                                   An analgesic that is both easy to use and
                                                                   easy on the stomach, Bufferin Luna
                                                                   provides quick relief of menstrual
                                                                   cramps and lower back pain.

     Recognizing significant change in the way          RESULTS
                                                        Cutbacks in the OTC market and steady growth in the
     individuals perceive quality of life and a shift
                                                        functional food products field are a measure of
     in consumer emphasis from treatment to             consumer trends and the increased shift in emphasis
     prevention, Lion has entered the functional        from illness treatment to prevention. Against this
     food products market to supplement its over-       backdrop, Lion worked diligently to release new and
     the-counter (OTC) drug activities and              improved products in its mainstay brands, stepped up
                                                        advertising and promotional investment to foster No. 1,
     facilitate further business growth.
                                                        ¥10 billion megabrands, and newly entered the
                                                        functional food products market. Despite these
           Net Segment Sales                            endeavors, overall results in the Pharmaceutical
           (Millions of yen)                            Products Division declined year on year, impacted by
                                                        a reduction in the scale of the health tonic drinks and
                                                        other markets.
                                                            In its core analgesics field, the release of Bufferin
                                                        Luna, providing quick relief for menstrual and back
           40,000                                       pain, contributed to results and sustained Lion’s top
                                                        position in terms of market share.
           30,000                                           The triple-vitamin formula Smile 40EX product
                                                        retained its leading market position, providing a
                                                        substantial boost to eye care product sales.
                                                            In insecticides, Lion launched new products in the
                                                        Varsan brand range incorporating innovative features
                 0                                      that remove the need for fumes and chemical pesticide
                               02   03   04   05   06
                                                        ingredients. Through these efforts, the Company
                                                        worked tirelessly to expand market scale. Expanding

Smile 40EX                             Pairacne W Cream                                (Left) Kyupurun
The effective combination of           This highly effective cream, which              This beauty support drink blends flavangenol
vitamins A, E and B contained in       combines anti-inflammatory and                  extracted from French pine bark extract with collagen.
these eyedrops brings express relief   antibacterial agents, treats the root           (Right) Gussumin
to tired, blurring eyes.               causes of facial acne.
                                                                                       Tomato vinegar and GABA, an amino acid found
                                                                                       naturally in both tomatoes and the human body, have
                                                                                       been combined to create this drink, designed to help
                                                                                       women cope with the stresses of modern-day life.

into daily use product fields, we launched a series of
new items through sales channels of toiletries and                         NEW VARSAN DEVELOPMENTS
daily use products in addition to the traditional                          Focusing on insect eradication efficacy, Lion has
                                                                           continued to develop the fumigation-type series of
pharmaceutical sales channels. Through these efforts,
                                                                           Varsan brand products. More recently, however, for
Lion reinforced its Varsan brand prowess. Among new                        consumers who are concerned more about safety and
products, Varsan Insect-Repellent Cube, a stylishly                        comfort, we have expanded our product range to meet
designed insect repellent that does not need to be                         these needs. In addition to Varsan Insect-Repellent
plugged in and requires no batteries, has been                             Cube—a stationary-type repellent placed around
                                                                           windows and other entranceways to prevent the entry of
particularly well received and is steadily gaining
                                                                           insects, released in 2006—Lion will introduce two types
market share.                                                              of Varsan Hyosatsu Jet Spray in 2007. These
    Lion has accumulated 20 years of research into the                     insecticides kill insects with a powerful minus 40-degree
vasodilating effects of tomato vinegar. Accordingly,                       spray. Furthermore, Lion will launch Varsan Insect-
Lion entered the functional food products market with                      Repellent Spray, which controls excessive diffusion and
                                                                           thereby prevents users from inhaling the repellent agent.
the launch of three new drinks. Gussumin, a lifestyle
                                                                           In this manner, we strive to address our customers’
support drink, was particularly successful in achieving                    evolving needs.
sales of approximately four million bottles in the first
seven months after its launch.                                             VARSAN HYOSATSU JET SPRAY
    In the fiscal year under review, Lion released                         Varsan Hyosatsu Jet Spray kills
                                                                           unpleasant bugs instantly by
Pairacne W Cream, the first acne and skin eruption
                                                                           freezing then with a powerful
remedy for direct skin application to contain both                         minus 40-degree spray that
anti-inflammatory and antibacterial agents. Through                        alleviates the need for chemical
this initiative, we saw steady growth of our market                        pesticide ingredients. Safe to use
                                                                           in homes with pets and small
share in this field.
                                                                           children, Varsan Hyosatsu Jet
                                                                           Spray leaves no odor after use.
                                                                           (Launched on March 6, 2007)

                                                                                                           ANNUAL REPORT 2006                   23
                                                                 Alkylene Oxide Adducts (AOA)
                                                                 Lion’s Chemical Division utilizes its
                                                                 expertise in surface science technology
                                                                 to develop nonionic surfactants.

     Within this division, Lion strives to expand its    RESULTS
                                                         In the chemical products market, cost structures have
     three core businesses: alkylene oxide adducts
                                                         changed radically due to crude oil prices remaining at a
     (AOA), oleo chemicals and carbon. Taking into       high level. In contrast, there is growing expectation that
     consideration the impact of its activities on the   the cost advantages offered by plant-based ingredients
     environment, Lion also aims for enhanced            will lead to greater business opportunities for plant-based
     profitability while developing and nurturing        products in keeping with recent environmental concerns.
                                                             Amid such circumstances, Lion promoted
     highly functional products that meet individual
                                                         comprehensive cost absorption measures that involved
     customers’ needs.                                   passing increased raw material costs resulting from
                                                         surging oil prices to product prices, withdrawing
           Net Segment Sales                             unprofitable products, curtailing overall costs and
           (Millions of yen)                             developing new functional products. Despite these
                                                         efforts, however, sales were down from the previous fiscal
           35,000                                        year, reflecting intense market competition.
                                                             Sales in the AOA business were buoyed by the new
                                                         application of nonionic surfactants for detergents in the
           25,000                                        Southeast Asian market. The business achieved a
                                                         moderate sales increase in spite of the impact of intense
                                                         price competition in the domestic market.
           15,000                                            The oleo chemicals business, which utilizes vegetable
                                                         oils and fats as starting materials, handles fatty-acid
                                                         methyl ester, one of the basic raw materials of surfactants.
             5,000                                       Sales in this business declined compared with the
                 0                                       previous year due to inventory adjustments by customers
                               02   03   04   05   06
                                                         of methyl ester and carotene.


                                      Palm carotene

                                                               Dielectric carbon (left) has a wide
             Oleo Chemicals                                    variety of applications, such as in
             Palm and other plant-derived                      IC trays (right).
             ingredients are used as raw material
             for surfactants.

    In the carbon business market, Lion sells electro-
conductive carbon as well as electro-conductive             NEW INSULATING OIL
compounds made from electro-conductive carbon and           Electricity is an everyday necessity. Substation
                                                            transformers, which are filled with petroleum-based oil,
plastics. The compounds are supplied to customers in
                                                            adjust the power voltages for household and industrial
advanced, high-growth fields. Sales of electro-conductive   use. In cooperation with Japan AE Power Systems
carbon increased significantly due to the robust demand     Corporation, the largest transformer manufacturer in
in the electronic device and battery sectors. Sales of      Japan, Lion developed plant-based transformer oil,
conductive compounds showed double-digit growth             satisfying requirements for both environmental
                                                            friendliness and high performance in insulating and
compared with the previous fiscal year, buoyed by
                                                            cooling effects.
contributions from new products. Furthermore, the
profitability of the electro-conductive compounds
business surged due to cost reductions brought about by
partially outsourcing business to overseas factories.
    As for other products, sales increased for cationic
cellulose, an ingredient used in shampoos. During the
fiscal year under review, Lion also expanded sales of
ellagic acid, which is used as a whitening agent.

                                                            The latest type of transformer, which is 10-meters high,
                                                            will use 200kl of insulation oil.

                                                                                            ANNUAL REPORT 2006         25
     With a focus on Asia, Lion’s
     International Division operations                                                                     CHINA
                                                                                 Lion Daily Necessities Chemicals       SOUTH KOREA
     span eight countries and                                                                 (Qingdao) Co., Ltd.       CJ Lion Corporation
     administrative regions where it is
     active in the home products business,                                                HONG KONG
                                                                                 Lion Home Products                    TAIWAN
     encompassing toothpastes, body                                               (International) Ltd.                 Lion Chemical
     washes and laundry detergents.                                                                                    (Taiwan) Co., Ltd.

     Consolidated Net Sales                                                         THAILAND
     (Millions of yen)                                                              Lion Corporation (Thailand) Ltd.

       40,000                                                                       Southern Lion Sdn. Bhd.

                                                                                     Lion Corporation (Singapore) Pte. Ltd.

                                                       Consolidated subsidiary                INDONESIA
                                                                                              P.T. Lion Wings
       10,000                                          Affiliate accounted for by
                                                       equity method

                         05   06

     GENERAL POLICIES AND OVERALL RESULTS                                double-digit year-on-year percentage sales growth, a
     While introducing and cultivating global brands                     figure that exceeded market expansion.
     common to the ASEAN and Northeast Asian regions,                        Having commenced full-scale business development
     Lion is conducting product development in close liaison             in South Korea in 2005, Lion strengthened its
     with local business partners in order to meet each                  infrastructure for further growth, proactively introduced
     country’s market needs.                                             new products, reinforced its sales structure and
         In Thailand, where the GDP growth rate hovered                  implemented cost-reduction measures.
     around 5% in 2006, the toiletries market continued to                   Accounting for these factors and supported by robust
     expand. Under these circumstances, Lion introduced                  conditions in ASEAN countries, Lion’s International
     new products and actively engaged in advertising and                Division reported double-digit percentage sales growth
     promotion with the aim of boosting sales. Buoyed by                 compared with the previous fiscal year.
     these initiatives, Lion enjoyed steady results, particularly
     in laundry detergents and toothpastes, and recorded

• TAIWAN                                                         • SINGAPORE
Sales of household products grew due                             Singapore also achieved double-digit growth
to the introduction of new liquid                                in terms of overall sales and fabric care
laundry detergents. Overall sales were                           product sales, the latter coming as a result
on par with the previous fiscal year.                            of brisk sales for Top laundry detergent and
                                             Lanpao              newly introduced Liquid Top.                 Top
                                             Laundry detergent                                                     Laundry detergent

• HONG KONG                                                      • INDONESIA
Laundry detergent sales rose                                     Dishwashing detergents under the
approximately 30%, owing to the                                  Mama brand and Emeron basic
introduction of laundry detergents with                          skin care products enjoyed
fabric softening functions. These                                popularity in Indonesia, recording
endeavors significantly improved overall                         an increase in sales of more than
sales in Hong Kong.                                              20%. Furthermore, export
                                             Laundry detergent                                           Emeron
                                                                 expansion supported overall             Shampoo
                                                                 business growth.

Despite the entry of competitors into the fabric care
segment, sales of compact-type laundry detergents were           • CHINA
more than double those of the previous year. In addition,        In China, Lion focuses on its
sales of laundry detergents for delicate fabrics and fabric      oral care business, with ZACT
softeners grew over 20%,                                         toothpaste and Systema
primarily for refills.                                           toothbrushes gaining in
Consequently, overall sales                                      popularity in 2006. There was
for the fabric care business                                     significant improvement in
recorded double-digit                                            product exports from the
growth, a performance                                            Qingdao plant to Japan and
repeated by Systema                                              South Korea, which served to         Systema          ZACT
                                                                                                      Toothbrush       Toothpaste
toothbrush and toothpaste                                        boost overall business sales.
sales, contributing to
substantial business           Systema
                               Toothbrush, toothpaste
expansion in Thailand.
                                                                 • SOUTH KOREA
                                                                 Although sales of oral care products increased thanks to
                                                                 new Dentrala brand toothpastes and toothbrushes,
• MALAYSIA                                                       Mouhatsuryoku hair-nourishment treatment sales were
On the back of robust demand for Top and Bio Zip laundry         stagnant. As a result, overall sales in South Korea were on
detergents, as well as the introduction of new Liquid Top,       par with the previous year. Powder
sales of laundry detergents continued to be strong. In the       detergents, however, contributed
Shokubutsu-Monogatari (Plant                                     to improvements in the earnings
Story) brand, Lion introduced                                    structure as streamlining of
new value-added Royal, which                                     formulations and reviewing the
significantly boosted sales of                                   selection of raw materials
beauty care products from the                                    achieved drastic cost reductions.
previous year. This contributed                                  Chamgreen dishwashing
to an overall double-digit                                       detergents, which were very much
percentage increase in year-         Shokubutsu (Royal)          in demand, registered double-digit        Dentrala
on-year sales in Malaysia.           Shower Cream                growth in sales.                          Toothbrush, toothpaste

                                                                                                  ANNUAL REPORT 2006                   27

           The Lion Group is focusing on developing
           products with a difference that anticipate
           customer lifestyle needs, maintain and
           enhance health and beauty, and create a
           pleasant living environment in the home.
           Our R&D work is aimed at strengthening
           brands through continuing technological
           innovation and establishing ourselves as a
           leading company in the production of
           environmentally friendly and ecologically
           sound consumer goods.
              In fiscal 2006, our R&D expenses on a
           consolidated basis totaled ¥7,922 million,
           or about 2.4 % of net sales.

     R&D Expenses                        Our Value Innovation Plan Part II 09 (VIP II 09) aims at making Lion No. 1 in
     (Millions of yen)
                                         the new comfortable lifestyle support industry, and this fiscal year we are
                                         implementing new efforts to achieve this goal. We are entering new fields such
                                         as functional foods and medical health care products, and pushing ahead with
                                         the environmentally friendly product development represented by our ECO
                                         LION activities. To further leverage the unique strengths of our Company, we
                                         have also implemented a number of changes in our R&D structure.
                                            We are working to enhance our R&D capabilities in order to expand the
                                         range of our business operations and to create a new foundation for future
                                         growth, building upon innovative technology and the development of

                                         products that anticipate consumer needs and create new markets. Moreover,
                                         in close cooperation with our Production Headquarters, we are aiming at a
           0                             thoroughgoing streamlining of operations and a variety of cost-reduction
                         04   05   06
                                         measures, including innovations in the production process and
                                         rationalization of product composition.


In fiscal 2006, we reorganized the R&D structure of the Home Products Business in order to
strengthen our capacity for developing innovative products in new fields and enhance the
potential for cross-organizational collaboration. With this change, sharing technology across
product divisions throughout the Company has become easier, and the structure is now more
capable of supporting unique, high-value-added product development.

THE SHIFT TO A RESEARCH & DEVELOPMENT                                         of promoting a coordinated Company-wide R&D
HEADQUARTERS STRUCTURE                                                        effort, the research laboratories of the Home Products
Previously each of our business units had its own                             business were spun off to become the nucleus of a new,
research laboratories, with the idea that by                                  consolidated Research & Development Headquarters
strengthening collaboration between research and                              structure. On March 29, 2007, the Pharmaceutical
marketing, product development could be accelerated.                          Research Laboratories and Chemicals Research
However, with rising consumer interest in self-                               Laboratories will also be integrated into the Research
medication, there is a corresponding increase in                              & Development Headquarters. This will create more
demand for products in the new fields of functional                           active exchanges of researchers between the
foods and medical health care. To strengthen                                  laboratories and greater research synergy, laying the
development of such products, a greater degree of                             groundwork for a system that can strongly promote the
information sharing and cooperation between the                               development of innovative, market-creating products
various research laboratories has become                                      that can anticipate changes in the market and
indispensable. Beginning in April 2006, in the interest                       consumer needs.


                                                                               Research Planning & Administration Department

                                                                                       Oral Care Research Laboratories
                                                     Developmental Research
                                                                                      Beauty Care Research Laboratories

                                                                               Pharmaceutical Research Laboratories Nos. 1 & 2
               Research & Development Headquarters

                                                                                      Fabric Care Research Laboratories

                                                                                      Living Care Research Laboratories

                                                                                      Chemicals Research Laboratories

                                                                                    Functional Food Research Laboratories

                                                                                  Functional Materials Research Laboratories
                                                        Applied Research
                                                                                  Biological Science Research Laboratories

                                                                                 Process Development Research Laboratories

                                                                                    Oleochemical Research Laboratories

                                                                                Packaging & Implement Research Laboratories

                                                                                    Analytical Technology Research Center
                                                      Research Supporting
                                                                                     Flavor & Fragrance Research Center

                                                                               Human & Environmental Safety Evaluation Center

                                                                                                                ANNUAL REPORT 2006     29

                                         Lion developed Top Fuai-Kan (Fresh Touch and Color), an
                                         innovative laundry detergent under the Top brand name, by adding
                                         the action of Lion’s unique proprietary plant-based cellulose powder
                                         to Top’s existing excellent detergency. This powder reduces friction
                                         between garments, prevents fabric scuffing, preserves original colors
                                         and delivers a soft and fluffy feel.

     Evolving consumer attitudes toward cleanliness have             One of the most popular fabrics for clothing,
     resulted in increased amounts of laundry. In response       cotton is made up of short fibers, excels in water
     to this trend, larger-capacity washing machines have        absorbency and boasts a unique internal texture that
     become more common in recent years. Despite their           traps several layers of air. With these characteristics,
     larger capacities, a growing number of washing              cotton is ideally suited to the Japanese climate. On the
     machines are designed to be more environmentally            other hand, due to fabric friction cotton is susceptible
     friendly with an increased focus on water conservation.     to scuffing, which causes color fading and fiber loss.
     As a result, people in Japan are washing more laundry       The new plant-based cellulose powder attaches itself to
     with less water.                                            every single fabric fiber to minimize fabric friction
         Lion’s Fabric Care Research Laboratories advanced       between garments during wash cycles, prevent scuffing
     research to scientifically establish the effects of         and fiber loss, and preserve softness. As a result, Top
     washing on clothing. The research confirmed that (1)        Fuai-Kan can maintain fabric color and softness when
     fabric friction increases when laundry loads are washed     washing laundry loads in washing machines designed
     in less water, leading to fabric scuffing, (2) such         to use less water.
     scuffing can contribute to fading and fiber loss, and (3)
     the subsequent fabric deterioration results in a rough
     feel as clothing loses its softness.
         With the aim of solving these problems, Lion
     successfully developed a functional component, a
     plant-based cellulose powder, which prevents fabric
     friction, scuffing and color fading while preserving a
     soft, fluffy feel. Lion also succeeded in developing a
     new product incorporating this technology.

                                                                        Comparison of black T-shirts after 20 wash cycles
                                                                        Left: Existing compact detergent
                                                                        Right: Top Fuai-Kan


                                Incorporating Lion’s proprietary new foaming technology, Charmy
                                Awa no Chikara (Power of Suds) dishwashing detergent realizes long-
                                lasting, powerful suds. With the refreshing fragrance of apple cider,
                                this new dishwashing detergent enables pleasant dishwashing without
                                the need to add more detergent to the sponge.

Washing dishes after meals consistently ranks among            Incorporating a new sodium secondary alkane
the most disliked of household chores. In developing a     sulfonate (SAS) washing ingredient and a mineral ion,
new dishwashing detergent designed to fulfill such         Charmy Awa no Chikara can quickly reduce surface
latent consumer desires as “enjoying a pleasant feeling    tension, creating finer, richer suds compared with
when washing the dishes” and “quick washing through        conventional dishwashing detergents. SAS can also
high detergency,” Lion also discovered the importance      lower the interfacial tension of water and oil,
of suds and fragrance.                                     dispersing heavy, greasy grime into the membranes of
      Given these facts, Lion conducted a study on ideal   the suds. These features help Charmy Awa no Chikara
suds and fragrances for dishwashing detergents and         to maintain rich and powerful suds.
successfully developed rich, long-lasting suds by
employing its proprietary foaming technology,
utilizing a mineral ion and sparkling apple cider
fragrance with Lion’s advanced fragrance know-how.                                              Conventional dishwashing
With its high detergency, Charmy Awa no Chikara
washes dishes without the need to add more detergent
to the sponge. Additionally, it provides a pleasant
feeling that makes washing-up more enjoyable.

                                                                                                Charmy Awa no Chikara

                                                           Dishwashing detergent suds as seen under a microscope.
                                                           Compared with conventional dishwashing detergents, the individual
                                                           bubbles created by Charmy Awa no Chikara are approximately one-
                                                           tenth the size, making the suds finer and richer.

                                                                                             ANNUAL REPORT 2006                31

     Lion’s operations are based on the motto “Fulfilling a spirit of love,” reflecting the Company’s
     aim to enhance the happiness and lifestyle of each and every customer. Lion’s overall
     management activities adhere to this company motto. Lion will continue to promote Company-
     wide corporate social responsibility (CSR) activities to maintain the trust of its stakeholders.

           Customers                                                                                         and
                                                          Company                                         investors

           Employees                               Lion-Group Charter for                               wholesalers,
                                                     Corporate Behavior                                   retailers

                                                    Corporate activities

                                         The economy       Society     The environment
             Society                                                                                    Government

                                                   Corporate compliance

                                             LION’S CSR ACTIVITY STRUCTURE

                       BASIC CSR POLICY AND STRUCTURE
                       Since its foundation Lion has been conducting business activities based on its company motto
                       and management philosophy. Through these efforts, Lion has continuously earned the trust of the
                       public and fulfilled an essential role in society. Consequently, CSR concepts are nothing new to
                       Lion, which recognizes them as the selfsame corporate activities that have been carried out since
                       the Company was founded.
                          In January 2003, Lion made a Compliance Declaration and established the Lion-Group
                       Charter for Corporate Behavior.
                          In March 2005, Lion established a dedicated CSR Promotion Department to further fortify its
                       CSR efforts, fulfill its commitment to stakeholders and better clarify its stance on CSR.
                          Furthermore, Lion regards proactive CSR activities as essential to achieving its avowed goal of
                       increasing corporate value through the Value Innovation Plan Part II 09 (VIP II 09) medium-term
                       management plan begun in 2005. To this end, Lion announced a streamlining of its in-house
                       CSR promotion structure and systems, innovative approaches to environmental activities and
                       thorough contribution to local communities.


Leveraging its business characteristics, Lion engages in social contribution activities
while carrying out its responsibilities in compliance with social norms. Lion’s CSR
activities can be traced back to the launch of Lion Toothpowder (see photo right)
 in 1900, with which the Company made donations to charity for each empty
toothpaste bag returned. This practice was continued for about 20 years.                                    (Front)            (Back)

Lion held the first dental hygiene lecture in 1933 and
has been conducting oral care promotion and education
activities ever since. Currently Lion is supporting a
broad range of oral hygiene promotion activities
through the Lion Foundation for Dental Health
(LDH), which was established in 1964. Over five million
people have participated in this event since 1989.          Lion employees and their families          Volunteer workers working hard
                                                            enjoy building nests for a colony          during forest trimming activities.
                                                            of endangered little terns.

                                                            OTHER ACTIVITIES
                                                            Lion made donations through the Japan Business
                                                            Federation (or Nippon Keidanren) to assist with
                                                            reconstruction and contributed one million yen to the
                                                            Japan Red Cross after Hurricane Katrina struck the
An LDH representative instructs a group of schoolchildren   United States in late August 2005. In addition, Lion
on the importance of oral care habits.                      sent donations partially raised by employees to provide
                                                            relief assistance in the aftermath of the Sumatra
NATURE CONSERVATION ACTIVITIES                              Earthquake and Indian Ocean tsunami that occurred in
Lion has been associated with protection projects for       December 2004 and also contributed recovery aid after
endangered species promoted by local municipalities         the northern Pakistan earthquake of October 2005. In
around its operating sites and has been cooperating in      addition to these donations, Lion provides support for
a variety of activities, including building nests for       academic and educational activities and each of its
endangered little terns and breeding Odawara killifish.     operating sites is engaged in a wide range of social
In addition, the Company set up “Lion Forest in             contribution activities, including environmental
Yamanashi” with the aim of reducing CO2 in the              beautification and regional cleanup activities.
atmosphere by promoting of the use of paper made
                                                            * Lion introduced a Volunteer Special Leave System and Volunteer General
from lumber from forest trimming and thinning                 Leave System in July 2005. The Volunteer Special Leave System allows
activities. Employees make good use of Lion’s                 employees to take up to five days of leave to participate in volunteer activities
                                                              identified by the Company. The Volunteer General Leave System supports
volunteer leave system* to help with forest trimming.         employees to take part in activities in which they have a personal interest.

                                                                                                       ANNUAL REPORT 2006                         33

     As a company that provides products that consumers use every day, Lion considers environmental
     issues as one of its highest priorities. With this in mind, Lion is fully aware of its responsibilities
     as a corporate citizen and is expanding positive approaches to reduce environmental effects as
     much as possible throughout its processes, from product development, raw material procurement,
     manufacturing, logistics, sales and customer use to the ultimate disposal of products.

                                                               Considering the                                     Fostering
                Reducing                                                                 Appropriately
                                    Effectively Using            Environment                                     Environmental
               Greenhouse                                                                  Handling
                                     and Recycling             from a Product-                                    Awareness
              Gas Emissions                                                                Chemical
                                       Resources                   Oriented                                        within the
                                                                 Perspective                                      Lion Group

             Product             Raw Material                                                                       Customer Use and
                                                        Manufacturing        Logistics             Sales
           Development           Procurement                                                                       Disposal of Products

     PROGRESS OF LION’S ENVIRONMENTAL ACTIVITIES                          perspective; appropriately handling chemical substances;
     Launched in 2005, Lion’s VIP II 09 medium-term                       and fostering environmental awareness within the Lion
     management plan has been identifying efforts “to become              Group.
     a leading company in environmental friendliness” as one                  Lion continues to promote a Group-wide approach
     of the three themes of its corporate vision.                         to environmentally friendly product development and
         In January 2006, the Group formulated its ECO                    business activities.
     LION declaration with the aim of becoming an
     environmentally aware firm and has engaged in Group-
     wide environmental protection activities.
         ECO LION activities refer to the five principal areas
     of environmental protection activity implemented in the                                             The ECO LION mark symbolizes
     Group’s overall business activities: reducing greenhouse                                            our overall business activity
                                                                                                         efforts aimed at positive
     gas emissions; effectively using and recycling resources;
                                                                                                         environmental responsiveness.
     considering the environment from a product-oriented

                                                    WEB SITE CSR INFORMATION
        Lion releases CSR Reports in English (extracts from the Japanese version) in portable document format (pdf) on its company
              Web site for the purpose of providing more information, including employee systems and responses to customers.


■ Reducing Greenhouse Gas Emissions                      product containers and packaging to promote
Under the Kyoto Protocol that came into effect in        environmentally friendly operations. Furthermore,
2005, the Japanese government announced its              in order to realize thorough environmental care
commitment to reduce greenhouse gas emissions by         through its products, Lion established Lion Eco
6% from the fiscal 1990 level between fiscal 2008        Standards as its new environmentally friendly
and 2012. Against this backdrop, Lion carried out        criteria, encompassing the overall product lifecycle
Group-wide efforts and successfully cut its CO 2         from raw material procurement, manufacturing and
emissions by 7% in 2005 compared with the 1990           logistics to disposal after household use. Lion will
level. To this end, the Group’s CO 2 emissions stood     continue to develop reliable products for consumers.
at 114,909 tons. In addition, Lion is working to
reduce CO 2 emissions in every facet of its corporate    ■ Appropriately Handling Chemical Substances
activities, focusing not only on CO 2 emitted through    Although they serve to enhance our lives, chemical
energy consumption, but also on CO 2 emissions           substances may cause significant damage to the
arising from consumer use of its products. Due to        environment and people’s health in cases of
these efforts, the total CO 2 emissions by the Lion      improper handling or accidents. In its New
Group, which combines CO 2 emissions attributable        Environmental Guidelines in April 2006, Lion
to both energy consumption and surfactants in its        announced the installation of a supply chain
products, were down by 33% from the 1990 level in        management system. In addition to its focus on
2005. Lion continues to make every effort to reduce      product safety, Lion will also implement strict
CO 2 emissions and sets its targets high.                measures regarding the safety of raw materials.
                                                         Looking ahead, we will continue to comply with
■ Effectively Using and Recycling Resources              relevant laws and regulations and give due
In working toward the realization of a sustainable,      consideration to safety and environmental
recycling-oriented society, Lion is striving to          protection throughout our business processes.
effectively use resources, reduce industrial waste and
promote recycling programs. Thanks to a variety of       ■ Fostering Environmental Awareness
in-house activities, this resulted in total waste           within the Lion Group
generation in fiscal 2005 being successfully reduced     Lion is continuously conducting wide-ranging
by 1,029 tons from the previous fiscal year to 4,067     educational activities to raise each and every
tons. In addition, Lion made great efforts to reduce     employee’s environmental awareness and facilitate
the final disposal volume to less than 25% of the        voluntary activities. Its in-house magazine also
1990 level by 2010, as established by the Japan          features articles that cover environment-related
Business Federation, and its final disposal volume       themes. In July 2005, Lion Group participated in
has remained lower than this target since 2002. Lion     the Team Minus 6% project, a national,
will continue to encourage the cyclical and effective    government-promoted initiative to counteract the
use of resources.                                        effects of global warming. Furthermore, Lion holds
                                                         a “Proposed Campaign for ECO LION Activities,”
■ Considering the Environment from a Product-            which every year gathers ideas for environmentally
  Oriented Perspective                                   friendly activities from employees, and conducts
Lion has proactively adopted the Three Principles        various volunteer activities such as forest trimming
of Environmentally Responsible Composition               in order to raise environmental awareness.
Development for its product formulation, and the 3
Rs of Container and Packaging Reduction for its

                                                                                    ANNUAL REPORT 2006          35

     One of Lion’s Value Innovation Plan Part II 09 (VIP II 09) medium-term management plan
     goals is to increase corporate value. In order to realize this goal, we are working toward a
     stronger, more complete corporate governance structure. Specifically, our efforts are focused
     on increasing management transparency, strengthening our supervision, enhancing the
     efficiency of our decision-making process and establishing a compliance system.

     CORPORATE GOVERNANCE SYSTEM                                                                      2007, the Board of Directors was made up of eleven
     Directors, Board of Directors, Executive Committee                                               directors, including two external directors, and the
     An audit system serves as the basis of Lion                                                      Executive Committee was made up of the president,
     Corporation’s management supervision. An executive                                               two senior executive directors, six executive directors,
     officer system, under which a Board of Directors is                                              ten executive officers as well as a standing auditor.
     tasked with management decision-making and audit                                                    From March 2006, the duration of an executive’s
     functions and job execution functions fall to an                                                 appointment has been shortened from two years to one
     Executive Committee, has been in place since March                                               year to increase opportunities for directors to gain the
     2004 to strengthen the management functions and                                                  trust of shareholders.
     speed up the decision-making process. As of March


                                                                                                Shareholders’ Meeting

                                           Senior Executive                              Board of Directors              Audit      Corporate Auditors             Oversight
                                               Committee                             (Management Supervision)                       (Compliance Audit)
        Management Evaluation

                                         Main corporate                          • Decisions on executing key                          (Job Audit)
                                         strategy, such as basic                   business issues

                                         policies of medium-                     • Supervision of directors’                                Opinions
                                         and long-term                             management functions                                    and advice
                                         management plans                        • Supervision of executive officers                         on legal
                                                                                                                        Audit              compliance

                                                                                                                                                                               Accounting Auditor
                                  Opinion and advice on legal                                       Report Mandate
                                  compliance and management policy
        Compensation Advisory

                                  Report on executive compensation
                                                                                       Executive Committee

                                                                                          (Job Execution)
                                                                                                                                 Report                         Report
                                                                                                                                             Auditing Office
                                                                                           Business Units                                     (Internal Audit)
                                                                                           (Job Execution)                                (Audits of legality, fairness,
                                                                         Business, manufacturing, R&D headquarters and                    and efficiency, audits of
                                                                         functional divisions                                             progress on compliance)

                                                                           Spreading and maintaining ethics awareness

                                                                                        Corporate Ethics Committee

                                                                   Lion-Group Charter for Corporate Behavior and Behavioral Guidelines

Management Evaluation Committee                           ■ TRUST-TYPE RIGHTS PLAN
In October 2003, Lion established a Management
                                                                                         5   Deliver
Evaluation Committee with the aim of reflecting                                              common stock
                                                                     Lion                                          Shareholders
outside opinions on a variety of issues relating to                                                                (Beneficiaries)
general management. Convening twice a year, the                                          4   Exercise
                                                                                             subscription rights
eight members who make up this committee offer their
                                                                                         1   Conclude               3   Issue subscription
views on general management issues, including                                                trust contract             rights to
corporate governance matters.                                2   Issue subscription
                                                                 rights to trust bank
                                                                 as allotment receiver
                                                                                                                    Trust Bank
Compensation Advisory Committee                                                                                         (Trustee)
The Compensation Advisory Committee, which is
comprised of two external directors and two external      Notes: 1. The acquirer may not exercise subscription rights despite
corporate auditors, was newly established on                        receipt of any rights.
                                                                 2. The trust-type rights plan will come into effect ( 3 ~ 5 ) when a third
December 27, 2006 to increase objectivity and clarity               party attempts to acquire or purchase more than 20% of the
in matters concerning executive compensation.                       Company’s stock without the prior consent of the Board of Directors.

Auditors and Board of Corporate Auditors                  as a restraining measure against attempts to acquire or
Lion’s corporate auditors consist of two standing         purchase more than 20% of the Company’s stock
auditors and two external corporate auditors. Each of     without the prior consent of the Board of Directors.
the auditors attends meetings of the Board of Directors   With regard to the activation of the trust-type rights
and other important meetings in accordance with           plan, in the event of an acquisition proposal being
auditing policies and plans established by the Board of   implemented a Corporate Governance Committee
Corporate Auditors. Corporate auditors monitor the        made up of two external directors and two external
execution of specific duties of each director and the     auditors will be set up as required to ensure objectivity
internal auditing department, as well as implement        in particular. This Corporate Governance Committee
audits of Lion and its subsidiary companies.              would have the authority to advise the Board of
                                                          Directors on the necessity or not of activating the
Risk Management Activities                                trust-type rights plan. At the same time, two external
Lion undertakes risk management activities that           directors have been appointed to strengthen the Board
include preliminary analysis of risk within relevant      of Directors’ oversight function.
departments, the investigation of countermeasures and         In May 2006, Internal Control System Policies
deliberation at Senior Executive Committee and            were established. Based on these, the Company’s
Executive Committee meetings. Overall risk oversight      policies were stated as being to “enhance compliance
is thoroughly maintained by, for example, seeking the     structure,” “secure the appropriateness and efficiency
advice of the Lion attorney who specializes in risk       of job execution” and “improve audit effectiveness.”
management issues.                                            By increasing management transparency and
                                                          maintaining compliance by enhancing oversight
Principal Corporate Governance Improvement                functions and increasing the speed of decision making,
Activities in Fiscal 2006                                 Lion will strengthen its corporate governance system
Following its approval at a shareholders’ meeting in      with the aim of increasing corporate value.
March 2006, Lion introduced a trust-type rights plan
incorporating subscription rights and a trust structure

                                                                                                      ANNUAL REPORT 2006                      37
     (As of March 29, 2007)

     Representative Director,   Representative Director and   Representative Director and
     President and CEO          Senior Executive Director     Senior Executive Director
     Sadayoshi Fujishige        Makoto Imai                   Kazuo Ohbu

     Executive Director         Executive Director            Executive Director
     Tetsuo Yamada              Naokazu Kubo                  Haruo Iwasaki

     Executive Director         Executive Director            Executive Director
     Yasunobu Horiguchi         Teruhisa Satsuki              Kazuo Obayashi

     Director                   Director
     Mitsuaki Shimaguchi        Hideo Yamada

Representative Director        Sadayoshi Fujishige   Chairman of the Board, President and Chief Executive Officer

Representative Directors and   Makoto Imai           Responsible for Corporate Ethics, Secretary, System, Personnel,
Senior Executive Directors                           General Affairs, CSR, Legal Affairs, and Pharmaceutical Affairs
                               Kazuo Ohbu            Responsible for Research & Development Headquarters, Chemicals
                                                     Division, Production Headquarters, and Intellectual Property

Executive Directors            Tetsuo Yamada         Responsible for Risk Management, Corporate Planning, Logistics
                                                     Planning & Development, Finance, Public Relations, and Investor

                               Naokazu Kubo          Executive General Manager of Household Products Division,
                                                     Responsible for Distribution Development, Business Coordination,
                                                     and Home Products Sales

                               Haruo Iwasaki         Executive General Manager of Health Care Products Division,
                                                     Responsible for Advertising and Behavioral Science Research
                               Yasunobu Horiguchi    Executive General Manager of Chemicals Division
                               Teruhisa Satsuki      Executive General Manager of Research & Development
                               Kazuo Obayashi        Responsible for International Division (including general overseas
                                                     affairs), Purchasing Headquarters, and Strategic Business

Directors                      Mitsuaki Shimaguchi   Professor of Graduate School of Business Administration,
                                                     Keio University
                               Hideo Yamada          Attorney at Law
Standing Corporate Auditors    Takayasu Kasamatsu
                               Yoshihiro Shimoura
Corporate Auditors             Kazumi Idogawa        (Certified Public Accountant)
                               Masahiro Mikami       (Certified Tax Accountant)

Managing Executive Officer     Eiji Natsukawa        Executive General Manager of Gift and Channel-Specific Products
Executive Officers, Senior     Norihiro Ohno         Executive General Manager of Purchasing Headquarters
                               Mitsuharu Kachi       Executive General Manager of International Division
Executive Officers             Shinjiro Iwahori      Director of Finance Department
                               Shuichi Ohta          Director of Personnel Department
                               Keikichi Sugiyama     Director of Research Planning & Administration Department, and
                                                     Functional Food Research Laboratories, Research & Development

                               Shozo Hanada          Director of Planning & Coordination Department, Health Care
                                                     Products Division
                               Kenjiro Kobayashi     Director of Oral Care Business Department, Health Care Products
                               Yuji Watari           Director of Planning & Coordination Department, Household Products
                               Takao Terui           Executive General Manager of Production Headquarters

                                                                                          ANNUAL REPORT 2006              39
     Lion Corporation and Consolidated Subsidiaries

                                                                            Millions of yen (Except per share amounts and otherwise noted)

                                                                                    2006                    2005                     2004                  2003

     Income statement data:
         Net sales                                                           ¥     330,380           ¥     331,798           ¥     309,514          ¥     308,545
         Cost of sales                                                             165,570                 163,153                 149,150                148,971
         Gross profit                                                              164,810                 168,644                 160,363                159,574
         Selling, general and administrative expenses                              164,467                 162,577                 154,341                149,708
         Operating income                                                                343                  6,066                    6,021                 9,865
         Income (loss) before income taxes                                          13,020                    8,737                   (5,017)              13,985
         Net income (loss)                                                            5,540                   5,473                   (4,723)              10,946
     Balance sheet data:
         Total liabilities and net assets                                    ¥     246,327           ¥     249,303           ¥     235,405          ¥     249,199
         Property, plant and equipment, net                                         65,606                  68,570                   68,641                69,262
         Long-term liabilities                                                      42,818                  36,008                   35,955                32,190
         Total liabilities                                                         141,193                 137,411                 132,167                135,654
         Total net assets     *1
                                                                                   105,133                 111,892                            —                   —
         Total shareholders’ equity                                                         —              109,103                 101,021                112,105
     Other selected data:
         Capital expenditure*2                                               ¥      10,149           ¥      11,794           ¥       23,266         ¥        7,290
         R&D expenses                                                                 7,922                   8,506                    7,844                 7,835
         Depreciation and amortization           *2
                                                                                      9,634                   9,754                  14,352                  7,853
         Number of employees                                                          5,771                   6,024                    5,721                 5,594
     Common share data (yen):
         Earnings (loss) per share - basic*3                                 ¥        19.60          ¥        19.10          ¥        (16.66)       ¥        36.81
         Earnings per share - fully diluted                                           19.52                   19.05                           —              36.75
         Dividends paid per share                                                     10.00                     9.00                     8.00                  8.00
         Book value per share        *4
                                                                                    376.76                  384.60                   356.90                385.83
         Common stock (number of shares outstanding)                             299,115,346             313,515,346             313,515,346            313,515,346
         Common stock (number of fully diluted shares)                                      —                       —                         —                   —
     Financial ratios (%, times):
         As a percent of net sales:
              Gross profit                                                              49.9%                   50.8%                    51.8%                 51.7%
              Selling, general and administrative expenses                              49.8                    49.0                     49.8                  48.5
              Operating income                                                             0.1                     1.8                       2.0                 3.2
              Income (loss) before income taxes                                            3.9                     2.6                   (1.6)                   4.5
              Net income (loss)                                                            1.7                     1.7                   (1.5)                   3.5
         Return on equity                                                                  5.3                     5.2                   (4.4)                 10.0
         Current ratio                                                                125.0                   116.1                    117.5                 134.3
         Debt-to-equity ratio                                                         138.7                   125.9                    130.8                 121.0
         Inventory turnover                                                             12.3x                   12.7x                    13.1x                 14.6x

     *1 Sections under “Total net assets” are newly provided to conform to Japanese accounting regulation revisions. The fiscal 2005 figures have also been restated to
        reflect this change. See note 3(a) of the Notes to Consolidated Financial Statements for details.
     *2 Includes the effects of intangible assets.
     *3 See note 2(l) of the Notes to Consolidated Financial Statements.
     *4 Following amendments to accounting rules in 2001, the figures for book value per share are calculated using the number of shares issued less treasury stock.
     *5 Wholesale prices were significantly revised in 2001, while revisions in all other years were either minor with nominal impact or not undertaken.

       2002              2001*5              2000               1999                1998               1997               1996

¥     308,572     ¥     308,512       ¥     332,631       ¥     342,008      ¥     346,755       ¥     355,341      ¥     345,505
      153,780           156,522             169,007             175,700            181,426             185,332            183,027
      154,792           151,989             163,624             166,307            165,329             170,009            162,478
      146,393           145,712             155,428             158,353            158,191             161,672            154,407
         8,398             6,276               8,195               7,954              7,138               8,336              8,070
       10,477            (25,464)            10,145              10,544               8,030               9,131              9,024
         5,847           (13,856)              8,373               5,965              4,522               5,055              4,184

¥     250,210     ¥     243,405       ¥     254,736       ¥     253,052      ¥     245,149       ¥     281,341      ¥     287,893
       73,225            78,275              81,670              86,914             90,665              94,843             97,118
       43,389            41,090              19,547              20,802             20,428              26,527             57,398
      141,079           133,638             125,670             133,235            136,551             173,610            182,597
              —                   —                  —                  —                   —                  —                  —
      107,871           108,587             127,563             118,363            108,221             107,192            104,705

¥        6,697    ¥        7,558      ¥        7,986      ¥        5,910     ¥        8,543      ¥      10,530      ¥             —
         8,030             8,845               9,425                    —                   —                  —                  —
         8,698             9,420             10,170              10,664             11,541              11,747             13,111
         5,483             5,620               6,050                    —                   —                  —                  —

¥        18.91    ¥       (44.32)     ¥        26.13      ¥        18.87     ¥        14.62      ¥        16.34     ¥        13.98
              —                   —                  —                  —             14.49               16.08              13.74
          8.00              8.00                8.00                8.00               8.00                8.00               8.00
       358.26            351.47              400.73              368.86             349.78              346.46             338.46
    313,515,346       314,289,346         318,332,346         320,896,346        309,399,482         309,399,482        309,357,809
              —                   —                  —                  —        334,197,577         334,266,225        327,810,254

          50.2%             49.3%               49.2%               48.6%              47.7%               47.8%              47.0%
          47.5              47.3                46.7                46.3               45.6                45.5               44.7
           2.7                2.0                   2.5                2.3                 2.1                2.3                2.3
           3.4               (8.3)                  3.0                3.1                 2.3                2.6                2.6
           1.9               (4.5)                  2.5                1.7                 1.3                1.4                1.2
           5.4              (11.7)                  6.8                5.3                 4.2                4.8                4.2
         138.6             133.7               131.5               123.2              114.0               111.4              133.8
         130.8             123.1                98.5               112.6              126.2               162.0              174.4
          14.5x             13.2x               14.0x               15.1x              15.7x               16.0x              16.3x

                                                                                                        ANNUAL REPORT 2006             41

      SCOPE OF CONSOLIDATION                                    Lion also transferred its interest in Well Pack Innovation
                                                                Co., Ltd., a subsidiary of Lion Corporation (Thailand)
     In fiscal 2006, ended December 31, 2006, the Lion          Ltd. On this basis, Well Pack Innovation no longer
     Group consisted of Lion Corporation, 21 consolidated       qualified as a subsidiary company and was removed from
     subsidiaries, three non-consolidated equity-method         the scope of consolidation as an equity-method affiliate.
     subsidiaries and eight equity-method affiliates. During    In the 12-month period to December 31, 2006, there
     the fiscal year under review, Lion liquidated’s      were no subsidiaries or equity-method affiliates added to
     Company, Ltd. and transferred the entire shareholding      the scope of consolidation. The balance dates for each of
     of Lion Building Maintenance Co., Ltd. As a result, both   the Group’s 21 consolidated subsidiaries is December
     companies were removed from the Company’s scope of         31. Accordingly, adjustments to financial statements are
     consolidation. From a Group ownership perspective,         not required.

                     Net Sales                                        Cost of Sales Ratio
                     (Millions of yen)                                (%)

                      350,000                                         60

                      300,000                                         50

                       50,000                                         10

                           0                                           0
                                     02 03 04 05 06                              02 03 04 05 06

                     SG&A Expenses to Net Sales                       Operating Income/Operating Income Ratio
                     (%)                                              (Millions of yen)                    (%)

                      60                                              10,000                                 5

                                                                       8,000                                 4

                                                                       6,000                                 3
                                                                       4,000                                 2

                                                                       2,000                                 1

                       0                                                    0                                0
                                02 03 04 05 06                                       02 03 04 05 06

                                                                            Operating income      Operating income ratio

 NET SALES AND OPERATING INCOME                                                                  On the earnings front, Lion worked diligently to
                                                                                            reduce costs and to secure fundamental improvements
Conditions in Japan’s home products market                                                  in its profit structure. In addition to cutbacks in
throughout the fiscal year under review were harsh and                                      manufacturing costs, Lion also strove to curtail logistics
marked by intense competition. Lion’s operating                                             expenses. Despite these endeavors, operating income
environment was further buffeted by contraction in the                                      fell 94.3% to ¥343 million. This is attributed to the
over-the-counter (OTC) drugs market and efforts by                                          decline in gross profit reflecting reduced sales, the
the Company to standardize sales through shipment                                           increase in raw material costs owing to crude oil prices
cutbacks and adjustments to wholesale inventories.                                          that hovered at persistently high levels and the upswing
Accounting for these factors, net sales edged down                                          in competition costs relating to new and existing core
0.4% compared with the previous fiscal year to                                              products.
¥330,380 million.

■ SG&A Expense Breakdown                                                          2006                                 2005                                  2004
                                                                       Amount                                Amount                                Amount
                                                                   (Millions of yen)    % of net sales   (Millions of yen)    % of net sales   (Millions of yen)   % of net sales

Selling, General and Administrative Expenses                         ¥164,467                49.8%         ¥162,577                 49.0%        ¥154,341                  49.8%
    Sales Incentive Expenses                                            14,660                4.4              14,307                 4.3            12,575                 4.1
    Sales Promotion Expenses                                            63,753               19.3              58,538               17.6             58,719                19.0
    Freight and Storage Expenses                                        16,549                5.0              17,528                 5.3            15,336                 5.0
    Advertising Expenses                                                22,393                6.8              23,752                 7.2            21,536                 7.0
    Salaries and Allowances                                             14,729                4.5              14,898                 4.5            14,119                 4.6
    R&D Expenses                                                          7,922               2.4                8,506                2.6              7,844                2.5
    Other                                                               24,458                7.4              25,046                 7.5            24,209                 7.8

■ Factors Impacting Operating Income in Fiscal 2006
(Hundred millions of yen rounded to the nearest first decimal place)

                Operating income for FY 2005                                                                                 60.7

                                                             Manufacturing cost reductions 11.3;
                    Total cost-reduction efforts             lower logistics costs 3.7;                                                                 23.9
                                                             staff costs reductions 8.9

                      Lower general expenses                                                                                                                       8.1

              Lower gross profit resulting from
                             decreased sales

              Lower gross profit resulting from
                  changes in the product mix

            Increase in competition expenses                                                                                 (42.1)
                                                                                                                             Increase in sales incentive expenses (3.5);
                                                                                                                             increase in sales promotion expenses (52.2);
             Influence of high crude oil prices                          (14.6)                                              decrease in advertising expenses 13.6

                Operating income for FY 2006           3.4

                                                   0         10         20             30        40         50          60            70        80          90           100

* Competition expenses are comprised of sales incentive, sales promotion and advertising expenses.

                                                                                                                                           ANNUAL REPORT 2006                       43
      OPERATING REVIEW BY SEGMENT                                                     loss of ¥335 million owing to the decline in domestic
                                                                                      sales and an increase in raw materials costs reflecting
     HOME PRODUCTS                                                                    the persistently high prices for crude oil.

                           Millions of yen
                                                                  Change              ■ Principal Product Category Sales
                            Fiscal 2006 Fiscal 2005       Amount           %                          Millions of yen

     Net Sales              ¥235,020         ¥237,241     ¥(2,221)         (0.9)%                                                        Change
                                                                                                       Fiscal 2006 Fiscal 2005     Amount         %
     Operating Income                                                        —
       (loss)                     (335)         8,434      (8,770)                    Oral Care         ¥ 52,167        ¥ 50,431   ¥ 1,735        3.4%

     Operating Income/                                                                Beauty Care         33,558         35,909     (2,351)       (6.5)
       Net Sales (%)                 —          3.6%                                  Household         149,294         150,900     (1,605)       (1.1)
     1. From the fiscal year under review, administrative and corporate
        unallocated operating expenses have been charged to business segments
        as appropriate.
     2. Restating earnings data in accordance with the historic accounting method     ORAL CARE
        for unallocated operating expenses, operating income in fiscal 2006 was
        ¥5,409 million, a decrease of 35.9% compared with the previous fiscal year.   In its toothpaste business, Lion enjoyed firm sales of its
                                                                                      anti-cavity PC Clinica range, buoyed by the release of
     Sales in the Home Products segment amounted to                                   products featuring new flavors. Results were also
     ¥235,020 million, a slight decline of 0.9% year on year.                         supported by the launch of Dentor Systema EX,
         In its domestic home products business, Lion                                 incorporating a new antibacterial periodontal disease
     focused on two priority initiatives as the basis for                             prevention agent. Despite these efforts, sales of
     future growth. The first entailed the introduction of                            mainstay Dentor products stalled due to harsh market
     new, distinctive products in the Company’s mainstay                              competition, resulting in an overall year-on-year
     Clinica, Top and other brands, leveraging the                                    decline in toothpaste sales.
     strengths of Lion’s proprietary technologies. This was                               Regarding Lion’s toothbrush operations, sales were
     supported by strategic investment in marketing,                                  effectively unchanged from the previous fiscal year.
     advertising and promotion. The second initiative was                             Gains secured through improvements in Between
     the introduction of medical health care products in                              brand products were offset by a slump in ultra-fine
     each of the oral care and beauty care segments, which                            bristle Dentor Systema sales.
     combined its home and pharmaceutical products                                        Sales of mouthwash significantly exceeded those of
     operations. Despite Lion’s tireless efforts, net sales                           the previous fiscal year, bolstered by the release of a
     decreased year on year due to intense market                                     non-alcohol Dentor Systema Dental Rinse with
     competition and steps undertaken to adjust wholesale                             bactericidal properties that penetrate deep inside the
     inventories.                                                                     “biofilm” to kill bacteria, and the launch of Clinica
         Overseas, Lion introduced new toothpastes and                                Dental Rinse – Quick Care, a dental rinse that prevents
     toothbrushes while reinforcing advertising and                                   cavities while alleviating bad breath.
     promotional campaigns to further develop a robust                                    Dental material sales also fared well, reflecting the
     business platform in South Korea. At the same time,                              popularity of DENT.EX Systema toothbrushes and
     the Company actively promoted a compact-type                                     efforts to expand the DENT. Check-Up toothpaste
     laundry detergent in Thailand. Buoyed by these                                   range.
     efforts, overseas sales in this segment were firm.                                   Overseas, Systema brand toothpastes and
         Although Lion worked diligently to reduce total                              toothbrushes recorded steady sales in Thailand. Lion
     costs with a particular emphasis on manufacturing and                            also achieved significant success following the launch of
     logistics expenses, the Company incurred an operating                            Dentrala toothpaste in South Korea. As a result, sales

outside Japan climbed substantially year on year.           ■ Lion’s Major Home Product Fields and
                                                              2006 Market Positions in Japan
   As a result of these factors, sales of Oral Care
                                                                                               Market Size in Japan     Lion’s Market
Products rose 3.4% compared with the previous fiscal
                                                                                                 (Billions of yen)         Position
year to ¥52,167 million.                                    Toothpastes                             ¥ 67                     1
                                                            Toothbrushes                                45                   1
BEAUTY CARE                                                 Liquid Hand Soaps                           15                   1
Despite efforts to boost sales promotion activities of      Antiperspirant Deodorants                   38                   4
Shokubutsu-Monogatari (Plant Story) Herb Blend              Laundry Detergents                        109                    3
shampoos and conditioners in 2006, sales of natural         Fabric Softeners                            57                   3
herb blend shampoos and conditioners declined               Dishwashing Detergents                      44                   3
compared with the previous fiscal year. The slump in        Note: Figures for market size presented above are based on retail sales data,
                                                                  and do not include sales of gift packages.
sales is attributed to the impact of intense market                                                (Source: 2006 INTAGE Inc. SRI survey)

    During the fiscal year under review, Lion took steps    HOUSEHOLD PRODUCTS
to improve its Kireikirei series of antibacterial           In household products, Lion raised the proportion of
medicated hand soaps. This was underpinned by the           plant-based ingredients used in its mainstay Top
release of a refill pack of Kireikirei Medicated Foaming    laundry detergent. By so doing, the Company
Hand Soap, an easy-to-use product for young children        succeeded in improving Top’s detergency properties
who have trouble making a lather with conventional          and enhancing its environmentally friendly features.
liquid soaps. Buoyed by increased demand in response        Lion also experienced steady results with Heyaboshi
to concerns surrounding the norovirus, sales of liquid      (Hang-to-Dry) Top that controls the unpleasant smell
hand soap products surged significantly year on year.       generated by laundry hung inside to dry. Impacted by
    In similar fashion to its natural herb blend shampoos   efforts to bring greater balance to its wholesale
and conditioners, Lion boosted sales promotions for         inventories, however, overall sales of laundry
Shokubutsu-Monogatari (Plant Story) Herb Blend Body         detergents declined.
Wash. This was again insufficient to offset intense             Despite the release of improved products including
market competition, resulting in stagnant sales.            Charmy V Quick, sales of dishwashing detergents
    Lion enhanced its lineup of hair-nourishment            dropped below those of the previous fiscal year
treatments, adding Mouhatsuryoku Innovate EX with           reflecting intense market competition throughout the
increased scalp penetration features to its medicated       fiscal year under review.
series. Buffeted by the contraction in the market,              Overall year-on-year sales of household cleaners
however, sales fell below the levels recorded in the        were robust, buoyed by the wide market acceptance of
previous fiscal year.                                       the Look Kirei no Mist series, which prevents grime
    In its antiperspirant and deodorant activities, sales   and malodorous substances with a single spray, and
of Lion’s mainstay Ban Powder Spray were steady.            contributions from the improved Ofuro no Look
Impacted by weak results in Ban Zero, however, overall      (bath cleaner) for hard-to-remove stains.
sales in this category declined year on year.                   Overseas, sales increased significantly year on year
    Overseas, Lion launched Free & Free Damage Aid          on the back of firm sales of the Pao series of laundry
shampoo and treatment in Thailand, enjoying healthy         detergents in Thailand.
sales growth.                                                   As a result, sales in the Household Products
    Accounting for the aforementioned factors, sales of     category edged down 1.1% compared with the
Beauty Care Products fell 6.5% compared with the            previous fiscal year to ¥149,294 million.
previous fiscal year to ¥33,558 million.

                                                                                                   ANNUAL REPORT 2006                       45
     PHARMACEUTICAL PRODUCTS                                                       by severe market competition and a slump in Stoppa
                                                                                   Anti-Diarrheal Medicine, however, overall sales fell
                          Millions of yen
                                                                                   below those of the previous fiscal year.
                           Fiscal 2006 Fiscal 2005      Amount           %            Lion experienced similar results in its semi-adhesive
     Net Sales              ¥47,981         ¥50,315    ¥(2,333)          (4.6)%    products. While Kyusoku Jikan semi-adhesive cooling
     Operating Income             943         3,619      (2,676)        (73.9)     pads for the feet and legs received wide acclaim from
     Operating Income/                                                             customers, the Hiepita series semi-adhesive cooling
       Net Sales (%)            2.0%          7.2%                                 pads for fever confronted difficult conditions impacted
     Note: Restating earnings data in accordance with the historic accounting      by market-scale contraction. Accounting for these
           method for unallocated operating expenses, operating income in fiscal
           2006 was ¥2,337 million, a decrease of 35.4% compared with the          factors, overall sales of semi-adhesive products declined
           previous fiscal year.
                                                                                   year on year.
     In the Pharmaceutical Products Division, sales                                   The market for health tonic drinks also declined in
     decreased 4.6% year on year to ¥47,981 million.                               terms of its market scale. Against this backdrop, Lion
         During the fiscal year under review, Lion                                 worked diligently to expand retail sales of New
     experienced difficult operating conditions with                               Guromont, a health tonic drink, undertaking aggressive
     contractions in its major markets of OTC drugs,                               sales promotion activities. Despite these endeavors,
     eyedrops, health drinks and insecticides.                                     overall sales were flat.
         Against this backdrop, Lion actively released new                            Lion achieved far greater success in its insecticide
     products in the mainstay analgesic, eyedrop and                               business. During the fiscal year under review, the
     insecticide fields, while at the same time leveraging                         Company released Varsan Insect-Repellent Cube, a new
     proprietary technologies to make inroads into new                             insect-repellent agent that requires no battery or
     businesses such as functional food products. Despite                          electricity and is effective for up to one month.
     these endeavors, overall sales in the Pharmaceutical                             In 2006, Lion also entered the functional food
     Products Division declined year on year.                                      products market. Under the KENBISOUKEN brand of
         From an earnings perspective, Lion made every                             health and beauty support products, Lion launched
     effort to reduce manufacturing and logistics expenses.                        Gussumin and Kyupurun as a part of efforts to cultivate
     Costs associated with the development of new and                              new opportunities and business fields.
     existing products, however, far outweighed these
     initiatives. As a result operating income totaled ¥943                        ■ Lion’s Major Pharmaceutical Fields and
                                                                                     2006 Market Positions in Japan
     million for the fiscal year under review.
         In analgesics, Lion released Bufferin Luna, to                                                       Market Size in Japan   Lion’s Market
                                                                                                                (Billions of yen)       Position
     provide quick and effective relief from severe discomfort
                                                                                   Analgesics                       ¥45                    1
     caused by menstrual, back and other pain. Confronted
     by a harsh competitive environment and weak sales of                          Eyedrops                           65                   3
     its mainstay Bufferin A, however, analgesic sales fell                                                    (Source: 2006 INTAGE Inc. SDI survey)
     below those of the previous fiscal year.
         Sales of eyedrops surpassed those of the previous
     fiscal year with the strong performance of Smile 40EX.
     Positive results are also due to the launch of a new
     product, Smile Contact Cool Fresh, which incorporates
     a cornea protection ingredient and provides a
     moisturizing effect that excels at soothing tired eyes.
         In digestive organ drugs, sales of New Chugai
     Ichoyaku increased significantly year on year. Impacted

CHEMICAL PRODUCTS                                                                 OTHER BUSINESSES

                      Millions of yen                                                                  Millions of yen
                                                             Change                                                                          Change
                       Fiscal 2006 Fiscal 2005        Amount           %                                Fiscal 2006 Fiscal 2005       Amount           %

Net Sales               ¥32,334         ¥33,898      ¥(1,563)          (4.6)%     Net Sales              ¥15,044         ¥10,343      ¥4,700          45.4%
Operating Income                                                                  Operating Income
  (loss)                     (286)        1,020       (1,307)            —          (loss)                      28           (97)         125              —
Operating Income/                                                                 Operating Income/
  Net Sales (%)                 —          3.0%                                     Net Sales (%)            0.2%              —
Note: Restating earnings data in accordance with the historic accounting method   Note: Restating earnings data in accordance with the historic accounting
      for unallocated operating expenses, operating income in fiscal 2006 was           method for unallocated operating expenses, operating loss in fiscal
      ¥612 million, a decrease of 40.0% compared with the previous fiscal year.         2006 was ¥94 million.

Overall sales in the Chemical Products Division fell 4.6%                         Net sales in this segment jumped 45.4% year on year to
compared with the previous fiscal year to ¥32,334                                 ¥15,044 million and operating income totaled ¥28
million.                                                                          million. This was caused by an increase in the number
    In the fiscal year under review, Lion prioritized the                         of completions in the construction contracting business.
development of highly functional products, including
electro-conductive compounds and industrial detergents.
Impacted by a decline in sales of fatty acid methyl ester                          NET INCOME
reflecting the drop in overall demand, sales deteriorated
compared with the previous fiscal year.                                           During the fiscal year under review, Europe introduced
    Despite efforts to increase profitability through a                           accounting standards that utilize the mark-to-market
review of underperforming products, Lion reported an                              method for the calculation of assets, leading many
operating loss of ¥286 million in its Chemical Products                           companies to terminate cross holdings of marketable
Division owing to the increase in raw materials prices                            securities that easily fluctuate in market value.
resulting from crude oil prices, which continued to hover                         Accordingly, Lion terminated its cross shareholdings
at high levels.                                                                   with Henkel KGaA, resulting in a gain on sales of
    Sales of surfactants and fatty-acid nitrogen derivatives                      investment securities totaling ¥8,387 million. In
declined year on year, reflecting intensified competition                         addition, Lion transferred the businesses of subsidiary
for fabric softeners and other finished products in Japan,                        company McCormick-Lion Limited and sold off shares
which outweighed steady exports to the ASEAN market.                              of subsidiary Lion Building Maintenance Co., Ltd.,
    Lion expanded applications for its fatty acid methyl                          leading to a ¥5,887 million gain on disposal of property,
esters, including customers in metalworking processes, in                         plant and equipment. Combined, these and other factors
raw material for alcohol, and in biodiesel fuels. Year-on-                        above accounted for ¥15,114 million in extraordinary
year sales decreased, however, owing to a slowdown in                             income. As a result, income before income taxes rose
demand.                                                                           from ¥8,737 million in the previous fiscal year to
    Sales of electro-conductive carbon increased                                  ¥13,020 million.
significantly, supported by plaudits from users in Japan                              Net income increased slightly from ¥5,473 million
and overseas for their excellent conductivity when used in                        a year earlier to ¥5,540 million in the year under
electronic components, auto parts and other applications.                         review in spite of a significant decrease in operating
    As a result of the favorable response of domestic and                         income.
overseas customers, Lion recorded a marked increase in                                Net income per share in fiscal 2006 was ¥19.60
sales of its special cosmetic raw materials for use in                            and ROE was 5.3%.
shampoos and conditioners.

                                                                                                                          ANNUAL REPORT 2006                   47
      FINANCIAL POSITION                                                                CASH FLOWS

     Total liabilities and net assets at the end of fiscal 2006                        Net cash provided by operating activities totaled
     amounted to ¥246,327 million, a decrease of ¥2,976                                ¥3,343 million, up ¥1,478 million compared with the
     million from a year earlier. Net assets totaled ¥105,133                          previous fiscal year. Although trade notes and account
     million, reflecting a decrease in retained earnings caused                        payable declined year on year, income before income
     by retirement of treasury stock and other factors, as well                        taxes increased from ¥8,737 million a year earlier to
     as a reduction in unrealized holding gain on other                                ¥13,020 million, trade notes and accounts receivable
     securities. Shareholders’ equity to total assets was 41.3%.                       as well as inventories were down, and accrued
         Total liabilities at the end of fiscal 2006 increased                         expenses and other payables increased compared with
     ¥3,782 million to ¥141,193 million. While a reduction                             the previous fiscal year.
     in trade notes and accounts payable led to a decrease in                             Net cash provided by investing activities climbed
     current liabilities from ¥101,402 million a year earlier to                       to ¥11,092 million, an increase of ¥20,354 million in
     ¥98,375 million as of December 31, 2006, total long-                              comparison with the previous fiscal year. Though the
     term liabilities rose to ¥42,818 million as a result of an                        Company purchased ¥10,034 million worth of
     increase in the current portion of long-term debt. As a                           property, plant and equipment, proceeds from sales of
     result, the current ratio at period-end stood at 125.0%.                          investment securities amounted to ¥14,242 million
         Total net assets totaled ¥105,133 million, down from                          and proceeds from sales of property, plant and
     ¥111,892 million* a year earlier. This was primarily                              equipment totaled ¥7,738 million.
     owing to the retirement of treasury stock.                                           Net cash used in financing activities increased
         Capital expenditure including intangible assets                               ¥2,095 million year on year to ¥3,610 million.
     totaled ¥10,149 million, in contrast to ¥11,794 million                           Although proceeds from long-term loans payable
     in fiscal 2005. Depreciation and amortization charges                             amounted to ¥7,500 million, this was offset by ¥7,672
     decreased to ¥9,634 million from ¥9,754 million at the                            million for purchases of treasury stock and ¥7,046
     end of fiscal 2005.                                                               million for the repayment of short-term loans payable.
     *Sections under “Total net assets” are newly provided to conform to
      Japanese accounting regulations revisions. The fiscal 2005 figures have
      also been restated to reflect this change. See note 3(a) of the Notes to
      Consolidated Financial Statement for details.

              Total Assets                                          Current Ratio                           Capital Expenditure
              (Millions of yen)                                     (%)                                     (Millions of yen)

              300,000                                              150                                      25,000

                                                                   120                                      20,000

                                                                    90                                      15,000
                                                                    60                                      10,000

                                                                    30                                       5,000

                    0                                                0                                             0
                              02 03 04 05 06                                     02 03 04 05 06                            02 03 04 05 06
                                                                                                                * Also includes acquisition of intangible
                                                                                                                  fixed asset.

 OUTLOOK                                                     market for functional food products, launching sales of
                                                             gum and other foods with specified health use. Through
Japan’s economy is expected to see a gradual recovery in     these initiatives to expand its business domain, Lion will
2007. However, a continuing severe business                  continue to promote the creation of a “total oral care”
environment is predicted to prevail in the home product      business.
market, reflecting intensifying sales competition among         In the Beauty Care Business Department, Lion will
manufacturers.                                               focus on cultivating its Kireikirei and Ban brands in an
   Against this backdrop, the Lion Group will steadily       aim to boost profitability. We will work to further
implement the specific measures of its Value Innovation      expand the No. 1 position of Kireikirei hand soap by
Plan Part II 09 (VIP II 09) to become the No. 1              raising market share to 50% and expand market share
company in the new comfortable lifestyle support             for Ban brand antiperspirant and deodorant by
industry. With the aim of maximizing synergistic effects     introducing innovative new products that cut and
in technology, branding and logistics, Lion plans to         prevent body odor. Lion aims to reinforce its business
integrate its Health Care Products Division (Oral Care       platform and improve the market position of its
and Beauty Care Business Departments) businesses with        Mouhatsuryoku hair-nourishment treatment and Free
its pharmaceutical products business at the end of           & Free hair-styling products by unveiling products
March 2007.                                                  with distinctive new features.
                                                                In pharmaceutical products, Lion will promote the
  Health Care Products                Oral Care Business     creation of No. 1 selling, ¥10 billion megabrands by
        Division                         Department          strengthening its product lineups and bolstering
                                     Beauty Care Business    advertising investment for its focus brands. These
                                         Department          include Bufferin, Smile, Dent Health, Stoppa,
                                   Pharmaceutical Business   Guronsan, Guromont, Varsan, Pair and Halix. Lion
                                        Department           will make a concerted push to reinforce its growth
   Household Products                Fabric Care Business    platform by leveraging the synergistic effects of its
        Division                         Department          three business departments under the Health Care
                                     Living Care Business    Products Division and aggressively developing its new
                                          Department         businesses in the area of functional food products,
                                                             which the Company entered in 2006. In particular,
                                                             Lion will extend its business domain by unveiling
   Accordingly, the newly formed Health Care                 foods for specified health use and other new products
Products Division will comprise three departments.           for better addressing lifestyle-related diseases and
In the Oral Care Business Department of this division,       promoting women’s health and beauty.
Lion will strengthen its leading position in the                The Household Products Division is comprised of
toothpaste market. The Company will reinvigorate its         the Fabric Care and the Living Care Business
Dentor brand toothpaste lineup by launching sales of         Departments. In the former, Lion aims to enhance the
new Dentor Clear Max, a toothpaste that thoroughly           share of its Top brand of laundry detergents through
cleanses and refreshes the mouth. In addition, Lion will     continuous advertising campaigns regarding the
continue to strengthen and cultivate its initiatives with    brand’s exceptional detergency and environmental
drugstores in handling high-value-added merchandise          benefits. Especially in premium laundry detergent
such as the Dent Health brand released in 2006. The          markets, Lion aspires to secure the No.1 position for
Company also plans to make further inroads into the          Top Fuai-Kan (Fresh Touch and Color), launched in

                                                                                           ANNUAL REPORT 2006             49
     March 2007. This new product is designed to protect        while implementing cost-reduction initiatives. In oral
     clothing during wash cycles from fabric-friction           care, we will enhance our global lineup of Systema
     damage and preserve original fabric color and soft         series products and continue to nurture the Dentrala
     touch. Lion also aims to develop new customer loyalty      brand in South Korea in order to extend our market
     by calling attention to distinguishing features of its     share. In beauty care, Lion aims to increase market
     Care Veil laundry detergent and fabric softener for        share by introducing new products under the
     those with sensitive skin, which were launched in          Shokubutsu-Monogatari (Plant Story) brand. Lion is
     October 2006.                                              also actively exploring avenues to develop its OTC
        In the Living Care Business Department, Lion will       drugs business in Northeast Asia.
     continue to deliver products that make housecleaning          As a result of the above, consolidated net sales are
     easier and more enjoyable, such as the Look Kirei no       estimated to increase 2.9% to ¥340.0 billion. Ordinary
     Mist series of disinfectants. The Company will further     income is forecast to jump 312% to ¥10.0 billion and
     bolster its product lineup in this series. Lion has also   net income is projected to edge down 0.7% to ¥5.5
     released Charmy Awa no Chikara, a dishwashing              billion.
     detergent featuring rich, long-lasting suds and a             Cash dividends for fiscal 2007 are forecast at ¥10
     refreshing fragrance for greater dishwashing               per share, comprising interim and year-end dividends
     enjoyment. We will continue to bolster the brand in a      of ¥5 per share.
     push to make it the No. 1 share of any single product         Under cash flows from operating activities, income
     in the dishwashing detergent market.                       before income taxes is projected to reach
        The Chemicals Division’s business environment is        approximately ¥9.0 billion. Depreciation and
     expected to remain severe owing to the continuing          amortization charges are expected to amount to
     high price of raw materials, despite deceleration of       approximately ¥10.0 billion.
     crude oil price rises. In the core alkylene oxide             In cash flows from investing activities, capital
     adducts (AOA) business as well as in oleo chemicals,       expenditure is anticipated at ¥10.0 billion.
     Lion will strengthen its competitiveness by developing        Cash provided by financing activities is expected to
     and nurturing highly functional products, and              decrease by about ¥4.5 billion owing to the payment
     enhance profitability by implementing cost reductions      of dividends and repayment of borrowings.
     and withdrawing low-profit products. By these                 As a result, cash and cash equivalents at the end of
     measures, Lion will improve the structure of these         fiscal 2007 are projected at ¥29.0 billion.
     businesses. In the business of high-value-added
     products such as conductive carbon products and
     industrial detergents, Lion will expand into leading-
     edge growth fields to enhance profitability.
        Lion is also planning to commence the global
     marketing of methyl ester sulfonate (MES), a laundry
     detergent surfactant with high detergency and superb
        In the overseas fabric care business, Lion will
     bolster production capacity for detergents in
     Thailand, where the Company’s detergents are selling
     strongly. We also plan to add to our lineup of fabric
     softeners and expand business in the key regions,

 RISK INFORMATION                                            (3) Exchange rate fluctuations
                                                                The Lion Group translates into yen the financial
The Lion Group’s management performance and                     statements of overseas subsidiaries when
financial status may be adversely affected by various           preparing consolidated financial statements. The
risks as business activities are pursued in the future. Of      values of items denominated in foreign
these risks, the following items in particular may have a       currencies may be affected by prevailing foreign
material impact on the decisions of investors.                  exchange rates when translated into yen. The
Forward-looking statements are based on decisions               Lion Group has taken steps to minimize the risk
made by the Lion Group as of February 9, 2007.                  of an increase in raw material costs by hedging
Business risks are not limited to the items listed below.       against exchange rate fluctuations. However,
                                                                short, medium and long-term changes in foreign
(1) Product quality and value                                   exchange rates may adversely affect the Lion
   The Lion Group plans, develops, produces and                 Group’s management performance and financial
   sells products under management based on                     status.
   international quality standards while strictly
   complying with related laws and regulations, such         (4) Major lawsuits
   as the Pharmaceutical Affairs Law, to provide                During this fiscal year under review, the Lion
   worry-free, safe, useful and environmentally                 Group was not subject to any lawsuits that would
   aware products to customers. In addition, the                materially affect its operations. In a future
   Company makes full use of customer opinions                  lawsuit, however, if the Lion Group is
   received through its Consumer Service Office to              successfully sued for significant damages, it may
   improve our products, containers and packaging               adversely affect the Lion Group’s management
   and displays. In the event of an unforeseen and              performance and financial status.
   serious problem with product quality, however,
   the affected product and all products made by the         (5) Earthquakes and other natural disasters
   Lion Group may lose their perceived value. This              In the product manufacturing process, the Lion
   may adversely affect the Lion Group’s                        Group has put in place safety measures against
   management performance and financial status.                 earthquakes and other natural disasters. In the
                                                                event of a major disaster, however, our
(2) Changes in raw material costs                               production equipment may be damaged or
   The Lion Group’s products use minerals and                   business activities may cease, adversely affecting
   vegetable oils and fats as raw materials. Since              the Lion Group’s management performance and
   these materials are easily impacted by global                financial status.
   market prices, the Company has measures in
   place to reduce costs and diversify the range of
   materials used. However, an increase in raw
   material costs may adversely affect the Lion
   Group’s management performance and financial

                                                                                          ANNUAL REPORT 2006         51
     Lion Corporation and Consolidated Subsidiaries
     December 31, 2006 and 2005
                                                                                                             Thousands of
                                                                       Millions of yen                       U.S. dollars [Note 1(b)]

     ASSETS                                                                    2006             2005                 2006

     Current assets:
         Cash and time deposits                                              ¥ 26,995          ¥ 15,943         $     226,643
         Short-term investments [Note 4]                                                  —            500                      —
         Trade notes and accounts receivable                                      64,138         68,282               538,478
         Inventories [Note 5]                                                     26,387         27,399               221,538
         Deferred income taxes [Note 7]                                             3,491         3,038                 29,314
         Prepaid expenses and other current assets                                  3,867         4,258                 32,468
         Less allowance for doubtful accounts                                     (1,870)         (1,721)              (15,707)
              Total current assets                                              123,008         117,699             1,032,734

     Property, plant and equipment, at cost:
         Land [Note 10]                                                           18,824         19,726               158,044
         Buildings and structures [Note 10]                                       59,160         63,506               496,689
         Machinery and equipment [Note 10]                                      129,181         140,317             1,084,556
         Construction in progress                                                   3,401         1,297                 28,558
         Less accumulated depreciation                                         (144,961)        (156,277)           (1,217,037)
              Property, plant and equipment, net                                  65,606         68,570               550,810

     Intangible assets:
         Trademarks [Notes 2(h)]                                                    6,361         7,236                 53,413
         Patent rights and other [Notes 2(a), (h)]                                  3,066         3,245                 25,748
              Total intangible assets                                               9,428        10,481                 79,161

     Investments and other assets:
         Investment securities [Note 4]                                           20,283         28,469               170,288
         Investments in non-consolidated subsidiaries and affiliates                6,570         6,808                 55,163
         Long-term loans receivable                                                      370           302                3,112
         Prepaid pension cost [Note 8]                                              9,766         3,727                 81,993
         Deferred income taxes [Note 7]                                           10,272         12,250                 86,240
         Other                                                                      1,181         1,229                   9,915
         Less allowance for doubtful accounts                                        (160)          (235)                (1,349)
              Investments and other assets, net                                   48,282         52,552               405,363

     Total assets                                                            ¥ 246,327         ¥ 249,303        $ 2,068,068
     See accompanying notes to consolidated financial statements.

                                                                                                                        Thousands of
                                                                                Millions of yen                         U.S. dollars [Note 1(b)]

LIABILITIES AND NET ASSETS                                                                2006            2005                  2006

Current liabilities:
    Short-term loans payable [Note 6]                                                 ¥      7,612       ¥     8,088       $       63,912
    Trade notes and accounts payable                                                       50,185             53,995             421,338
    Accrued expenses and other payables                                                    33,592             31,322             282,025
    Accrued income taxes                                                                     2,121             1,371               17,808
    Other [Note 3(b)] [Note 7]                                                               4,864             6,625               40,837
        Total current liabilities                                                          98,375            101,402             825,921

Long-term liabilities:
    Long-term debt [Note 6]                                                                13,599              6,284             114,174
    Accrued retirement benefits [Note 8]                                                   24,214             25,779             203,294
    Other [Note 7]                                                                           5,004             3,944               42,019
        Total long-term liabilities                                                        42,818             36,008             359,487

        Total liabilities                                                                 141,193            137,411           1,185,408

Contingent liabilities [Note 11]

Net assets [Note 3(a)]
Shareholders’ equity:
    Common stock:
      Authorized: 1,185,600,000 shares in 2006 and 592,619,000 shares in 2005
      Issued and outstanding: 299,115,346 shares in 2006 and
       313,515,346 shares in 2005                                                          34,433             34,433             289,092
    Capital surplus                                                                        31,499             31,584             264,459
    Retained earnings                                                                      46,600             51,834             391,242
    Treasury stock, at cost [Notes 9(a), (b)]                                             (15,913)           (16,443)           (133,602)
        Total shareholders’ equity                                                         96,620            101,409             811,191

Valuation and translation adjustments:
    Unrealized holding gain on other securities [Note 2(e)]                                  4,727             7,654               39,689
    Deferred losses on derivative financial instruments used for
     hedge accounting                                                                              (3)            —                      (26)
    Foreign currency translation adjustments                                                      433            38                  3,639
        Total valuation and translation adjustments                                          5,157             7,692               43,302

Minority interests in consolidated subsidiaries                                              3,354             2,789               28,166

        Total net assets                                                                  105,133            111,892             882,660

Total liabilities and net assets                                                      ¥ 246,327          ¥ 249,303         $ 2,068,068

                                                                                                         ANNUAL REPORT 2006                        53
     Lion Corporation and Consolidated Subsidiaries
     Years ended December 31, 2006 and 2005
                                                                                                                    Thousands of
                                                                              Millions of yen                       U.S. dollars [Note 1(b)]

                                                                                        2006           2005                 2006

     Net sales                                                                      ¥ 330,380         ¥ 331,798        $ 2,773,745
     Cost of sales                                                                      165,570           163,153          1,390,065
         Gross profit                                                                   164,810           168,644          1,383,680
     Selling, general and administrative expenses [Note 3(b)] [Note 12]                 164,467           162,577          1,380,800
         Operating income                                                                       343         6,066                2,881

     Other income:
         Interest and dividend income                                                           524           445                4,407
         Equity in earnings of non-consolidated subsidiaries and affiliates                1,555            1,768              13,057
         Gain on disposal of property, plant and equipment                                 5,887              880              49,430
         Gain on sales of investment securities                                            8,387               5               70,422
         Other                                                                             1,742              996              14,630
              Total other income                                                         18,098             4,097            151,947

     Other expenses:
         Interest expense                                                                       344           255                2,889
         Loss on disposal of property, plant and equipment                                 1,027              697                8,627
         Loss on impairment of fixed assets [Note 2(g)]                                         481            —                 4,038
         Early retirement payments                                                              958            —                 8,048
         Loss on closure of a plant                                                        1,644               —               13,803
         Other                                                                                  965           472                8,103
              Total other expenses                                                         5,420            1,426              45,509

     Income before income taxes                                                          13,020             8,737            109,318
     Income taxes [Note 2(j)]:
         Current                                                                           2,532            1,710              21,264
         Deferred                                                                          4,660            1,606              39,130
                                                                                           7,193            3,316              60,394
         Income before minority interests                                                  5,827            5,421              48,925

     Minority interests in earnings of consolidated subsidiaries                            (287)             51                (2,410)
         Net income                                                                 ¥      5,540      ¥     5,473      $       46,514

                                                                              Yen                                   U.S. dollars [Note 1(b)]

     Per share of common stock [Note 2(l)]:
         Net income                                                                 ¥      19.60      ¥     19.10      $           0.16
         Net income, as adjusted for dilution                                              19.52            19.05                  0.16
         Cash dividends                                                                    10.00             9.00                  0.08
     Weighted-average number of shares of common stock (in thousands)                   282,721           282,420
     See accompanying notes to consolidated financial statements.

Lion Corporation and Consolidated Subsidiaries
Years ended December 31, 2006 and 2005
                                                                                Millions of yen
                                                                                                               Shareholders’ Equity
                                                                of shares            Common                Capital             Retained             Treasury
                                                                 issued               stock                surplus             earnings          stock, at cost

Balance at December 31, 2004                                   313,515,346             ¥ 34,433             ¥ 31,549             ¥ 48,992           ¥ (16,546)
    Net income                                                              —                     —                     —              5,473                  —
    Cash dividends                                                          —                     —                     —             (2,259)                 —
    Bonuses to directors and corporate auditors                             —                     —                     —                 (55)                —
    Net decrease due to inclusion of subsidiaries and
     affiliates in consolidation                                            —                     —                     —               (314)                 —
    Treasury stock acquired, net [Note 9(a)]                                —                     —                     —                  —                102
    Gain (loss) on sales of treasury stock [Note 9(a), (b)]                 —                     —                   34                   —                  —
    Other, net                                                              —                     —                     —                  (0)                —
Balance at December 31, 2005                                   313,515,346               34,433               31,584                  51,834          (16,443)
    Net income                                                              —                     —                     —              5,540                  —
    Cash dividends                                                          —                     —                     —             (2,837)                 —
    Bonuses to directors and corporate auditors                             —                     —                     —                 (73)                —
    Retirement of treasury stock [Note 9(a)]                   (14,400,000)                       —                  (97)             (7,861)            7,959
    Treasury stock acquired, net [Note 9(a)]                                —                     —                     —                  —            (7,860)
    Gain (loss) on sales of treasury stock [Notes 9(a), (b)]                —                     —                   12                   (0)              431
    Net decrease due to subsidiaries and affiliates
     excluded from consolidation                                            —                     —                     —                  (0)                —
    Other, net                                                              —                     —                     —                  (0)                —
Balance at December 31, 2006                                   299,115,346             ¥ 34,433             ¥ 31,499             ¥ 46,600           ¥ (15,913)

                                                                                Thousands of U.S. dollars [Note 1(b)]

Balance at December 31, 2005                                   313,515,346           $289,092              $265,175             $435,185           $ (138,056)
    Net income                                                              —                     —                     —             46,514                  —
    Cash dividends                                                          —                     —                     —         (23,821)                    —
    Bonuses to directors and corporate auditors                             —                     —                     —               (617)                 —
    Retirement of treasury stock [Note 9(a)]                   (14,400,000)                       —               (819)           (66,005)             66,824
    Treasury stock acquired, net [Note 9(a)]                                —                     —                     —                  —          (65,995)
    Gain (loss) on sales of treasury stock [Notes 9(a), (b)]                —                     —                  104                   (3)           3,625
    Net decrease due to subsidiaries and affiliates
     excluded from consolidation                                            —                     —                     —                  (8)                —
    Other, net                                                              —                     —                     —                  (2)                —
Balance at December 31, 2006                                   299,115,346           $289,092              $264,459             $391,242           $ (133,602)
See accompanying notes to consolidated financial statements.

                                                                                                                            ANNUAL REPORT 2006                    55
     CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY                                                                   (CONTINUED)
     Lion Corporation and Consolidated Subsidiaries
     Years ended December 31, 2006 and 2005
                                                                        Millions of yen
                                                                                     Valuation and translation adjustments
                                                                             Unrealized       Deferred losses on derivative Foreign currency   Minority interests
                                                                         holding gain on         financial instruments         translation      in consolidated
                                                                         other securities      used for hedge accounting      adjustments         subsidiaries

     Balance at December 31, 2004                                               ¥ 3,606                        ¥—                ¥(1,014)              ¥ 2,216
         Net income                                                                     —                        —                       —                    —
         Cash dividends                                                                 —                        —                       —                    —
         Bonuses to directors and corporate auditors                                    —                        —                       —                    —
         Net decrease due to inclusion of subsidiaries and affiliates
          in consolidation                                                              —                        —                       —                    —
         Treasury stock acquired, net [Note 9(a)]                                       —                        —                       —                    —
         Gain (loss) on sales of treasury stock [Note 9(a), (b)]                        —                        —                       —                    —
         Other, net                                                                4,048                         —                   1,053                  573
     Balance at December 31, 2005                                                  7,654                         —                       38              2,789
         Net income                                                                     —                        —                       —                    —
         Cash dividends                                                                 —                        —                       —                    —
         Bonuses to directors and corporate auditors                                    —                        —                       —                    —
         Retirement of treasury stock [Note 9(a)]                                       —                        —                       —                    —
         Treasury stock acquired, net [Note 9(a)]                                       —                        —                       —                    —
         Gain (loss) on sales of treasury stock [Notes 9(a), (b)]                       —                        —                       —                    —
         Net decrease due to subsidiaries and affiliates
          excluded from consolidation                                                   —                        —                       —                    —
         Other, net                                                               (2,927)                        (3)                   394                  565
     Balance at December 31, 2006                                               ¥ 4,727                        ¥ (3)             ¥     433             ¥ 3,354

                                                                        Thousands of U.S. dollars [Note 1(b)]

     Balance at December 31, 2005                                              $ 64,266                      $ —                  $ 325              $ 23,419
         Net income                                                                     —                        —                       —                    —
         Cash dividends                                                                 —                        —                       —                    —
         Bonuses to directors and corporate auditors                                    —                        —                       —                    —
         Retirement of treasury stock [Note 9(a)]                                       —                        —                       —                    —
         Treasury stock acquired, net [Note 9(a)]                                       —                        —                       —                    —
         Gain (loss) on sales of treasury stock [Notes 9(a), (b)]                       —                        —                       —                    —
         Net decrease due to subsidiaries and affiliates
          excluded from consolidation                                                   —                        —                       —                    —
         Other, net                                                             (24,577)                       (26)                  3,314               4,747
     Balance at December 31, 2006                                              $ 39,689                      $ (26)               $3,639             $ 28,166
     See accompanying notes to consolidated financial statements.

Lion Corporation and Consolidated Subsidiaries
Years ended December 31, 2006 and 2005
                                                                                                            Thousands of
                                                                        Millions of yen                     U.S. dollars [Note 1(b)]

                                                                                2006         2005                   2006
Cash flows from operating activities:
   Income before income taxes                                                   ¥ 13,020     ¥     8,737          $ 109,318
   Depreciation and amortization                                                   9,634           9,754             80,884
   Decrease in accrued retirement benefits                                        (7,636)         (3,760)           (64,115)
   Interest and dividend income                                                     (524)           (445)            (4,407)
   Interest expense                                                                  344             255              2,889
   Gain on disposal of property, plant and equipment                              (4,860)           (183)           (40,803)
   Loss on impairment of fixed assets                                                481              —               4,038
   Gain on sales of investment securities                                         (8,387)             (5)           (70,422)
   Equity in earnings of non-consolidated subsidiaries and affiliates             (1,555)         (1,768)           (13,057)
   Decrease (increase) in trade notes and accounts receivable                      4,768         (11,717)            40,036
   Decrease (increase) in inventories                                              1,520          (1,483)            12,763
   (Decrease) increase in trade notes and accounts payable                        (5,183)          6,345            (43,519)
   Increase (decrease) in accrued expenses and other payables                      1,387          (4,198)            11,651
   Other, net                                                                        321             195              2,699
        Subtotal                                                                   3,329           1,725             27,956
   Interest and dividends received                                                 1,962           1,970             16,476
   Interest paid                                                                    (274)           (262)            (2,308)
   Income taxes paid                                                              (1,674)         (1,568)           (14,054)
           Net cash provided by operating activities                               3,343           1,865             28,069

Cash flows from investing activities:
   (Increase) decrease in time deposits                                               (57)         2,627                (485)
   Redemption of short-term investments                                               500             —                4,198
   Purchases of property, plant and equipment                                     (10,034)        (8,943)            (84,249)
   Proceeds from sales of property, plant and equipment                             7,738          1,899              64,969
   Purchases of intangible assets                                                    (570)          (805)             (4,793)
   Purchases of investment securities                                              (2,412)        (4,562)            (20,253)
   Proceeds from sales of investment securities                                    14,242            506             119,574
   Additions to loans receivable                                                     (170)          (153)             (1,431)
   Proceeds from loans receivable                                                     143            188               1,207
   Other, net                                                                       1,713            (18)             14,387
           Net cash provided by (used in) investing activities                     11,092         (9,262)             93,124

Cash flows from financing activities:
    Increase in short-term loans payable                                           6,460        6,473                54,241
    Repayment of short-term loans payable                                         (7,046)      (5,688)              (59,157)
    Increase in long-term loans payable                                            7,500           —                 62,967
    Repayment of long-term loans payable                                            (200)         (78)               (1,680)
    Increase in commercial paper payable                                          26,054       15,448               218,747
    Repayment of commercial paper payable                                        (26,019)     (15,448)             (218,446)
    Proceeds from sales of treasury stock                                            342          920                 2,871
    Purchases of treasury stock                                                   (7,672)        (605)              (64,418)
    Cash dividends                                                                (2,835)      (2,260)              (23,809)
    Cash dividends to minority shareholders                                         (107)         (98)                 (903)
    Other, net                                                                       (86)        (177)                 (722)
            Net cash used in financing activities                                 (3,610)      (1,514)              (30,309)
Effect of exchange rate changes on cash and cash equivalents                         168          130                 1,418
Net change in cash and cash equivalents                                           10,994       (8,781)               92,302
Cash and cash equivalents at beginning of the year [Note 2(d)]                    15,788       24,480               132,554
Cash and cash equivalents of newly consolidated subsidiaries                          —            89                    —
Cash and cash equivalents at end of the year [Note 2(d)] [Note 14]              ¥ 26,782     ¥ 15,788             $ 224,856
See accompanying notes to consolidated financial statements.

                                                                                             ANNUAL REPORT 2006                        57
     Lion Corporation and Consolidated Subsidiaries, December 31, 2006

     (a) The accompanying consolidated financial statements of Lion              consolidated subsidiaries maintain their accounting records in
     Corporation (the “Company”) and consolidated subsidiaries                   the currencies of their countries of domicile. The U.S. dollar
     have been compiled from the financial statements filed with the             amounts included in the consolidated financial statements,
     Director of the Kanto Local Finance Bureau as required by the               solely for the convenience of the reader, represent the
     Securities and Exchange Law of Japan. These financial                       arithmetic results of translating yen amounts into U.S. dollar
     statements have been prepared from the accounts maintained                  amounts at ¥119.11 = U.S.$1.00, the approximate rate of
     by the Company in accordance with the provisions set forth in               exchange in effect on December 31, 2006. This translation
     the Commercial Code of Japan.                                               should not be construed as a representation that the yen
         The accompanying consolidated financial statements of the               amounts have been or could be converted into U.S. dollars at
     Company and consolidated subsidiaries are prepared on the                   the above or any other rate.
     basis of accounting principles generally accepted in Japan,
     which are different in certain respects as to the application and           (c) As permitted under the Securities and Exchange Law of
     disclosure requirements of International Financial Reporting                Japan, amounts of less than one million yen have been omitted.
     Standards.                                                                  As a result, the totals shown in the financial statements do not
     (b) The Company and domestic consolidated subsidiaries                      necessarily agree with the sum of the individual amounts.
     maintain their accounting records in Japanese yen, and foreign

     (a) PRINCIPLES OF CONSOLIDATION                                                  The equity method has been applied, in accounting for the
     The consolidated financial statements include the accounts of               investments in three non-consolidated subsidiaries and eight
     the Company and significant subsidiaries controlled directly or             affiliates for the year ended December 31, 2006 and in four
     indirectly by the Company in accordance with the accounting                 non-consolidated subsidiaries and eight affiliates for the year
     standards for consolidation. Affiliated companies over which                ended December 31, 2005.
     the Company exercises significant influence in terms of their                    Investments in non-consolidated subsidiaries and affiliates,
     operating and financial policies have been included in the                  other than those accounted for by the equity method, are stated
     accompanying consolidated financial statements on an equity                 principally at cost determined by the moving-average method.
     method basis.                                                                    Differences between investment cost and equity in net
         The consolidated subsidiaries for the year ended December               assets acquired are being amortized over 10 years or charged to
     31, 2006 were as follows:                                                   income if the amount is not significant.
         Lion Chemical Co., Ltd./ Lion Business Service Co., Ltd./
         Lion Hygiene Co., Ltd./ Lion Trading Co., Ltd./                         (b) FOREIGN CURRENCY TRANSLATION
         Lion Packaging Co., Ltd./ Lion Engineering Co., Ltd./                   All current and long-term monetary assets and liabilities
         Leo Field Promotions Co., Ltd./ Lion Logistics Service Company, Ltd./   denominated in foreign currencies are translated into Japanese yen
         Lion Dental Products Co., Ltd./ Lion Field Marketing Co., Ltd./         at the exchange rates in effect at the balance sheet date. Foreign
         Lion Cordial Support Co., Ltd./ Ipposha Oil Industries Co., Ltd./       exchange gain/loss on translation is recognized in the consolidated
         McCormick-Lion Limited/ Lion Home Products (International) Ltd./        statements of income to the extent that the underlying assets and
         Lion Corporation (Singapore) Pte. Ltd./                                 liabilities are not hedged by forward foreign exchange contracts.
         Lion Trading (Shanghai) Co., Ltd./ CJ Lion Corporation/                      The financial statements of the overseas consolidated
         Lion Daily Necessities Chemicals (Qingdao) Co., Ltd./                   subsidiaries and affiliates are translated into Japanese yen at
         Lion Chemical Industry (Taiwan) Co., Ltd./                              the rates of exchange in effect at the balance sheet date for all
         Lion Corporation (Thailand) Ltd./ Lion Advertising Ltd.                 assets and liabilities, at the average rates for income and
         Lion Building Maintenance Co., Ltd. was excluded from                   expense accounts, and at historical rates for shareholders’
     consolidation because the Company transferred all of its shares             equity. Differences arising from translation are presented as
     to Nippon Kanzai Co., Ltd. in late September 2006.                          “Foreign currency translation adjustments” in a separate’s Company, Ltd. was excluded from consolidation                   component of valuation and translation adjustments in the
     because of its liquidation.                                                 accompanying consolidated balance sheets.
         The number of non-consolidated subsidiaries at December
     31, 2006 and 2005 were five and six, respectively. Their                    (c) DERIVATIVES
     aggregate total assets, retained earnings, net sales and net                The Company and certain consolidated subsidiaries utilize
     income were not significant.                                                derivative financial instruments to hedge their exposure to

fluctuation in foreign exchange rates.                                  net of disposition costs, and (ii) the present value of future cash
    Derivative financial instruments and foreign currency               flows arising from the ongoing utilization of the asset and its
transactions are accounted for as follows: (i) all derivatives are      disposition after use. This standard covers land, factories,
recognized as either assets or liabilities and measured at fair         buildings, and other forms of property, plant and equipment as well
value, and gain/loss on derivative transactions is recognized in        as intangible assets. Fixed assets are to be grouped at the lowest
the consolidated statements of income; and (ii) because of the          levels for which there are identifiable cash flows which are
high correlation of their effectiveness, gain/loss on derivatives       independent of the cash flows of other groups of assets.
positions which qualify as hedges is deferred until the maturity
of each underlying hedged transaction.                                  (h) INTANGIBLE ASSETS
                                                                        Trademarks, patent rights and certain capitalized software are
(d) CASH EQUIVALENTS                                                    amortized by the straight-line method over their estimated
For purposes of the consolidated statements of cash flows, the          useful lives.
Company considers deposits with banks and short-term
investments with original maturities of three months or less to         (i) RESEARCH AND DEVELOPMENT EXPENSES
be cash equivalents.                                                    Research and development expenses are charged to income as
Securities are classified into one of the following categories          (j) INCOME TAXES
based on management’s intent in holding them: (i) held-to-              The Company and domestic consolidated subsidiaries have
maturity debt securities, (ii) other securities (marketable), and       adopted tax-effect accounting which requires the recognition of
(iii) other securities (non-marketable).                                income taxes by the asset and liability method. Under this
(i) Held-to-maturity debt securities are stated at amortized            method, deferred tax assets and liabilities are determined
      cost.                                                             based on the differences between financial reporting and the
(ii) Other securities (marketable) are stated at fair value, with       tax bases of the assets and liabilities and are measured using
      any unrealized holding gain or loss, net of the applicable        the enacted tax rates.
      taxes, presented as a separate component of net assets.
(iii) Other securities (non-marketable) are stated at cost by the       (k) ACCRUED RETIREMENT BENEFITS
      moving-average method.                                            Employees of the Company and certain domestic consolidated
      Debt securities due within one year are presented as current      subsidiaries who terminate their employment are generally
      and all other securities are presented as non-current in the      entitled to lump-sum severance payments determined by
      accompanying consolidated balance sheets.                         reference to their current basic rate of pay, length of service
                                                                        and the conditions under which the termination occurs.
(f) INVENTORIES                                                             The Company and domestic consolidated subsidiaries have
Inventories are stated at cost determined primarily by the first-       adopted the accounting standard for employees’ retirement benefits
in, first-out method for merchandise and finished products, and         and provide for this liability based on the actuarial present value of
by the moving-average method for other inventories.                     their defined retirement benefit plans and the related pension plan
                                                                        assets recognized as of each balance sheet date.
(g) PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION                          The Company and certain consolidated subsidiaries also
Property, plant and equipment is stated at cost. Depreciation is        provide for retirement allowances to directors and corporate
computed by the declining-balance method based on the estimated         auditors based on their internal regulations at an estimate of
useful lives of the respective assets, except that certain              the amount which would be required to be paid if all directors
consolidated subsidiaries apply the straight-line method.               and corporate auditors retired at the balance sheet date.
    The Company and domestic consolidated subsidiaries have
adopted an accounting standard for the impairment of fixed assets.      (l) NET INCOME AND DIVIDENDS PER SHARE
This standard requires that tangible and intangible fixed assets be     Basic net income per share is computed by dividing net income
carried at cost less depreciation, and be reviewed for impairment       available for distribution to shareholders of common stock by
whenever events or changes in circumstances indicate that the           the weighted-average number of shares of common stock
carrying amount of an asset may not be recoverable.                     outstanding during the year (exclusive of the dilutive effect of
    In addition, companies are required to recognize an impairment      the exercise of any stock options).
loss in their consolidated statements of income if certain indicators        Diluted net income per share is computed based on the net
of asset impairment exist and if the book value of an asset exceeds     income available for distribution to the shareholders and the
the undiscounted sum of its future cash flows. This standard states     weighted-average number of shares of common stock
that impairment losses should be measured as the excess of the          outstanding during each year after giving effect to the dilutive
book value over the higher of (i) the fair market value of the asset,   potential of shares of common stock to be issued upon the

                                                                                                            ANNUAL REPORT 2006                   59
     exercise of stock options for the years ended December 31,               respective year together with the interim cash dividends paid.
     2006 and 2005.
         In determining the hypothetical shares repurchased, the              (m) CONSUMPTION TAXES
     average price per share for the year is used.                            Transactions subject to consumption taxes are recorded at
         Cash dividends per share represent the cash dividends                amounts exclusive of consumption taxes.
     proposed by the Board of Directors as applicable to each

     Effective the year ended December 31, 2006, the Company and                  AUDITORS
     its domestic consolidated subsidiaries have adopted an accounting        Effective the year ended December 31, 2006, the Company
     standard for presentation of net assets in the balance sheet.            and domestic consolidated subsidiaries have adopted an
          The amount corresponding to total net assets for the year           accounting standard for directors’ bonuses.
     ended December 31, 2006 and 2005 under the previous                          The standard requires that directors’ bonuses be accounted
     standards were ¥101,781 million (U.S.$854,494 thousand)                  for as an expense of the accounting period in which such
     and ¥109,103 million, respectively. However, the adoption of             bonuses were accrued.
     this standard had no material effect on the statement of income              As a result, selling, general and administrative expenses
     for the year ended December 31, 2006.                                    increased by ¥26 million (U.S.$222 thousand), and income
          This standard requires that balance sheets be presented             before income taxes decreased by ¥26 million, compared with
     as follows;                                                              the amounts which would have been recorded under the
          1. The balance sheet is divided into “Assets,” “Liabilities,”       previous method.
             and “Net assets” section. “Net assets” is divided into
             “Shareholders’ equity,” “Valuation and translation               (c) METHOD OF ALLOCATING OPERATING EXPENSES
             adjustments,” and “Minority interests in consolidated            Effective the year ended December 31, 2006, in order to
             subsidiaries.”                                                   disclose segment operating income and loss more accurately,
          2. “Shareholders’ equity” is divided into “Common stock,”           the Company has changed its method of disclosing expenses
             “Capital surplus,” “Retained earnings” and “Treasury             incurred in administrative departments.
             stock, at cost.”                                                     Expenses incurred in administrative departments, which
          3. “Valuation and translation adjustments” is divided into          were previously recorded as unallocated operating expenses, are
             “Unrealized holding gain on other securities,” “Deferred         to be allocated to each business segment.
             losses on derivative financial instruments used for hedge
             accounting” and “Foreign currency translation                         Segment information disclosed under the previous method
             adjustments.”                                                    for the year ended December 31, 2006 is summarized follows:

                                                   Millions of yen
                                                          Home       Pharmaceutical    Chemical                             Eliminations/
                                                         products       products       products              Other            Corporate     Consolidated

     Sales to external customers                     ¥235,020          ¥ 47,981        ¥ 32,334          ¥ 15,044             ¥       —     ¥330,380
     Intersegment sales                                         —               —              —                      —               —               —
     Total sales                                         235,020          47,981           32,334            15,044                   —         330,380
     Operating expenses                                  229,610          45,644           31,722            15,138               7,921         330,037
     Operating income (loss)                         ¥     5,409       ¥ 2,337         ¥     612         ¥           (94)     ¥(7,921)      ¥      343

Marketable and investment securities at December 31, 2006 and 2005 consisted of the following:
                                                                                                                                Thousands of
                                                                                Millions of yen                                 U.S. dollars
                                                                                        2006                    2005                   2006
   Government and corporate bonds                                                        ¥        —              ¥        500         $             —
        Subtotal                                                                                  —                       500                       —

   Marketable equity securities                                                              18,889                27,088                 158,586
   Government and corporate bonds                                                                  2                        3                       22
   Investment trusts and others                                                               1,391                  1,378                 11,680
        Subtotal                                                                             20,283                28,469                 170,288
Total                                                                                    ¥ 20,283                ¥28,969              $170,288

   The acquisition cost and related fair value of other securities at December 31, 2006 were as follows:
                                                        Millions of yen
                                                              Acquisition                Fair                Unrealized              Unrealized
                                                                 cost                   value                  gains                   losses
Other securities:
   Marketable equity securities                                   ¥10,840                 ¥18,889                  ¥8,166                      ¥117
Total                                                             ¥10,840                 ¥18,889                  ¥8,166                      ¥117

                                                        Thousands of U.S. dollars
                                                              Acquisition                Fair                Unrealized              Unrealized
                                                                 cost                   value                  gains                   losses
Other securities:
   Marketable equity securities                                   $ 91,012              $158,586                 $ 68,560                      $ 986
Total                                                             $ 91,012              $158,586                 $ 68,560                      $ 986

   Other securities whose fair value was not determinable at December 31, 2006 are summarized as follows:
                                                                                                                                Thousands of
                                                                                                        Millions of yen         U.S. dollars
                                                                                                               Carrying               Carrying
                                                                                                                value                  value
Other securities:
   Non-marketable equity securities                                                                                ¥1,391               $ 11,680

   At December 31, 2006, the redemption schedule for securities with maturity dates which are classified as held-to-maturity debt
securities was as follows:
                                                                                Millions of yen
                                                                                                            Due after one          Due after five
                                                                                     Due within             year through           years through
                                                                                      one year               five years              ten years
Held-to-maturity debt securities                                                                  ¥—                      ¥—                      ¥2
Total                                                                                             ¥—                      ¥—                      ¥2

                                                                                Thousands of U.S. dollars
                                                                                                            Due after one          Due after five
                                                                                     Due within             year through           years through
                                                                                      one year               five years              ten years
Held-to-maturity debt securities                                                                  $—                      $—                     $ 22
Total                                                                                             $—                      $—                     $ 22

                                                                                                                ANNUAL REPORT 2006                       61
     Inventories at December 31, 2006 and 2005 consisted of the following:
                                                                                                                               Thousands of
                                                                                     Millions of yen                           U.S. dollars
                                                                                             2006               2005                  2006
     Merchandise and finished products                                                        ¥ 20,519           ¥ 20,191            $ 172,277
     Work in process                                                                              1,948              3,325                16,359
     Raw materials                                                                                2,930              2,755                24,607
     Supplies                                                                                          987           1,127                 8,294
     Total                                                                                    ¥ 26,387           ¥ 27,399            $ 221,538

     Short-term loans payable, principally from banks, generally represented 365-day notes at average interest rates of 2.16% and
     1.57% at December 31, 2006 and 2005, respectively.
        Long-term debt at December 31, 2006 and 2005 consisted of the following:
                                                                                                                               Thousands of
                                                                                     Millions of yen                           U.S. dollars
                                                                                             2006               2005                  2006
     Long-term loans payable from banks at average interest rates of
         1.23% and 1.22% at December 31, 2006 and 2005, respectively                          ¥13,599               ¥6,284           $114,174
     Total long-term debt                                                                     ¥13,599               ¥6,284           $114,174

     The significant components of deferred tax assets and liabilities at December 31, 2006 and 2005 were as follows:
                                                                                                                               Thousands of
                                                                                     Millions of yen                           U.S. dollars
                                                                                             2006               2005                  2006
     Deferred tax assets:
         Allowance for doubtful accounts                                                     ¥         721      ¥      709           $     6,060
         Accrued retirement benefits                                                             13,895             16,237               116,659
         Amortization of goodwill                                                                 1,559              2,078                13,091
         Loss on impairment of fixed assets                                                             32              34                    273
         Loss on closure of a plant                                                                    619               —                 5,200
         Accrued enterprise tax                                                                        175             256                 1,470
         Tax loss carryforwards                                                                   4,382              4,798                36,796
         Unrealized intercompany profits                                                               162             415                 1,363
         Other                                                                                    2,754              3,286                23,128
         Less valuation allowance                                                                      (645)           (351)              (5,418)
             Total deferred tax assets                                                           23,657             27,466               198,621
     Deferred tax liabilities:
         Special tax-purpose reserve                                                             (1,808)               (995)             (15,180)
         Gain on contribution of securities to pension trust                                     (5,712)             (5,712)             (47,963)
         Unrecognized holding gain on other securities                                           (3,193)             (5,232)             (26,808)
         Other                                                                                         (368)           (310)              (3,091)
             Total deferred tax liabilities                                                    (11,082)             (12,251)             (93,043)
     Net deferred tax assets                                                                 ¥ 12,575           ¥ 15,214             $ 105,578

         Deferred tax liabilities included in current liabilities and non-current liabilities were ¥7 million and ¥1,180 million, respectively,
     at December 31, 2006 and ¥22 million and ¥51 million, respectively, at December 31, 2005.

   A reconciliation of the differences between the statutory tax rate and the effective tax rates for the years ended December 31,
2006 and 2005 is summarized as follows:
                                                                                                      2006                  2005
Statutory tax rate:                                                                                      40.7%                  40.7%
    Permanent differences, net                                                                               3.1                    1.0
    Equity in earnings of non-consolidated subsidiaries                                                   (4.9)                     (8.2)
    Tax benefits realized on losses of subsidiaries                                                          4.3                    2.2
    Unrealized profit                                                                                        7.0                     —
    Loss on impairment of fixed assets                                                                       0.8                     —
    Other                                                                                                    4.2                    2.3
Effective tax rates                                                                                      55.2%                  38.0%

The Company and certain domestic consolidated subsidiaries          indemnities are paid when an employee retires.
have defined benefit pension plans. The primary plans are the           The following table sets forth the funded and accrued status
“Lion Pension Fund” of the Company and the tax-qualified            of the plans, and the amounts recognized in the consolidated
pension plans of certain consolidated subsidiaries. In addition,    balance sheets at December 31, 2006 and 2005 for the
the Company has a pension trust. The Company and certain            Company’s and consolidated subsidiaries’ defined benefit
consolidated subsidiaries also have lump-sum severance              pension plans:
indemnity plans. In certain cases, additional severance
                                                                                                                     Thousands of
                                                                            Millions of yen                          U.S. dollars
                                                                                    2006              2005                  2006
Projected benefit obligation                                                        ¥ (69,784)        ¥(71,300)            $(585,881)
Fair value of pension plan assets                                                      68,508           65,390               575,174
Funded status                                                                           (1,275)          (5,910)              (10,707)
Unrecognized actuarial (gain) loss                                                      (9,080)         10,147                (76,236)
Unrecognized prior service cost                                                         (3,565)          (5,093)              (29,934)
Unrecognized pension plan assets                                                                —      (20,285)                        —
Accrued employees’ retirement benefits, net                                           (13,921)         (21,141)             (116,877)
Prepaid pension cost                                                                     9,766            3,727                81,993
Accrued employees’ retirement benefits                                              ¥ (23,687)        ¥(24,868)            $(198,870)

    Retirement allowances to directors and corporate auditors, included in “Accrued retirement benefits” in the accompanying
consolidated balance sheets, totaled ¥526 million (U.S.$4,424 thousand) and ¥910 million at December 31, 2006 and 2005,

    The components of net periodic retirement benefit expenses for the years ended December 31, 2006 and 2005 were as follows:
                                                                                                                     Thousands of
                                                                            Millions of yen                          U.S. dollars
                                                                                    2006              2005                  2006
Service cost                                                                          ¥ 2,229          ¥ 2,169              $ 18,718
Interest cost                                                                            1,705            1,742                14,315
Expected return on pension plan assets                                                        (824)          (635)              (6,923)
Amortization of actuarial (gain) loss                                                         (443)          762                (3,720)
Amortization of prior service cost                                                      (1,528)          (1,528)              (12,829)
Additional severance indemnities paid                                                         994              —                8,346
Contributions made to defined contribution pension plans                                       62             40                     524
Net periodic retirement benefit expenses                                              ¥ 2,195          ¥ 2,550              $ 18,432

                                                                                                      ANNUAL REPORT 2006                    63
        The assumptions used in accounting for the above plans for the years ended December 31, 2006 and 2005 are set forth as follows:
                                                                                                            2006                  2005
     Discount rate:                                                                                                2.5%                   2.5%
     Expected rate of return on pension plan assets:                                                               2.0%                   2.0%
     Recognition period for actuarial gain/loss:                                                              15 years             15 years
     Amortization period for prior service cost:                                                               5 years               5 years

     (a) TREASURY STOCK                                                  ¥77 million during the year ended December 31, 2005.
     As approved by the Board of Directors at a meeting held on
     November 30, 2006, the Company repurchased 13,900 thousand          (b) STOCK OPTION PLAN
     shares of its own common stock at an aggregate cost of ¥7,672       Directors, corporate auditors and certain eligible employees of
     million (U.S.$64,418 thousand) and retired 14,400 thousand          the Company were granted stock options for the purchase of an
     shares of its own common stock at an aggregate cost of ¥7,959       aggregate of 15,790 thousand shares of common stock as of
     million (U.S.$66,824 thousand). As approved by the shareholders     December 31, 2006.
     at a meeting held on March 30, 2005, the Company repurchased             As a result of the exercise of these stock options, the
     1,000 thousand shares of its own common stock during the year       Company sold 687 thousand shares of common stock for a total
     ended December 31, 2005 at an aggregate cost of ¥605 million.       of ¥345 million (U.S.$2,898 thousand) during the year ended
         In order to meet the requests of shareholders who own odd lot   December 31, 2006 and 1,845 thousand shares of common
     shares of common stock, the Company repurchased 278 thousand        stock for a total of ¥895 million during the year ended
     shares of common stock during the year ended December 31,           December 31, 2005. The balance of the stock options may be
     2006 at an aggregate cost of ¥187 million (U.S.$1,577 thousand)     exercised through March 31, 2009.
     and 402 thousand shares of common stock during the year ended            In addition, directors, corporate auditors and certain eligible
     December 31, 2005 at an aggregate cost of ¥264 million.             employees of the Company were granted stock options as a
         In addition, at the request of certain shareholders, the        retirement benefit for the purchase of an aggregate of 129
     Company sold 156 thousand shares of common stock for a total of     thousand shares of common stock as of December 31, 2006.
     ¥86 million (U.S.$727 thousand) during the year ended December      The stock options may be exercised within 10 days after each
     31, 2006 and 140 thousand shares of common stock for a total of     director, corporate auditor and eligible employee retires.

     The assets pledged as collateral for short-term loans payable and trade notes and accounts payable at December 31, 2006 and
     2005 were as follows:
                                                                                                                           Thousands of
                                                                                 Millions of yen                           U.S. dollars
                                                                                         2006               2005                  2006
     Land                                                                                  ¥       327         ¥    323            $ 2,753
     Buildings and structures                                                                  1,626               1,417             13,652
     Machinery and equipment                                                                       549              429               4,614
        Total                                                                              ¥ 2,503             ¥2,170              $ 21,020

Contingent liabilities at December 31, 2006 and 2005, were as follows:
                                                                                                                    Thousands of
                                                                            Millions of yen                         U.S. dollars
                                                                                    2006             2005                  2006
As guarantors of indebtedness of non-consolidated subsidiaries,
affiliates and employees                                                              ¥ 3,591          ¥3,406               $ 30,150
Endorsed notes receivable                                                                      43            44                    364
Negotiation of export bills under L/C                                                         121             —                1,021
   Total                                                                              ¥ 3,756          ¥3,451               $ 31,535

For the years ended December 31, 2006 and 2005, research and        general and administrative expenses, amounted to ¥7,922 million
development expenses, all of which have been included in selling,   (U.S.$66,513 thousand) and ¥8,506 million, respectively.

Non-cancelable leases are accounted for as operating leases         totaled ¥408 million (U.S.$3,430 thousand) and ¥472 million,
regardless of whether such leases are classified as operating or    respectively.
finance leases, except that lease agreements which stipulate            Pro forma data concerning acquisition costs, accumulated
the transfer of ownership of the leased property to the lessee      depreciation, net book value and depreciation expense of the
are accounted for as finance leases.                                leased assets, including the interest portion thereon, are
    For the years ended December 31, 2006 and 2005, lease           summarized as follows:
expenses for finance leases which do not transfer ownership
                                                                                                                    Thousands of
                                                                            Millions of yen                         U.S. dollars
                                                                                    2006             2005                  2006
Acquisition costs                                                                     ¥ 1,914          ¥1,900               $ 16,072
Accumulated depreciation                                                                (1,113)             (978)              (9,348)
Net book value                                                                                800           921                6,724
Depreciation expense                                                                          408           472                3,430

   Future minimum lease payments due subsequent to December 31, 2006 and 2005, including the interest portion thereon, are
summarized as follows:
                                                                                                                    Thousands of
                                                                            Millions of yen                         U.S. dollars
                                                                                    2006             2005                  2006
Within one year                                                                          ¥ 336           ¥ 368               $ 2,827
Over one year                                                                                 464           553                3,897
   Total                                                                                 ¥ 800           ¥ 921               $ 6,724

                                                                                                     ANNUAL REPORT 2006                  65
     Reconsolidations between the balance of cash and time deposits reflected in the consolidated balance sheets as of December 31,
     2006 and 2005 and that of cash and cash equivalents at end of the year reflected in the consolidated statements of cash flows for
     the years then ended are summarized as follows.
                                                                                                                                          Thousands of
                                                                                    Millions of yen                                       U.S. dollars
                                                                                            2006                           2005                  2006
     Cash and time deposits                                                                  ¥ 26,995                      ¥ 15,943             $ 226,643
     Short-term investments                                                                             —                         500                     —
     Time deposits with maturities greater than three months                                          (212)                       (154)              (1,787)
     Debt securities with maturities greater than three months                                          —                         (500)                   —
        Total cash and cash equivalents at end of the year                                   ¥ 26,782                      ¥ 15,788             $ 224,856

     BUSINESS SEGMENT INFORMATION                                           solutions, inflammation and pain-relieving first-aid products,
     The Company and its consolidated subsidiaries operate                  health-tonic drinks and insecticides.
     principally in four business segments; home products,                      Operations in the chemical products segment involve the
     pharmaceutical products, chemical products and other.                  manufacture and sale of surface active agents and fatty acid
         Operations in the home products segment involve the                nitrogen compounds.
     manufacture and sale of personal care products, such as                    Operations in the other segment involve the manufacture
     toothpastes, toothbrushes, laundry detergents and soaps,               and sale of spices, seasonings, and salad dressings, plant
     dishwashing detergents, cleansers and fabric softeners.                construction, transportation and storage.
         Operations in the pharmaceutical products segment involve              Business segment information for the years ended December
     the manufacture and sale of analgesic medicines, eyedrop               31, 2006 and 2005 is summarized as follows [Note 3(c)]:

                                                 Millions of yen
                                                        Home       Pharmaceutical    Chemical                                 Eliminations/
                                                       products       products       products                 Other             Corporate       Consolidated

     Sales to external customers                   ¥235,020          ¥ 47,981        ¥ 32,334            ¥ 15,044             ¥           —     ¥330,380
     Intersegment sales                                       10              —           8,019                 6,590             (14,620)                —
     Total sales                                       235,030           47,981          40,353               21,635              (14,620)          330,380
     Operating expenses                                235,366           47,038          40,640               21,606              (14,614)          330,037
     Operating income (loss)                       ¥       (335)     ¥     943       ¥     (286)         ¥            28      ¥           (5)   ¥        343

     Identifiable assets                           ¥126,765          ¥ 38,631        ¥ 41,846            ¥ 4,164              ¥ 34,918          ¥246,327
     Depreciation and amortization                       7,291            1,263             797                   123                   158           9,634
     Loss on impairment of fixed assets                       —               —               —                   197                   284              481
     Capital expenditures                                8,080             533              993                       38                503          10,149

                                         Thousands of U.S. dollars
                                                Home          Pharmaceutical           Chemical                                  Eliminations/
                                               products          products              products               Other                Corporate             Consolidated

Sales to external customers               $ 1,973,135            $402,837              $271,470           $126,304               $            —       $ 2,773,745
Intersegment sales                                    90                     —           67,325                55,335                (122,750)                     —
Total sales                                   1,973,225              402,837            338,794               181,639                (122,750)            2,773,745
Operating expenses                            1,976,043              394,917            341,202               181,403                (122,700)            2,770,864
Operating income (loss)                   $      (2,818)         $      7,920          $ (2,408)          $           236        $           (50)     $        2,881

Identifiable assets                       $ 1,064,276            $324,334              $351,328           $ 34,964               $ 293,165            $ 2,068,068
Depreciation and amortization                    61,217                10,606              6,695                1,033                    1,332                80,884
Loss on impairment of fixed assets                    —                      —                    —             1,654                    2,384                 4,038
Capital expenditures                             67,844                 4,479              8,341                      319                4,228                85,212

                                         Millions of yen
                                                Home          Pharmaceutical           Chemical                                  Eliminations/
                                               products          products              products               Other                Corporate             Consolidated

Sales to external customers                ¥237,241              ¥ 50,315              ¥ 33,898           ¥ 10,343                   ¥        —       ¥ 331,798
Intersegment sales                                    —                      —                  —                      —                      —                    —
Total sales                                    237,241               50,315             33,898                10,343                          —              331,798
Operating expenses                             228,806               46,695             32,877                10,441                     6,910               325,731
Operating income (loss)                    ¥     8,434           ¥ 3,619               ¥ 1,020            ¥           (97)           ¥ (6,910)        ¥        6,066

Identifiable assets                        ¥132,961              ¥ 40,463              ¥ 28,695           ¥ 4,279                    ¥ 42,902         ¥ 249,303
Depreciation and amortization                    7,187                 1,365                823                       95                     283               9,754
Capital expenditures                             9,418                   409              1,029                       43                     894              11,794

Geographical segment information for the years ended December 31, 2006 and 2005 is summarized as follows:
                                                           Millions of yen
                                                                     Japan                   Asia                       Corporate                   Consolidated
Sales to external customers                                        ¥284,907                   ¥ 45,473                      ¥            —               ¥ 330,380
Intersegment sales                                                       1,615                        1,990                      (3,605)                           —
Total sales                                                            286,522                    47,463                         (3,605)                     330,380
Operating expenses                                                     287,107                    46,831                         (3,900)                     330,037
Operating income (loss)                                            ¥         (584)            ¥        632                  ¥        295                 ¥      343
Identifiable assets                                                ¥194,394                   ¥ 22,325                      ¥ 29,607                     ¥ 246,327

                                                           Thousands of U.S. dollars
                                                                     Japan                   Asia                       Corporate                   Consolidated
Sales to external customers                                    $ 2,391,967                  $381,778                    $                —           $2,773,745
Intersegment sales                                                      13,562                    16,711                        (30,273)                           —
Total sales                                                        2,405,529                    398,489                         (30,273)                 2,773,745
Operating expenses                                                 2,410,440                    393,175                         (32,751)                 2,770,864
Operating income (loss)                                        $        (4,911)             $         5,314             $        2,478               $         2,881
Identifiable assets                                            $ 1,632,061                  $187,433                    $ 248,573                    $2,068,068

                                                                                                                            ANNUAL REPORT 2006                          67
                                                               Millions of yen
                                                                        Japan                   Asia                 Corporate               Consolidated
     Sales to external customers                                        ¥293,660                  ¥38,137                  ¥       —            ¥331,798
     Intersegment sales                                                       1,559                    1,498                   (3,058)                      —
     Total sales                                                            295,220                 39,636                     (3,058)              331,798
     Operating expenses                                                     289,500                 39,363                     (3,132)              325,731
     Operating income                                                   ¥     5,720               ¥       272              ¥      73            ¥     6,066
     Identifiable assets                                                ¥187,808                  ¥19,083                  ¥42,411              ¥249,303

     Sales to overseas customers for the years ended December 31, 2006 and 2005 are summarized as follows:
     Millions of yen                                                          Thousands of U.S. dollars
                                    2006                                                                           2006
                                                         Sales to                                                                             Sales to
                 Asia               Other          overseas customers                    Asia                      Other                 overseas customers
            ¥ 48,580               ¥4,036             ¥ 52,616                       $407,861                   $33,889                     $441,750

     Millions of yen
                                                         Sales to
                 Asia               Other          overseas customers
            ¥ 41,194               ¥3,849             ¥ 45,044

     The Company and certain consolidated subsidiaries utilize                and trading companies with high credit ratings.
     derivative financial instruments primarily to hedge their                    Derivative transactions are controlled by the Finance
     exposure to fluctuation in foreign exchange rates. As a matter of        Department of the Company or the Administrative Section of
     policy, the Company and these consolidated subsidiaries do not           each consolidated subsidiary based on their internal rules.
     engage in derivatives trading for speculative purposes.                      Derivatives positions at December 31, 2006 and 2005 were
         The Company and certain consolidated subsidiaries do not             measured at fair value but unrealized gain/loss is deferred until
     anticipate nonperformance by any of the counterparties to such           the underlying hedged transactions become due or expire.
     transactions, all of whom are domestic financial institutions

     On February 9, 2007, the following appropriation of retained earnings was approved at a meeting of the Company’s Board of Directors:

                                                                                                                                          Thousands of
                                                                                                                Millions of yen           U.S. dollars

     Year-end cash dividends (¥5.00 [U.S.$0.04] per share)                                                                 ¥1,350                $ 11,340


                               ANNUAL REPORT 2006   69
     As of December 31, 2006


     Lion Chemical Co., Ltd.*                                             TAIWAN
     Manufacture and marketing of surfactants, detergents and raw         Lion Chemical Industry (Taiwan) Co., Ltd.*
     materials for diverse industrial products                            50, Cheng Tai Rd., Sec. 3, Wu Ku Hsiang, Taipei Hsien,
     Lion Business Service Co., Ltd.*                                     Taiwan, R.O.C.
     Real estate rental, dealing, brokerage management of                 Tel:+886-2-2291-1140~3
     employee welfare facilities
                                                                          HONG KONG
     Lion Hygiene Co., Ltd.*                                              Lion Home Products (International) Ltd.*
     Manufacture and marketing of institutional-use kitchen               21st Floor, Sing Pao Building, 101 King's Rd., North Point,
     cleaners, etc.                                                       Hong Kong, S.A.R., The People's Republic of China
     Lion Trading Co., Ltd.*                                              Tel:+852-2571-5022
     Marketing of industrial-use products related to household            THAILAND
                                                                          Lion Corporation (Thailand) Ltd.*
     Lion Packaging Co., Ltd.*                                            666 Rama 3 Rd., Yannawa, Bangkok 10120, Thailand
     Manufacture and marketing of synthetic resin containers, etc.        Tel:+66-2-294-0191
     Lion Engineering Co., Ltd.*                                          MALAYSIA
     Facility design, construction, and maintenance                       Southern Lion Sdn. Bhd.**
     Leo Field Promotions Co., Ltd.*                                      3, Jalan Firma 2, Tebrau, 81100 Johor Bahru, Johor, Malaysia
     Sales promotion-related activities                                   Tel:+60-7-354-6042
     Lion Field Marketing Co., Ltd.*                                      SINGAPORE
     Sales promotion-related activities                                   Lion Corporation (Singapore) Pte. Ltd.*
     Lion Logistics Service Company, Ltd.*                                221 Kallang Bahru, Lion Building, Singapore 339349
     Shipping and warehousing                                             Tel:+65-6296-6122

     Lion Dental Products Co., Ltd.*                                      INDONESIA
     Marketing of oral-care products                                      P.T. Lion Wings**
     Lion Cordial Support Co., Ltd.*                                      Jalan Inspeksi, Cakung Drain Timur No.1, Jakarta Timur
     Human resources services                                             13920, Indonesia
     Ipposha Oil Industries Co., Ltd.*
     Manufacture and marketing of surfactants, etc.                       CHINA
                                                                          Lion Daily Necessities Chemicals (Qingdao) Co., Ltd.*
     McCormick-Lion Limited*
     Manufacture and marketing of foods                                   No. 336 Taihangshan Rd., Qingdao Economic and Technical
                                                                          Development Zone, Qingdao City, Shangdong Province,
     Lion Akzo Co., Ltd**                                                 The People’s Republic of China
     Manufacture and marketing of fatty acid nitrogen derivatives, etc.
     Ketjen Black International Company**
                                                                          Lion Trading (Shanghai) Co., Ltd.*
     Manufacture and marketing of carbon black
                                                                          No. 50 Warehouse, No.389 Ying Lun Rd., Shanghai
     Calp Corporation**                                                   Waigaoqiao Free Trade Zone, Shanghai City,
     Manufacture and marketing of chemicals                               The People’s Republic of China
     Bristol-Myers Lion Ltd.**
                                                                          SOUTH KOREA
     Manufacture and marketing of pharmaceuticals
                                                                          CJ Lion Corporation*
     Planet, Inc.**                                                       11th Floor, Chungjeong Tower, 464, 3-ga, Chungjeong-ro,
     Utilization of VANs                                                  Seodaemun-ku, Seoul 120-723, Republic of Korea
     Planet Logistics Co., Ltd.**                                         Tel:+82-2-6363-1114
     Transport and storage of merchandise and finished products
                                                                          *    Consolidated subsidiaries
      NON-PROFIT ORGANIZATION                                             **   Affiliates accounted for by equity method

     The Lion Foundation for Dental Health
     Activities to promote good oral care habits

As of December 31, 2006

HEAD OFFICE                                                                ANNUAL MEETING OF SHAREHOLDERS
3-7, Honjo 1-chome, Sumida-ku,                                             The annual meeting of shareholders of Lion Corporation is
Tokyo 130-8644, Japan                                                      normally held in March each year in Tokyo, Japan.
Phone: +81-3-3621-6211
                                                                           WEB SITE INFORMATION
October 30, 1891

5,771 (consolidated)
2,494 (non-consolidated)


Issued and outstanding 299,115,346 shares

47,934                                                                     PRINCIPAL SHAREHOLDERS
                                                                                                                                      Number of shares owned Shareholding ratio
STOCK EXCHANGE LISTINGS                                                                        Shareholders                            (Thousands of shares)       (%)
                                                                           Trust & Custody Services Bank, Ltd. as trustee for
Tokyo Stock Exchange and Osaka Securities Exchange
                                                                           Mizuho Bank, Ltd. Retirement Benefit Trust Account
(Listed May 1949, Stock Code 4912)                                         re-entrusted by Mizuho Trust and Banking Co., Ltd.              15,038                  5.56
                                                                           The Bank of Tokyo-Mitsubishi UFJ, Ltd.                          12,109                  4.48
                                                                           Mizuho Corporate Bank, Ltd.                                     10,946                  4.05
Ernst & Young ShinNihon
                                                                           Mellon Bank Treaty Clients Omnibus                              10,896                  4.03
TRANSFER AGENT                                                             Tokio Marine & Nichido Fire Insurance Co., Ltd.                   6,443                 2.38
Mitsubishi UFJ Trust and Banking Corporation                               Mitsubishi UFJ Trust and Banking Corporation                      6,257                 2.31
4-5, Marunouchi 1-chome, Chiyoda-ku,                                       Mizuho Trust & Banking Co., Ltd.                                  6,189                 2.29

Tokyo 100-8212, Japan                                                      Sompo Japan Insurance Inc.                                        5,799                 2.14
                                                                           Meiji Yasuda Life Insurance Company                               5,382                 1.99
                                                                           The Dai-ichi Mutual Life Insurance Company                        4,500                 1.66
                                                                           1. In addition to the above, the Company holds 28,974,638 shares of treasury stock.
                                                                           2. The number of shares owned rounds odd lot certificates.
                                                                           3. The investment ratio is displayed after rounding off to two decimal places.

Stock Price (¥)                                                                                                                                     Topix
850                                                                                                                                                  2,500

800                                                                                                                                                  2,300

750                                                                                                                                                  2,100

700                                                                                                                                                  1,900

650                                                                                                                                                  1,700

600                                                                                                                                                  1,500

550                                                                                                                                                  1,300

500                                                                                                                                                  1,100

450                                                                                                                                                   900
400                                                                                                                                                   700
        1 2   3   4   5   6   7   8   9 10 11 12 1 2   3   4   5   6   7   8   9 10 11 12 1 2         3       4   5   6   7   8   9 10 11 12
      2004                                      2005                                     2006

                                                                                                                                   ANNUAL REPORT 2006                             71
                   This annual report was printed on 100% recycled paper with soy-based ink.

Lion Corporation                                                             Printed in Japan

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