Consol idated Financial Information 2006Year ended March 31, 2006

A N N U A L R E P O R T 2 0 0 6

Contents

1 Management’s Discussion and Analysis

14 Consolidated Balance Sheets

16 Consolidated Statements of Income

17 Consolidated Statements of Shareholders’ Equity

18 Consolidated Statements of Cash Flows

19 Notes to Consolidated Financial Statements

32 Independent Auditors’ Report

33 Six-Year Financial Summary

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Management’s Discuss ion and Analys is

Net Sales

In the fiscal year that ended on March 31, 2006 (fiscal2006), net sales increased 0.4% year-on-year to 196,119million yen. An analysis of sales by business segmentfollows.

Alcoholic Beverages and FoodsWith respect to the alcoholic beverages and foodssegment, our core business, the full-scale deregulationof alcoholic beverage retail licensing was introducedinto most regions in September 2003. This deregulationallowed a majority of major convenience stores andsupermarkets to obtain the alcoholic beverage retaillicensing. The changes in industry structure are progress-ing, and at the same time the population decrease isaccelerating, which makes the further intensifiedcompetition and pressure for lower pricing inevitablein the marketplace.

With the alcoholic beverages and foods market beingso competitive, the Takara Group has been striving tostrengthen its earning power by adding more value to itsalcoholic beverage products and by enhancing its profitmanagement. The Group is also entering into newmarket areas, such as the growing “home-meal replace-ment” market and shifting its foods business moretoward “functional foods” business. At the same time,the Group is continuing its efforts to cut down costs.

In fiscal 2006, sales to customers in the alcoholic bever-ages and foods segment decreased 1.1% year-on-yearto 176,107 million yen.

The breakdown of sales to customers in alcoholicbeverages and foods segment is as follows: • Shochu

79,588 million yen (100.3% of the previous year)• Sake

24,958 million yen (102.1% of the previous year) • Light-alcohol refreshers

20,045 million yen (92.7% of the previous year) • Other liquors

10,202 million yen (97.8% of the previous year)• Hon Mirin

16,115 million yen (102.9% of the previous year)• Other seasonings

4,751 million yen (104.6% of the previous year) • Beverages

12,319 million yen (86.6% of the previous year) • Raw alcohol

3,892 million yen (105.8% of the previous year) • Other

4,234 million yen (102.1% of the previous year)

BiomedicalThe biomedical segment is promoting its business bymaking the most of the biotechnologies that the Grouphas developed and accumulated over many years andby concentrating its management resources in the threebusiness sectors of genetic engineering research,genetic medicine and agribio business.

In the genetic engineering research sector, the Grouphas acquired Clontech Laboratories, Inc. of the UnitedStates, a manufacturer of research reagents, fromBecton, Dickinson and Company, in order to obtain saleschannels overseas, mainly in Europe and North America,further enhance the segment’s product lineup andimprove its research and development power. Thisacquisition brought in sales from the ClontechLaboratories’ products into the sector, which resultedin sales in the genetic engineering research sector farexceeding those of the previous year.

Sales in the gene medicine sector decreased slightlyfrom the last fiscal year. On the other hand, the agribiobusiness sector successfully increased its sales comparedto the previous fiscal year, thanks to significantlyincreased sales of a new product “Agar Drink (Calorie-Off)” that gained popularity along with the increase inhealth-consciousness of consumers as well as increasedsales of mushroom-related products from the launch ofhonshimeji sales.

In fiscal 2006, sales to customers in the biomedicalsegment increased 20.6% year-on-year to 16,490 millionyen.

The breakdown of sales to customers in the biomedicalsegment is as follows: • Research reagents

8,595 million yen (130.6% of the previous year) • Scientific instruments

2,784 million yen (95.3% of the previous year) • Contracted service and other

2,484 million yen (106.1% of the previous year) • Genetic engineering research sector

13,863 million yen (117.0% of the previous year)• Gene medicine sector

109 million yen (91.9% of the previous year) • Agribio sector

2,517 million yen (147.4% of the previous year)

Other OperationsOther operations are mainly comprised of printing,information and telecommunications, and rental realestate. Sales to customers from these operationsdecreased 2.7% from the previous fiscal year to 3,520million yen.

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Cost of Sales, Selling, General and AdministrativeExpenses, and Operating Income

Looking at the cost of sales and gross profit for fiscal2006, while net sales decreased 0.4% year-on-year, thecost of sales increased 0.9% as a result of escalatingprices of raw materials and an increase in cost of salesfrom the corporate acquisition. This resulted in grossprofit of 75,986 million yen, down 0.3% from the previousyear. Selling, general and administrative expensesincreased 1.8% from the year before to 70,062 millionyen. As a result of these factors, operating income infiscal 2006 decreased 20.0% year-on-year to 5,924 millionyen. Results by business segment are as follows.

Alcoholic Beverages and Foods The alcoholic beverages and foods segment is continu-ing to face a very severe business climate. Consumersare demanding lower-priced products, competition frombeer manufacturers is intensifying, and the drinkingpopulation in Japan is declining. The Takara Group,while suffering from stagnant sales growth, also faced arise in the cost of sales ratio due to higher purchaseprices of raw alcohol, which was caused by the world-wide skyrocketing price of crude oil. In addition, thederegulation of the alcoholic beverage retail licensingintensified the market competition, which necessitatedlarger spending for sales promotion activities. As a resultof all these factors, operating income amounted to 7,605million yen, which is 88.0% of that of the previous fiscalyear. The increase in sales promotion expenses over thepast several years is a result of strategic investment,which is necessary to secure the Group’s strong positionin the market where the deregulation and changes inindustry structure are progressing drastically. The Groupwill strive harder to control the overall promotion-relatedspending by being more selective in where to directsuch spending and put a brake on the tendency ofincreased spending.

BiomedicalThe biomedical segment has recorded operating lossesfor four consecutive fiscal years. In the fiscal year underreview, while the net sales and gross profit bothincreased thanks to acquisition of Clontech Laboratories,Inc., the cost of sales ratio increased due to recordingthe cost of inventories at market value incurred by theacquisition, and selling, general and administrativeexpenses also increased by consolidating ClontechLaboratories’ expenses. As a result of these factors,operating loss amounted to 1,476 million yen. Thebiomedical segment, however, is determined to expandits profit drastically in the future by aggressively investing

in research and development in such new fields as genetherapy and agribio, in addition to increasing profit byexpanding existing business models. Thus, the Group isconvinced that it is absolutely necessary to accelerateinvestments in R&D in the years to come.

Other OperationsOperating income in the other operations segment infiscal 2006 increased 9.4% year-on-year to 693 million yen.

Other Income and Expenses and Net Income

The other income in this fiscal year included, amongothers, a 1,609 million yen gain on sale of property, plantand equipment, and a 3,564 million yen gain resultingfrom changes in ownership in subsidiaries by conversionof bonds with stock acquisition rights that were issued byTakara Bio Inc. to purchase Clontech Laboratories, Inc.and from capital increase through public offering byViroMed Co., Ltd., our associate company accounted forby the equity method. As a result, despite that TakaraShuzo Co., Ltd. recorded the previous year’s salespromotional expense of 1,393 million yen as an extraor-dinary loss due to the introduction of sales promotionallowance, income before income taxes and minorityinterests came to 7,876 million yen. Details of salespromotion allowance are described in notes to consoli-dated financial statements.

Since there is no tax effect recognized for the gain onchanges in ownership, the income tax rate includingadjustments for income taxes paid decreased, resultingin a drastic increase in net income of 5,320 million,203.5% of that of the previous fiscal year.

Cash Flow

Net cash provided by operating activities amounted to6,211 million yen, a decrease of 1,278 million yen fromthe previous fiscal year after taking into account incomebefore income taxes and minority interests of 7,876million yen; depreciation and amortization of 5,910million yen; adjustment items such as gain on sales ofproperty, plant and equipment of 1,609 million yen (tonet cash provided by investing activities) and gain onchanges in ownership of 3,564 million yen; and adjust-ments of the increase/decrease in assets and liabilitiessuch as the introduction of sales promotion allowance of1,496 million yen.

Net cash used by investing activities was 12,687 millionyen, a year-on-year increase of 7,900 million yen. Whilethe cash outlay for acquisition of property, plant andequipment and intangible fixed assets decreased by2,557 million yen to 5,823 million yen, there was cash

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outlay of 7,126 million yen by Takara Bio Inc. forpurchase of subsidiary shares and capital due tochanging scope of consolidation.

Net cash provided by financing activities includedproceeds of 5,000 million yen from long-term loan, whichwas used to finance redemption of the same amount ofbonds. Also, the Group raised working capital of 11,000million yen through issuance of commercial paper, all ofwhich was redeemed by the end of fiscal 2006. AlthoughTakara Bio Inc. had cash inflow of 4,993 million yen fromproceeds from issuance of bonds with stock acquisitionrights this year, proceeds from investing activities for thisyear decreased, compared to the previous fiscal yearwhen Takara Bio had cash inflow of 7,477 million yenfrom proceeds from issuance of stocks.

These resulted in net cash provided by financingactivities of 344 million yen, a decrease of 4,703 millionyen year-on-year.

As a result of all the factors above, the balance of cashand cash equivalents at the end of the fiscal yeardecreased by 2,449 million yen year-on-year to 25,701million yen, in spite of a 3,448 million yen increase incash and cash equivalents from share exchanges due tochanging scope of consolidation.

Financial Position

Total assets at the end of fiscal 2006 increased by 21,693million yen year-on-year to 212,466 million yen. Themajor factors were an increase in assets due to consoli-dating Clontech Laboratories, Inc., whose total assetswere 9,784 million yen, and a 12,366 million yen increasein investment securities from unrealized gain reflectinga rise in stock prices.

Total liabilities increased by 7,070 million yen year-on-year to 98,333 million yen, mainly due to a 5,953 millionyen increase in deferred tax liabilities caused by anincrease of income taxes from unrealized gain oninvestment securities.

Minority interests increased by 2,262 million yen to12,293 million yen as a result of an increased ratio forminority interests from Takara Bio’s conversion of bondswith stock acquisition rights.

Shareholders’ equity increased by 12,360 million yenfrom the year before to 101,839 million yen, mainlythanks to an increase in retained earnings generated byincreased net income and unrealized gain on available-for-sale securities.

As a result of all these factors, the Group’s equity ratioincreased 1.0 percentage point year-on-year to 47.9%.

Medium-to-Long-Term Business Strategies

The Takara Group’s sixth medium-term business plan(covering the three years from April 2005 through March2008) contains the following basic business strategies.

• The Takara Shuzo Group should enhance the profitabil-ity of its core business, the domestic liquor business,while aggressively expanding its domestic non-liquorand overseas operations. The group should also makeefforts to evolve into a corporate group that can readilyadapt to changes in society.

• The Takara Bio Group should establish a stablefoundation of revenue by focusing on the threebusiness segments of genetic engineering research,gene medicine, and agribio business. At the sametime, the group should reform its business structure toestablish a solid foundation for future growth.

• The Takara Group should launch new operations suitedto an aging population and a declining birthrate thatcan grow into a new business foundation in the future.

• In accordance with the principles of corporate gover-nance, which has been promoted since the wholeGroup reorganized itself into a holding company, theTakara Group should enhance its corporate value byadapting effectively to changes in the commercialenvironment, including those related to revisions in theCommercial Law, and by strengthening its consolidat-ed business structure.

• The whole Group should enhance its corporate valueeven further by establishing a code of corporateethics, encouraging efforts to observe the law, main-taining its compliance system, and conducting activi-ties that benefit society, such as protecting theenvironment.

Analysis of Capital Resources and Liquidity

The Takara Group’s cash and cash equivalentsdecreased 2,449 million yen from the end of the previousfiscal year to 25,701 million yen. While the Group hadcash inflow of 4,993 million yen from proceeds fromTakara Bio’s issuance of bonds with stock acquisitionrights, the Group at the same time had cash outlays of5,000 million yen for redemption of bonds as well as a7,126 million yen cash outlay for purchase of subsidiaryshares and capital due to changing scope of consolida-tion, such as acquisition of Clontech Laboratories, Inc.In addition to this, the Group raised short-term workingcapital of 11,000 million yen through issuance of com-mercial paper, all of which was redeemed by the end ofthe fiscal year under review.

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The alcoholic beverages and foods segment plans toraise funds for future investments in property, plant andequipment internally or through issuance of bonds ifnecessary. Rating and Investment Information, Inc. (R&I)and Japan Credit Rating Agency, Ltd. (JCR) haveaffirmed A ratings on the Company’s outstanding bondsand assigned preliminary A ratings to the shelf registra-tion of the Company.

In addition, the Group has established commitment linestotaling 10,000 million yen with financial institutions, suchas banks, for its dynamic working capital.

The Biomedical segment also plans to finance internallyits investment in research and development and proper-ty, plant and equipment. However, it may be necessaryto raise funds some other way if there is a need forincreased funds in order to launch new operations andexpand its existing businesses.

Business Risks

The following are major potential risks to which theTakara Group (the Group and its affiliated companies)is exposed in business and other activities. In addition,conditions that may not become any risk are alsodescribed from the viewpoint of positive informationdisclosure to investors.

Upon identification of the possibility of such risks, theGroup will make the best efforts to avoid such occur-rence or take countermeasures against such occurrence.Please note that the following descriptions do not coverall of the risk factors concerning investment decisions.

Descriptions related to future occurrences are based onthe Group’s judgments as of the end of the fiscal yearended March 31, 2006.

(1) Risks concerning the alcoholic beverages and foodsbusiness and its business environment

<1> Risks concerning dependence on particular marketsand products More than 90% of sales of the Group’s alcoholic bever-ages and foods segment are generated inside Japan,and its market is highly vulnerable to changes in con-sumers’ tastes. The Group therefore is striving todevelop original products that meet the ever-changingtastes of consumers and unique products that differenti-ate the Group from competitors. However, changes inconsumers’ trends have been accelerating recently. Forthis reason, if the Group fails to offer attractive productsthat meet the consumers’ tastes and market trends, thebusiness growth and profitability will suffer and mayadversely affect the business performance and financial

situation. Furthermore, the Japanese population isgrowing older, with more aged people and less children,and it is said that the total population is beginning todecline. If this population decrease results in decline inliquor demand, the Group’s business may be adverselyaffected.

<2> Risks concerning market competition The removal of the supply-demand adjustment require-ment for alcoholic beverage retail licensing enforced inSeptember 2003 has changed the liquor distributionstructure drastically and prompted competing compa-nies to formulate and implement new price and productstrategies, which has intensified competition in themarketplace. In such a competitive business environ-ment, the Group is striving to face the challenges bycutting costs, developing and cultivating high-value-added products, strengthening brand power, andcarrying out sales activities that meet the changes indistribution channels. However, if the competitionincreases to a level that cannot be countered by thesemeasures and strategies, the Group’s performance andfinancial position may be adversely affected.

In addition, the Alcohol Business Law enforced in April2001 deregulated sales of industrial alcohol beginningApril 2006. While this law would enable the Group’s rawalcohol business to expand its sales into the industrialalcohol market, it may at the same time expose itsbusiness to competition from imported alcohol.

<3> Risks concerning dependence on particular plantsfor manufacturingMost of the Group’s alcoholic beverages are manufac-tured at the Fushimi Plant (Fushimi Ward, Kyoto City) andthe Matsudo Plant (Matsudo City, Chiba Prefecture), andthe Group is expanding the production lines in these twoplants. Therefore, in the event of a major earthquake orany other occurrence that prevents operations in anyof these areas, it may threaten to seriously affect themanufacture and supply of products, which may adverse-ly affect the Group’s business performance and financialposition. In addition, ethyl alcohol, a major raw materialused by the Group, is classified by the Fire Service Lawas a hazardous material, Class 4 (inflammable liquid,possessing a serious risk of starting and spreading a fire,which, once started, is hard to extinguish).

<4> Risks concerning fluctuations of raw material pricesThe Group’s procurement of raw materials could beaffected directly or indirectly by the climatic and eco-nomic conditions of the supplier countries and regions.Raw alcohol comes mainly from South America andAsian countries, and rice for sake and other products isprocured in Japan; therefore, the prices of these raw

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materials are influenced by weather conditions in these areas and the raw material market. Recently, the skyrock-eting market prices of crude oil and sugar have beenpushing up the purchase price of raw alcohol. Any hikein the procurement cost of raw materials beyond whatthe Group’s cost-cutting measures can cope with maycause deterioration in the Group’s price competitiveness and profitability, which in turn may adversely affect theGroup’s business performance and financial position.

<5> Risks concerning Japan’s legal regulations The alcoholic beverages business of the Group is subjectto regulations specified by the Liquor Tax Law governinglicenses for manufacturing and/or selling alcoholicbeverages and liquor taxes in Japan. In accordance withthe Liquor Tax Law, the Group has obtained, in additionto the license for the seller, the license for manufacturingeach type of product and for operating each manufac-turing plant from the relevant taxation office. In futurebusiness operation, the Group will continue to beregulated by the Liquor Tax Law, and any change to theliquor taxes rate may affect selling prices and sales trends.

<6> Risks concerning the social attitude toward drinkingIt has been said that drinking alcoholic beverages inmoderation generally relieves weariness, increases theappetite, eases stress, and works as a social lubricant.On the other hand, many problems in habitual drinkinghave been pointed out, such as intoxication, organdamage due to chronic drinking, alcoholism, under-agedrinking, and damage to the fetus owing to drinkingby pregnant women, none of which is seen in any otherbeverages or foods. Realizing these problems, theGroup, as an organization producing and sellingalcoholic beverages, is carrying out various activities tospread the idea of “controlled, moderate drinking”from the viewpoint of meeting its social responsibilitiesby helping to maintain and improve people’s health.If these alcohol-attributable problems become moreserious socially, the Group’s production and salesactivities may be affected or regulated, and the futuregrowth, the business performance, and the financialposition of the Group’s alcoholic beverages businessmay deteriorate.

(2) Risks concerning the biomedical business andthe environment of the business

<1> Risks concerning research and development activities In the biomedical business, the development of innova-tive new technologies leads to growth and a competitiveadvantage in the future; therefore, the Group placesgreat importance on research and development activi-ties and invests in such activities accordingly. However,there is no guarantee that the research and development

activities will advance as planned, and because clinicaldevelopment in the field of gene medicine takes a verylong time, it is also not guaranteed that any researchand development activities will bear satisfactory fruit ina timely manner. A delay in research and developmentactivities may adversely affect the business plan, thebusiness performance, and the financial position of theGroup’s biomedical business. Furthermore, there is noguarantee that the research and development activitiescurrently in progress will produce their expected results.Such a failure could hinder the Group from meeting itsplanned revenue making expectations.

<2> Risks concerning market competition Currently, the revenue base of the Group’s biomedicalbusiness is generated by genetic engineering research,whose major product is research reagents related tothe polymerase chain reaction (PCR *) method. Theseresearch reagents are manufactured and sold underlicenses by F. Hoffman – La Roche Ltd. and RocheMolecular Systems, Inc., but as these licenses are notexclusive and many companies are granted them,competition is increasingly intensified. Since, unlikemedical equipment, neither permission nor approvalis required for the manufacture and sale of scientificinstruments, entry into the market is relatively easy,and many enterprises are competing.

In the gene medicine sector, various genetic genetransfer methods and effective vectors have beendeveloped recently, and the applications of gene therapyare expanding from congenital diseases, infectiousdiseases, and various types of cancer to non-fatal chronicillnesses. Also, today, gene therapy is used to improvepatients’ quality of life (QOL) and not just to cure thediseases themselves. Thus, a potentially enormousmarket has opened up, which has resulted in manyenterprises investing in the research and development ofgene therapy, centering on Western venture businesses.

In the agribio business sector, the health food industry isbooming and many businesses, not just food manufac-turers but many pharmaceutical companies as well, areentering the rapidly growing market. Legal regulationsimpose restrictions on the descriptions of efficacies andeffects, and it is prohibited to use experimental datain sales promotions for differentiation. As a result, thismarket is easy for any company with no more thanmarketing abilities to enter, which is intensifying thecompetition. Under these market conditions, the Groupis striving to take every measure possible, including theenhancement of the research and development system,the start-up of new business projects, the early commer-cialization of projects in their research and developmentphase, the improvement of manufacturing facilities, and

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the enhancement of marketing abilities. However, ifthese measures fail to advance as planned or a competi-tor successfully commercializes a new technology beforethe Group does, the business plans, the businessperformance, and the financial position of the Groupmay be adversely affected. * PCR method: Polymerase chain reaction method (DNA

duplication using the polymerase chain reaction)

<3> Risks concerning dependence in manufacturingCurrently, the Group’s biomedical business dependsmostly on Takara Biotechnology (Dalian) Co., Ltd., aChinese subsidiary of the Takara Group, for manufactur-ing products related to the genetic engineering researchsector, which is the major source of revenue for thebiomedical business. Therefore, in the event of deterio-ration in security, a major earthquake, or any otheroccurrence that prevents operations in this region of thesubsidiary, the whole Group could lose most of itscapacity to manufacture the products concerned and thismay adversely affect the Group’s business performanceand financial position.

<4> Risks concerning legal regulations specific to thebiomedical business Research and development activities in genetic engi-neering are regulated by relevant legislations, such asthe Law Concerning Prevention from Radiation Hazardsdue to Radioisotopes, etc. and the Law Concerning theConservation and Sustainable Use of Biological Diversitythrough Regulations on the Use of Living ModifiedOrganisms, and the Group has to observe these lawsand regulations. In sales of research reagents, the Groupis also required to follow the Poisonous and DeleteriousSubstance Control Law. When these regulations aretightened or new regulations are enforced followingthe expansion of gene-related industries, however, theGroup’s business may be adversely affected. Researchreagents are not drugs defined by the PharmaceuticalAffairs Law, and therefore they are not regulated bythat law.

When launching the business of gene and cell therapiesor commercializing these therapies, the Group will besubject to relevant laws and regulations, such as thePharmaceutical Affairs Law. These laws and regulations,such as the Pharmaceutical Affairs Law, are targeted atsecuring the quality, effectiveness, and safety of drugs,quasi drugs, cosmetics, and medical instruments, andthe trading of these products requires obtainingapproval or permission from relevant authorities. Atpresent, it is uncertain whether or not the Group will begranted any necessary permission or approval based onthe Pharmaceutical Affairs Law for each project for whichit is carrying out research and development activities.

To start the gene diagnosis business, the Group hasto register as a sanitary inspection institute under theLaw for Clinical Laboratory Technicians and HealthLaboratory Technicians and observe the related lawsand regulations.

<5> Risks concerning intellectual property rightsIn the biomedical segment, where the success ofbusiness depends solely on the success of research anddevelopment, the Group regards securing intellectualproperty rights, including patents, as the critical factor,and it protects technologies developed in-house withpatent rights to prevent competitors from imitatingthem. The Group will continue placing the highestpriority on applications for patents in research anddevelopment activities. All of the applications are notalways registered, however, and when a registeredpatent is made invalid for any reason, or expires, theGroup’s business strategies or operational results maysuffer serious impact.

In addition, the Group is always mindful that, in bio-related industries with continuous cutthroat competitionin research and development, its technology guardedwith a patent right may be overridden at any time bya competitor’s development that is superior to its own.The Group is willing to acquire or buy licenses forpromising patent rights held by others, but this strategymay be very expensive or there is a possibility that theGroup may not be able to acquire licenses for necessarypatent rights.

(3) Risks shared by the whole Group

<1> Risks concerning impairment losses of investmentsecuritiesThe Group owns marketable securities. If their marketvalues fall drastically, the difference between theacquisition cost and market price is booked as a lossfor the fiscal year. Such a loss may adversely affect theGroup’s business performance and financial position.

<2> Risks concerning impairment accounting offixed assetsThe Group owns fixed assets. If the Group determinesthat an impairment loss should be recognized on anyfixed assets or asset group specified by the accountingstandard for impairment of fixed assets, the book valueof the asset or asset group in question is lowered to therecoverable price, and the difference is booked as a lossfor the fiscal year. Such a loss may adversely affect theGroup’s business performance and financial position.

<3> Risks concerning retirement benefit liabilities The Group calculates the cost of its employees’ retire-ment benefits and pension liabilities based on such

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preconditions as the discount rate used in actuarialcalculations and the expected return rate of pensionassets. If the actual results are different from the precon-ditions or the preconditions have been changed, theeffects are accumulated and regularly recognized in thefuture, and generally affect expenses recognized andliabilities booked in future periods. If the yield on theinvestment in pension asset management worsens, itmay adversely affect the Group’s performance andfinancial situations.

<4> Risks concerning overseas operations The Group’s operations include the manufacture andsale of merchandise in North America, Europe, andChina and other regions of Asia. If any of those countriesor regions experiences a drastic change in the conditionof their economies, politics, and/or their societies, orsuffers damage from a natural disaster, such as a majorearthquake, the demand for the Group’s products coulddeteriorate and/or production facilities might have tosuspend production. Such occurrences could seriouslyaffect the Group’s business plan and performance.

<5> Risks concerning fluctuations in exchange ratesLocal-currency-denominated items, including sales,expenses, and assets accounts, are translated to yen forthe purpose of the preparation of consolidated financialstatements. These items may be affected by theexchange rate at translation. The Group contractsforward exchanges and exchange hedging to minimizethe adverse effects caused by short-term fluctuations inexchange rates between the U.S. dollar and yen. In themedium to long term, however, the Group may fail toaccurately carry out procurement and sales activitiesas planned due to fluctuations in exchange rates.Therefore, fluctuations in exchange rates may adverselyaffect the business performance and the financialposition of the Group.

<6> Risks concerning product liabilitiesAll of the products developed and manufactured bythe Group are exposed to risks of compensations forproduct liabilities. If any defect is found during amanufacturing, selling or clinical testing process, or anyhealth impairment is caused by an alcoholic beverage,food, drug, or medical instrument in particular, theGroup may be subject to a product liability. Despiteinsurance contracts against compensations for productliabilities, it is uncertain whether or not the insurance willcover the full amount of the final compensation. A defectthat results in large-scale recalls or compensations forproduct liabilities not only causes a huge amount ofcosts but also affects the Group’s reputation, businessperformance, and financial position.

<7> Risks concerning legal regulationsThe Group is developing business in various nationsunder local governmental regulations, such as permis-sions for operations and investments, export restrictionsbecause of national security or other reasons, and tradeconditions, including tariff duties. The Group is alsosubject to legislation governing trade, monopoly, patents,consumers, taxation, foreign currency exchanges, andenvironmental and recycling issues. If the Group isunable to observe any of the legislative regulations, itsactivities may be restricted and a rise in costs may occur.

Also, as a corporation involved in the manufacture andsale of food products, the Group is maintaining businessfacilities, managing tools, containers, and packages, andcontrolling production processes and sales activities inaccordance with the provisions of the Food SanitationLaw. The Group observes the Food Sanitation Law andis taking extra care to control food hygiene. Food safetymatters, including food hygiene and such problems asintentional interference, are an unavoidable issue.Therefore, if any problem should arise related to thisissue, the business performance of the Group may beadversely affected.

Moreover, in sales of health foods, the Group is makingits best efforts to observe the provisions of thePharmaceutical Affairs Law for expressions and adver-tising of efficacies and effects and the directions forproper usage. Due to the general nature of health foods,however, the Group cannot completely rule out thepossibility of it violating any provision on mandatoryinformation. If any violation occurs within the Group,trust in the Group may deteriorate and the businessperformance of the Group may be adversely affected.

As the Group is also selling certain products on theInternet, the Group is subject to mandatory informationregulations based on the Specified CommercialTransactions Law.

<8> Risks concerning information control The Group retains personal information about numerousindividuals through, among other activities, salespromotion campaigns and mail order sales. The Groupis taking every precaution to prevent the leakage ofsuch information by establishing an information controlsystem, appointing personnel in charge of informationsecurity, conducting ongoing staff training, and takingother measures. However, the risk remains that someunexpected incidents could lead to the loss, leakage,or falsification of personal and other internal information.In such cases, the Group could lose its credibility amongthe general public, which may adversely affect theGroup’s business.

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<9> Risks concerning lawsuitsThe Group is striving to observe all the laws and regula-tions relevant to its business operations by enhancing itscompliance measures. However, as the Group conductsits business both in and outside Japan, there remains arisk of a third party filing a suit over such issues as theProduct Liability Law, intellectual property rights, or aclaim for compensation for an invention irrespective ofwhether or not the Group or its employees have violatedany law. If a court case were to be brought against theGroup, or if the court decision were to go against theGroup, the Group’s business performance and financialposition may be adversely affected.

Takeover Defense Guidelines: Policies on Response to Large-scale Purchases ofthe Company’s Shares

The following represents an English translation of theoriginal Japanese version of the Policies on Response toLarge-scale Purchases of the Company’s Shares, andis provided for the convenience of readers.

The Company, in order to maintain and increasecorporate value and, by extension, the joint benefit ofour shareholders (hereinafter “joint benefit of sharehold-ers”), has introduced the following policies (hereinafter“Plan”), to be implemented in response to any large-scale purchases of the Company’s share certificateswithout prior approval from the board of directors.

1. Initiatives to maintain and increase the joint benefitof shareholders of the Company

The Company and its group (hereinafter “Group”), inline with our corporate profile of contributing to thecreation of healthy lifestyles and a vital society inharmony with nature through fermentation technologiesand biotechnologies, is committed to contributing tosociety by seeking out new possibilities in culinaryculture, cultural life and the life sciences, and by continu-ing to create new value. This commitment is under-pinned by further developing our fermentationtechnologies of traditional Japanese sake brewing andour cutting-edge biotechnologies.

In 2000 the Group formulated the Takara Evolution-100(TE-100) long-term management concept covering 10years, and has engaged in raising corporate valuecontinually by progressing in five areas: business perfor-mance, business operations, management, corporateculture and human assets, and social and environmentalactions. Based on this long-term management concept,in 2002 the Takara Shuzo Group, focused on the alcoholicbeverages and foods business, and the Takara Bio

Group, focused on biomedical business, were restruc-tured to form a holding company which has allowedeach group to maintain its uniqueness and indepen-dence, while pursuing maximum business performance.

Under this management philosophy, we believe it isnecessary to rapidly develop the biomedical businesssegment while maintaining stable earnings growth fromthe alcoholic beverages and foods business. Accordingly,for the management of the Group’s business, it is criticalthat it develops the highest levels of specialized knowl-edge and extensive experience required by its twodifferent business models of the alcoholic beverages andfoods business and the biomedical business, the twopillars of the Group’s business operations, and theGroup also builds trust with its domestic and interna-tional stakeholders. We believe that these elements arethe foundation of the Group’s corporate value and willcontribute to increase the joint benefit of shareholders.

In light of these situations, our board of directorsbelieves that the establishment of a rational set of rulesthat ensures our shareholders have sufficient time andinformation to consider their response in the event of alarge-scale purchase of the Company’s share certificateswill contribute to the greater joint benefit of shareholders.

2. Objectives of introducing the PlanAs a publicly-traded company, the Company believesthat in principle the buying and selling of this Company’sshares should be left to the judgment of our sharehold-ers and investors, and that the decision as to whetheror not to sell shares to those seeking to control themanagement of this Company through the purchase ofour shares is, in the end, at the discretion of those whohold shares in the Company. Furthermore, even in theevent that a certain group of shareholders gains controlof the management of the Company, this action itselfmay not necessarily cause a loss in the joint benefit ofshareholders immediately or, on the contrary, it mayeven contribute to the maximization of the joint benefitof shareholders. In such an event, the Company will notoppose the efforts of a certain group of shareholders toacquire control of the management of the Company.

However, among those seeking to gain control of themanagement of the Company through a large-scalepurchase, there are those who seek to acquire theCompany’s shares just to abuse the system. Examplesinclude a set of individuals who, despite having no realinterest in the management of the Company, seek todrive up the price of the Company’s shares with theintention of forcing those connected with the Companyto buy them back at an inflated price (so-called “green

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mailer”). There are also cases of “two-tiered takeovers”in which an individual does not submit an offer for all ofthe Company’s shares during the first stage of purchase,but then seeks to coerce shareholders into selling theirshares by way of setting second-stage purchase termsthat are disadvantageous or unclear. In addition, evenif the purchase may not decrease the joint benefit ofshareholders in the manner described above, we believe,in the case of a transfer of a certain degree of manage-ment, that ensuring that shareholders are able to makean informed judgment—meaning that the shareholdershave the necessary information and sufficient time toconsider whether or not to sell the Company’s shares inresponse to the purchase—will contribute to the jointbenefit of shareholders.

Based on the list of shareholders of the Company as ofMarch 31, 2006 as well as the large holding report andthe change report received by the Company at present,regardless of whether or not they may be seeking tocontrol the management of the Company, there iscurrently no indication as to the existence of anyone whohas purchased or seeks to purchase our shares on a largescale to whom this plan may be applicable. However,in the future it is possible that such an individual mayappear. Accordingly, in accordance with the viewsexpressed above, we have introduced this Plan in orderto protect the joint benefit of shareholders from thepurchase that would clearly damage that benefit, andto ensure that our shareholders are able to make aninformed judgment as to whether or not to sell theirshares in response to a purchase that may incur thetransfer of the control of management.

3. Overview of the Plan

(1) Conditions for the application of the PlanThis Plan applies to situations where a specified share-holder group (Note 1) seeks to acquire a 20 percent-or-higher ratio of voting rights (Note 2) through a purchaseof the Company’s share certificates (Note 3), or wheresuch a purchase would have the effect of giving thespecified shareholder group a 20 percent-or-higher ratioof shareholder voting rights (hereinafter “large-scalepurchase”). Note that such purchases made with theexpressed prior approval of the board of directors areexempted from this definition.

In the event that this Plan is applied, those making alarge-scale purchase (hereinafter “large-scale purchaser”)must strictly abide by all the rules concerned with thelarge-scale purchase which are prescribed in the Plan(hereinafter “large-scale purchase rules”).

Large-scale purchase rules require that a large-scalepurchaser provides the Company’s board of directorswith sufficient information in advance, and commencesthe large-scale purchase only after a certain periodfor evaluation by the Company’s board of directorshas elapsed.

Note 1: “Specified shareholder group” shall be defined as: (1) any holder, as defined in the Securities Exchange Law

(Law No. 25 of April 13, 1948, including all amendmentsthereafter, hereinafter the same), Article 27-23, Paragraph1, including those considered to be a holder as definedin Paragraph 3 of the same article, or any joint holder, asdefined in the Securities Exchange Law, Article 27-23,Paragraph 5, including those considered to be a jointholder as defined in Paragraph 6 of the same article,of the Company’s share certificates (as defined in theSecurities Exchange Law, Article 27-23, Paragraph 1), or

(2) any person who purchases, as defined in the SecuritiesExchange Law, Article 27-2, Paragraph 1 and includingall exchanges taking place in a stock exchange, theCompany’s share certificates, as defined in the SecuritiesExchange Law, Article 27-2, Paragraph 1, or such aperson’s specially related person, as defined in theSecurities Exchange Law, Article 27-2, Paragraph 7.

This definition shall apply to all subsequent references.

Note 2: “Ratio of voting rights” shall be defined as:(1) In cases where the specified shareholder group corre-

sponds to Note 1 (1) above, it is the ratio of the numberof the Company’s share certificates held by a holder, asdefined in the Securities Exchange Law, Article 27-23,Paragraph 4. In such cases, the number of share certifi-cates held by any joint holders, as defined in the sameParagraph, will also be taken into consideration forcalculation.

(2) In cases where the specified shareholder group corre-sponds to Note 1 (2) above, it is the total of the ratio ofthe number of the Company’s share certificates held bythe one purchasing the Company’s shares and the ratioheld by any specially related persons, as defined in theSecurities Exchange Law, Article 27-2, Paragraph 8.

This definition shall apply to all subsequent references.

Note 3: “Share certificates” shall be either a share asdefined in the Securities Exchange Law, Article 27-23,Paragraph 1, or a share as defined in Article 27-2, Paragraph1 of the same law.

This definition shall apply to all subsequent references.

(2) Large-scale purchase rules

a. Provision for sufficient InformationWhen the large-scale purchase rules are applied, thelarge-scale purchaser must first submit to the Company’sboard of directors the name and address of the large-scale purchaser, its governing law of establishment, thename of a representative, contact information in Japan,as well as an overview of its purchase (hereinafter“purchase proposal”) and a statement of intent to abideby the large-scale purchase rules.

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Within five business days of receiving the statementof intent, the board of directors of the Company shalldeliver to the large-scale purchaser a list of informationregarding the large-scale purchaser him/herself and thepurchase proposal (hereinafter “necessary information”), as defined by items [1] through [6] below (hereinafter“necessary information list”), to be submitted by thelarge-scale purchaser. The purchaser must submit all ofthe necessary information contained in the necessaryinformation list, in writing, to the board of directors.

The board of directors shall disclose to shareholders anyor all parts of the necessary information submitted whichit concludes will assist shareholders in making aninformed judgment, in whatever manner the board ofdirectors deems appropriate.

1) Information regarding the large-scale purchaser andassociated groups

2) Trading conditions of the Company’s share certificates3) Purchase conditions of the purchase proposal 4) Basis for the calculation of purchase price of the

Company’s share certificates5) Proof of financial resources6) Management policies and business plans to be

implemented once the Company’s share certificateshave been acquired

The board of directors of the Company shall, in consulta-tion with unbiased external experts such as lawyers,certified public accountants and investment banks, fullyreview the necessary information and determine whetherthe necessary information submitted by the large-scalepurchaser meets the requirements of the necessaryinformation list, and whether it is sufficient for sharehold-ers to make an informed judgment.

Should the board of directors of the Company determinethat the necessary information submitted by the large-scale purchaser meets the requirements of the necessaryinformation list, and that it is sufficient for shareholdersto make an informed judgment, the board of directorsshall immediately disclose the receipt of the necessaryinformation in whatever manner the board of directorsdeems appropriate and inform the large-scale purchaser,and an evaluation period shall begin as of the day ofsuch disclosure (hereinafter “start date of the evaluationperiod”).

However, should the board of directors of the Companydetermine that the necessary information submitted bythe large-scale purchaser does not meet the require-ments of the necessary information list, or that it is notsufficient for shareholders to make an informed judg-ment, the board of directors may require the large-scalepurchaser to submit further information necessary so as

to meet the requirements of the necessary informationlist or provide information required to enable sharehold-ers to make an informed judgment (hereinafter “addi-tional necessary information”). In such a case, once theboard of directors of the Company determines that thelarge-scale purchaser has submitted such additionalnecessary information that would meet the requirement,the board of directors shall disclose this in whatevermanner it deems appropriate, and the date of suchdisclosure shall be taken as the start date of the evalua-tion period.

Furthermore, should the necessary information oradditional necessary information submitted by the large-scale purchaser contain any material false statements,the same measures as if the large-scale purchaser hadnot abided by the large-scale purchase rules may betaken.

b. Evaluation periodThe large-scale purchaser must provide a preset evalua-tion period, using the start date of the evaluation perioddescribed above as the starting date of the calculation,for the board of directors of the Company to, uponassessing the information provided by the purchaser,present an alternative proposal to the purchase proposalif the circumstances warrant, and for shareholders tohave sufficient time to make an informed judgment asto whether or not to sell their share certificates of theCompany in response to the purchase proposal. Thelarge-scale purchaser may not begin the large-scalepurchase until the day following the last day of theevaluation period.

More concretely, the evaluation period shall, dependingon how difficult it is to evaluate the purchase proposal,be set as below. Note that the board of directors of theCompany at its discretion may, depending on thepurchaser and the content of the purchase proposal,shorten the evaluation periods listed in items 1) and 2)below as it deems appropriate.

1) Takeover bid for all outstanding shares of theCompany, made in exchange for Japanese yen in cashonly: 60 days

2) Any large-scale purchases except those described in 1)above: 90 days

c. In the event that the purchase proposal is changedIf, after the start date of the evaluation period, anysignificant change is made to the purchase proposal(this purchase proposal incorporating these changes ishereinafter referred to as the “altered purchase propos-al”), the board of directors of the Company shall, inconsultation with unbiased external experts such aslawyers, certified public accountants and investment

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banks, compare the altered purchase proposal to theoriginal purchase proposal and determine whether itwould cause substantial harm to either the Companyor its shareholders.

If the board of directors, after comparing the alteredpurchase proposal to the original purchase proposal,determines that it would cause substantial harm toeither the Company or its shareholders, the large-scalepurchaser shall be required to submit to the Company allnecessary information pertaining to the altered purchaseproposal (in this case, only such necessary informationrelated to those changes which, in comparison to theoriginal purchase proposal, would cause substantialharm). The board of directors shall then disclose thereceipt of the altered purchase proposal and this dateshall mark the start date of a new evaluation periodwhose length shall be calculated as described in theabove section b.

However, if the board of directors determines that thealtered purchase proposal would not cause any greatersubstantial harm to either the Company or its share-holders than the original purchase proposal, then theevaluation period based on the prior and existing startdates of the evaluation period shall continue.

d. Compliance with the large-scale purchase rulesIf the large-scale purchaser observes the large-scalepurchase rules, submits the necessary information,including any additional necessary information, andobserves the evaluation period, the board of directorsof the Company shall not implement countermeasurescontained in this Plan, provided neither the large-scalepurchaser nor the purchase proposal matches any of thenumbered items listed below. Even if the board ofdirectors is opposed to the purchase proposal, it shalllimit itself to expressing its opposition, presentingalternative proposals, and making efforts to persuadeshareholders.

1) A large-scale purchase made in order to drive up theprice of the Company’s shares with the intention offorcing those connected with the Company to buythem back at an inflated price (so-called “greenmailer”) even though the purchaser has no interestin participating in the management of the Company

2) A large-scale purchase made with the intention oftaking temporary control of the management of theCompany, in order to transfer to the large-scalepurchaser or specified shareholder group theCompany’s intellectual property rights, know-how,confidential corporate information, or key clientsand customers that are necessary for the businessmanagement of the Company

3) A large-scale purchase made with the intention ofdiverting the assets of the Company to serve ascollateral or repayment of the large-scale purchaser’sor specified shareholder group’s debts after takingcontrol of the management of the Company

4) A large-scale purchase made with the intention oftaking temporary control of the management of theCompany, and through the sale or disposal of proper-ty, securities and other valuable assets which are notconnected to the business operations of the Companyfor a time, using the gain from such disposal to causetemporarily-high dividends, or with the intention oftaking advantage of a sudden surge in stock pricecaused by temporarily-high dividends to sell theCompany’s share certificates at the highest price

5) A large-scale purchase in which the purchaser does notsubmit an offer for all of the Company’s shares duringthe first stage of purchase, but then seeks to coerceshareholders into selling their shares by way of settingsecond-stage purchase terms that are disadvantageousor unclear (so-called “two-tiered takeovers”)

e. Implementation of countermeasuresIf the large-scale purchaser fails to abide by the large-scale purchase rules, or in the event that the purchaserabides by these rules but the board of directors of theCompany, in consultation with unbiased external expertssuch as lawyers, certified public accountants andinvestment banks, determines that the purchaser orpurchase proposal matches any of the situationsdescribed in the numbered items 1) through 5) above,then at the decision of the board of directors, thecountermeasures detailed in section f shall beimplemented immediately.

f. Details of countermeasuresThe board of directors of the Company may takecountermeasures, including allocation of free stockacquistition rights, and any other measures allowed bycurrent legislation and the articles of incorporation ofthis Company. The actual type of countermeasures andtheir conditions shall be selected as appropriate at thattime. Note that the board of directors shall, even afterthe implementation of these countermeasures, discon-tinue the countermeasures by means permissible by law,upon the receipt of the necessary information or thealtered purchase proposal from the large-scale purchas-er which lead to the determination that the large-scalepurchase will contribute to an increase in the jointbenefit of shareholders, or the purchaser retracts his/herattempt for large-scale purchase, so that the implemen-tation of these countermeasures is no longer necessary.

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Note that in the event that free stock acquistition rightsare allocated as a countermeasure, the allocation of suchstock acquistition rights to our shareholders shall takeplace as described below in Section (3), Overview ofstock acquistition rights.

(3) Overview of stock acquistition rightsIf free stock acquistition rights are allocated as a counter-measure, the allocation of such stock acquistition rightsto our shareholders (hereinafter “stock acquistitionrights”) shall be defined as described in the numberedlist given below. Note that the definitions given belowmay be subject to change, based on the circumstanceswhen stock acquistition rights are allocated.

1) Intended recipients of stock acquistition rightsIn the event that this Company’s board of directorsdecides to allocate stock acquistition rights, it shallimmediately set the reference date, based on Article124 of the Company Law (hereinafter “allocationreference date”). Those who are registered or recordedin the list of shareholders or the list of substantialshareholders as of the allocation reference date shall beallocated one stock acquistition rights per share thatthey hold.

2) Total number of stock acquistition rightsThe upper limit shall be the total number of outstandingshares issued as of the allocation reference date, lessthe treasury stocks as of the same date.

3) Date that the allocation of stock acquistition rightsbecomes effective

The date that the allocation of stock acquistition rightsbecomes effective shall be set by the board of directorsin a separate decision.

4) Type and number of shares for the purpose of stockacquistition rights

The type of shares for the purpose of stock acquistitionrights shall be common stocks of the Company, andeach stock acquistition rights entitles the holder tosubscribe for one common stock. Note that should theCompany’s shares be split or consolidated, stockacquistition rights shall be adjusted by using the methoddecided by the board of directors of the Company forthe allocation of free stock acquistition rights.

5) Required payment to exercise stock acquistition rightsThe payment required in order to exercise stock acquisti-tion rights shall be one Japanese yen or greater percommon stock whose amount shall be set by the boardof directors of the company.

6) Conditions of the exercise of stock acquistition rightsThe large-scale purchaser, specified shareholder group,or any person who acquires stock acquistition rights fromthe large-scale purchaser or specified shareholder group

without obtaining the approval of the board of directors,may not exercise these stock acquistition rights.

7) Transfer of stock acquistition rightsThe approval of the board of directors is required for anytransfer of stock acquistition rights.

8) Period for the exercise of stock acquistition rightsThe period for exercise of stock acquistition rights shallbe set by the board of directors in its decision ofallocating free stock acquistition rights, but within twomonths from the date when the board of directorsdecides to allocate free stock acquistition rights (here-inafter “period for exercise”). Note that if the last day ofthe period for exercise falls on a day that the places ofpayment are closed, then the following business dayshall be considered the last day.

9) Clause for acquisition of stock acquistition rightsA clause may be added to stock acquistition rights bywhich the Company may acquire all of free stockacquistition rights on or after a date set by the board ofdirectors in a separate decision, up to the day prior tothe start of the period for exercise (“acquisition clause”).

In addition, a clause may be added to stock acquistitionrights to the effect that, under and subject to certaincauses, the Company may acquire stock acquistitionrights in exchange for the Company’s common stocks(“acquisition clause”).

10) Issuance of stock acquistition rights certificatesstock acquistition rights certificates shall only be issuedwhen requested by the holder of stock acquistitionrights.

11) OthersAll other necessary details shall be determined by theboard of directors of the Company when the decision toallocate free stock acquistition rights is taken.

4. Effects on Shareholders and Investors

(1) Effect of the Plan on shareholders and investors atthe time of introduction

Since there is no intention to allocate free stock acquisti-tion rights when this Plan is introduced, there will be noeffect on the rights of shareholders and investors at thetime of introduction.

(2) Effect on shareholders and investors when thesecountermeasures are implemented

If stock acquistition rights are allocated as the imple-mentation of these countermeasures, then all thoseregistered or recorded in the list of shareholders as ofthe allocation reference date shall be allocated stockacquistition rights in proportion to the number of sharesthey hold.

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If those shareholders who receive an allocation do nottake the necessary steps to exercise the rights withinthe preset period for exercise, then their proportion ofvoting rights will decrease due to other shareholdersexercising their stock acquistition rights. Note that ifthe Company’s common stocks are issued as the resultof the acquisition clause that allows the acquisitionin exchange for the Company’s common stocks, thedecrease in proportion of voting rights will not occur.

The Company will provide shareholders with thenecessary information on the processes and proceduresinvolved in the implementation of countermeasurescontained in this Plan. However if, after the decision toallocate free stock acquistition rights is made, thisallocation is carried out, and the Company acquires freestock acquistition rights without issuing the Company’sshares to the holder of stock acquistition rights up tothe day before the start of the period for exercise ofstock acquistition rights due to such reasons as thelarge-scale purchaser retracting his/her purchase, thenthe Company’s share price may change sharply. We askthat all shareholders be aware of this point.

(3) Necessary procedures for shareholders when thesecountermeasures are implemented

In the event that allocation of free stock acquistitionrights is implemented as a countermeasure, the alloca-tion reference date will be announced, and free stockacquistition rights will be allocated to the shareholdersas of the allocation reference date, as described above.It is therefore necessary for shareholders to completethe transfer of shares procedures as quickly as possible.Note that the transfer of shares procedures is notrequired for shareholders using the Japan SecuritiesDepository Center. Shareholders do not need to applyfor the allocation of free stock acquistition rights. Allthose registered or recorded in the list of shareholdersor the list of substantial shareholders as of the allocationreference date automatically become eligible for stockacquistition rights on the date that the allocation offree stock acquistition rights becomes effective.

Please note that in the event that the issuance of stockacquistition rights through shareholder allocation isimplemented as a countermeasure, the Company orits securities agent shall send all shareholders as of theallocation reference date application forms for stockacquistition rights. Those shareholders wishing to receivean allocation of stock acquistition rights must fill in thenecessary fields in the stock acquistition rights applica-tion form and then receive their stock acquistition rightscertificates and exercise their stock acquistition rights.

At the first board of directors meeting held after theconclusion of each fiscal year’s annual meeting ofshareholders (the meeting made up of directors electedby the shareholders at each fiscal year’s annual meetingof shareholders), it shall decide whether or not tocontinue this Plan, and if it is decided to continue, theboard of directors reviews and decides the details ofthe Plan.

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Thousands ofMillions of Yen U.S. Dollars (Note 1)

2006 2005 2006

ASSETSCURRENT ASSETS:Cash and cash equivalents ¥ 25,701 ¥ 28,151 $ 219,666Time deposits 677 538 5,786Marketable securities (Note 3) 695 613 5,940Notes and accounts receivable:

Trade 51,335 49,535 438,760Unconsolidated subsidiary and associated companies 330 332 2,820Other 1,411 1,178 12,059Allowance for doubtful accounts (116) (205) (991)

Inventories (Notes 4 and 7) 25,188 23,724 215,282Deferred tax assets (Note 12) 2,288 1,568 19,555Prepaid expenses and other current assets 1,057 765 9,034

Total current assets 108,569 106,202 927,940

PROPERTY, PLANT AND EQUIPMENT (Notes 5 and 6):Land 14,003 13,833 119,683Buildings and structures 41,050 39,542 350,854Machinery, equipment and vehicles 74,044 72,017 632,854Tools, furniture and fixtures 13,113 12,463 112,076Construction in progress 359 151 3,068

Total 142,571 138,008 1,218,555Accumulated depreciation (90,524) (86,124) (773,709)

Net property, plant and equipment 52,046 51,884 444,837

INVESTMENTS AND OTHER ASSETS:Investment securities (Note 3) 33,412 21,852 285,572Investments in and advances to unconsolidated subsidiaryand associated companies 4,140 3,338 35,384

Goodwill 3,186 229 27,230Consolidation goodwill 69Deferred tax assets (Note 12) 1,719 1,796 14,692Other assets 9,391 5,399 80,264

Total investments and other assets 51,850 32,685 443,162TOTAL ¥212,466 ¥190,773 $1,815,948

See notes to consolidated financial statements.

Consol idated Balance Sheets

Takara Holdings Inc. and Consolidated SubsidiariesMarch 31, 2006 and 2005

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Thousands ofMillions of Yen U.S. Dollars (Note 1)

2006 2005 2006

LIABILITIES AND SHAREHOLDERS’ EQUITYCURRENT LIABILITIES:Short-term bank loans (Note 6) ¥ 4,650 ¥ 4,875 $ 39,743Current portion of long-term debt (Note 6) 144 5,057 1,230Notes and accounts payable:

Trade 15,868 14,724 135,623Unconsolidated subsidiary and associated companies 69 530 589Construction and other 3,103 2,811 26,521

Liquor taxes payable (Note 7) 8,852 9,579 75,658Accrued income taxes 1,598 2,264 13,658Accrued expenses 6,866 6,862 58,683Allowance for accrued sales promotion expenses 1,496 12,786Other current liabilities 2,956 2,503 25,264

Total current liabilities 45,605 49,207 389,786

LONG-TERM LIABILITIES:Long-term debt (Note 6) 25,590 21,495 218,717Liability for retirement benefits (Note 8) 8,870 8,230 75,811Deposits from customers 7,506 7,483 64,153Deferred tax liabilities (Note 12) 10,524 4,570 89,948Other 236 275 2,017

Total long-term liabilities 52,728 42,056 450,666

MINORITY INTERESTS 12,293 10,030 105,068

CONTINGENT LIABILITIES (Note 14)

SHAREHOLDERS’ EQUITY (Notes 9 and 17):Common stock, authorized, 870,000,000 shares in 2006 and 400,000,000 shares in 2005; issued, 217,699,743 shares 13,226 13,226 113,042

Capital surplus 3,205 3,158 27,393Retained earnings 72,113 68,510 616,350Unrealized gain on available-for-sale securities 13,902 6,936 118,820Foreign currency translation adjustments 321 (859) 2,743Treasury stock, at cost—1,201,317 shares in 2006 and 2,063,508 shares in 2005 (930) (1,493) (7,948)

Total shareholders’ equity 101,839 89,478 870,418TOTAL ¥212,466 ¥190,773 $1,815,948

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Thousands ofMillions of Yen U.S. Dollars (Note 1)

2006 2005 2006

NET SALES (Notes 10 and 18) ¥196,119 ¥195,359 $1,676,230COST OF SALES (Notes 7, 10 and 18) 120,132 119,114 1,026,769

Gross profit 75,986 76,244 649,452

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Notes 11 and 18) 70,062 68,841 598,820

Operating income 5,924 7,402 50,632

OTHER INCOME (EXPENSES):Interest and dividend income (Note 10) 342 258 2,923Grant received for research and development 202 135 1,726Gain on sales of property, plant and equipment 1,609 1,133 13,752Gain resulting from changes in ownership in subsidiaries 3,564 2,310 30,461Gain on sales of investment securities (Note 3) 18 895 153Interest expense (523) (557) (4,470)Loss on disposals of inventories (352) (514) (3,008)Loss on disposals of property, plant and equipment (730) (984) (6,239)Loss on impairment of long-lived assets (Note 5) (3,469)Loss on write-down of investment securities (674) (18) (5,760)Provision for sales promotion expenses for prior year (1,393) (11,905)Other, net (109) 222 (931)

Other income (expenses), net 1,951 (588) 16,675

INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 7,876 6,813 67,316

INCOME TAXES (Note 12):Current 3,446 3,807 29,452Deferred (634) 539 (5,418)

Total income taxes 2,811 4,347 24,025

MINORITY INTERESTS IN NET LOSS 256 147 2,188

NET INCOME ¥ 5,320 ¥ 2,614 $ 45,470

Yen U.S. Dollars

PER SHARE OF COMMON STOCK (Notes 2.q and 16):Basic net income ¥24.39 ¥11.74 $0.20Cash dividends applicable to the year 9.00 7.50 0.07

See notes to consolidated financial statements.

Consol idated Statements of Income

Takara Holdings Inc. and Consolidated SubsidiariesYears ended March 31, 2006 and 2005

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Thousands Millions of Yen

Outstanding Unrealized Foreign Number of Gain on Currency TreasuryShares of Common Capital Retained Available-for-sale Translation Stock,

Common Stock Stock Surplus Earnings Securities Adjustments At Cost

BALANCE AT APRIL 1, 2004 215,795 ¥ 13,226 ¥ 3,158 ¥ 67,601 ¥ 6,378 ¥ (971) ¥(1,386)Net income 2,614Cash dividends, ¥7.5 per share (1,624)Bonuses to directors and corporate auditors (72)

Net increase of treasury stock (159) (8) (106)Net increase in unrealized gain on available-for-sale securities 557

Net increase in foreign currency translation adjustments 111

BALANCE AT MARCH 31, 2005 215,636 13,226 3,158 68,510 6,936 (859) (1,493)Net income 5,320Cash dividends, ¥7.5 per share (1,623)Bonuses to directors and corporate auditors (93)

Net decrease of treasury stock 862 47 562Net increase in unrealized gain on available-for-sale securities 6,966

Net increase in foreign currency translation adjustments 1,180

BALANCE AT MARCH 31, 2006 216,498 ¥13,226 ¥3,205 ¥72,113 ¥13,902 ¥ 321 ¥ (930)

Thousands of U.S. Dollars (Note 1)

Unrealized Foreign Gain on Currency Treasury

Common Capital Retained Available-for-sale Translation Stock, Stock Surplus Earnings Securities Adjustments At Cost

BALANCE AT MARCH 31, 2005 $ 113,042 $ 26,991 $ 585,555 $ 59,282 $ (7,341) $(12,760)Net income 45,470Cash dividends, $0.06 per share (13,871)Bonuses to directors and corporate auditors (794)

Net decrease of treasury stock 401 4,803Net increase in unrealized gain on available-for-sale securities 59,538

Net increase in foreign currency translation adjustments 10,085

BALANCE AT MARCH 31, 2006 $113,042 $27,393 $616,350 $118,820 $ 2,743 $ (7,948)

See notes to consolidated financial statements.

Consol idated Statements of Shareholders ’ Equity

Takara Holdings Inc. and Consolidated SubsidiariesYears ended March 31, 2006 and 2005

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Thousands ofMillions of Yen U.S. Dollars (Note 1)

2006 2005 2006OPERATING ACTIVITIES:Income before income taxes and minority interests ¥ 7,876 ¥ 6,813 $ 67,316Adjustments for:

Income taxes paid (4,765) (4,342) (40,726)Depreciation and amortization 6,755 6,393 57,735Loss on impairment of long-lived assets 3,469Provision for retirement benefits 591 229 5,051Reversal of allowance for doubtful accounts receivables (17) (119) (145)Increase in allowance for accrued sales promotion expenses 1,496 12,786Loss on disposals of property, plant and equipment 730 984 6,239Loss on write-down of investment securities 674 18 5,760Gain on sales of property, plant and equipment (1,609) (1,133) (13,752)Gain on sales of investment securities (18) (895) (153)Gain resulting from changes in ownership in subsidiaries (3,564) (2,310) (30,461)Equity in earnings of associated companies 22 (51) 188Changes in assets and liabilities, net of effects from newly consolidated subsidiaries:

(Increase) decrease in trade receivables (555) 920 (4,743)(Increase) decrease in inventories (24) 402 (205)Decrease in interest and dividend receivable 21 19 179(Increase) decrease in other current assets (297) 194 (2,538)Decrease in trade payables (462) (976) (3,948)Decrease in liquor taxes payable (727) (637) (6,213)Increase (decrease) in consumption taxes payable 387 (764) 3,307

Other, net (303) (724) (2,589)Total adjustments (1,664) 675 (14,222)Net cash provided by operating activities 6,211 7,489 53,085

INVESTING ACTIVITIES:Proceeds from sales of property, plant and equipment 1,801 1,459 15,393Proceeds from sales of investment securities 21 1,569 179Proceeds from sales of investments in subsidiaries 930Purchases of property, plant and equipment (5,086) (7,523) (43,470)Purchases of investment securities (443) (111) (3,786)Increase in time deposits, net (48) (178) (410)Purchases of investments in subsidiaries and associated companies (239) (20) (2,042)Payment for purchases of Clontech Laboratories, Inc. and Takara Bio Farming Center Inc., net of cash acquired (7,126) (60,905)

Other, net (1,565) (912) (13,376)Net cash used in investing activities (12,687) (4,786) (108,435)

FINANCING ACTIVITIES:Decrease in short-term bank loans, net (225) (422) (1,923)Proceeds from long-term loans 5,000 42,735Repayments of long-term loans (818) (298) (6,991)Redemption of bonds (5,000) (42,735)Proceeds from issuance of convertible bonds 4,993 42,675Proceeds from issuance of stock to minority shareholders 620 7,477 5,299Proceeds from issuance of commercial paper 11,000 10,000 94,017Redemption of commercial paper (11,000) (10,000) (94,017)Repurchase of treasury stock (2,490) (67) (21,282)Repurchase of treasury stock by a consolidated subsidiary (363) (3,102)Cash dividends paid (1,662) (1,647) (14,205)Other, net 288 5 2,461

Net cash provided by financing activities 344 5,047 2,940FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS 232 (37) 1,982NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,898) 7,713 (50,410)CASH AND CASH EQUIVALENTS OF NEWLY CONSOLIDATED SUBSIDIARY 3,448 29,470CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 28,151 20,437 240,606CASH AND CASH EQUIVALENTS, END OF YEAR ¥ 25,701 ¥ 28,151 $ 219,666NON-CASH INVESTING AND FINANCING ACTIVITIES:

ASSETS ACQUIRED AND LIABILITIES ASSUMED BY CONSOLIDATION OF KAWAHIGASHI SHOJI CO., LTD. (See Note 9):

CURRENT ASSETS ACQUIRED ¥ 4,228 $ 36,136PROPERTY, PLANT AND EQUIPMENT ACQUIRED ¥ 705 $ 6,025CURRENT LIABILITIES ASSUMED ¥ 1,622 $ 13,863LONG-TERM LIABILITIES ASSUMED ¥ 63 $ 538

CONVERSION OF CONVERTIBLE BONDS ISSUED BY CONSOLIDATED SUBSIDIARY, TAKARA BIO INC. ¥ 5,000 $ 42,735

As a result of the above conversion, minority interest increased by ¥2,622 million ($22,410 thousand), retained earnings increased by ¥2,392 million ($20,444 thousand) and other component of shareholders’ equity decreased by ¥15 million ($128 thousand).

(Additional Information)Assets acquired and liabilities assumed by Takara Bio Inc., as a result of acquisition of Clontech Laboratories, Inc. and an increase in ownership inTakara Bio Farming Center Inc., are as follows:

Consol idated Statements of Cash F lows

Takara Holdings Inc. and Consolidated SubsidiariesYears ended March 31, 2006 and 2005

Thousands ofMillions of Yen U.S. Dollars (Note 1)

Current assets acquired ¥ 1,919 $ 16,401Property, plant and equipment acquired 6,947 59,376Current liabilities assumed (602) (5,145)Long-term liabilities assumed (1,112) (9,504)Consolidation goodwill 17 145Foreign currency translation adjustments (36) (307)Cash paid for the capital ¥ 7,132 $ 60,957See notes to consolidated financial statements.

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Notes to Consol idated F inancia l Statements

Takara Holdings Inc. and Consolidated SubsidiariesYears ended March 31, 2006 and 2005

1. BASIS OF PRESENTING THE CONSOLIDATED FINANCIAL STATEMENTS

The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in theJapanese Securities and Exchange Law and its related accounting regulations, and in conformity with accounting principlesgenerally accepted in Japan, which are different in certain respects as to application and disclosure requirements ofInternational Financial Reporting Standards.

In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to theconsolidated financial statements issued domestically in order to present them in a form which is more familiar to readersoutside Japan. In addition, certain reclassifications have been made in the 2005 financial statements to conform to theclassifications used in 2006.

The consolidated financial statements are stated in Japanese yen, the currency of the country in which Takara Holdings Inc.(the “Company”) is incorporated and operates. Japanese yen figures less than a million yen are rounded down to the nearestmillion yen, except for per share data. The translations of Japanese yen amounts into U.S. dollar amounts are includedsolely for the convenience of readers outside Japan and have been made at the rate of ¥117 to $1, the approximate rate ofexchange at March 31, 2006. U.S. dollar figures less than a thousand dollars are rounded down to the nearest thousand dollar,except for per share data. Such translations should not be construed as representations that the Japanese yen amounts couldbe converted into U.S. dollars at that or any other rate.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Consolidation-The consolidated financial statements as of March 31, 2006 include the accounts of the Company and its29 significant (25 in 2005) subsidiaries (together, the “Group”). Under the control or influence concept, those companiesin which the Company, directly or indirectly, is able to exercise control over operations are fully consolidated, and thosecompanies over which the Group has the ability to exercise significant influence are accounted for by the equity method.

Investments in seven (eight in 2005) associated companies are accounted for by the equity method. Investments in theremaining unconsolidated subsidiary and associated companies are stated at cost. If the equity method of accounting hadbeen applied to the investments in these companies, the effect on the accompanying consolidated financial statementswould not be material.

The difference of the cost of an acquisition from the fair value of the net assets of the acquired subsidiary at the date ofacquisition is being amortized over a period of five years.

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

b. Cash Equivalents-Cash equivalents are short-term investments that are readily convertible into cash and that are exposedto insignificant risk of changes in value. Cash equivalents include time deposits, certificate of deposits, trust fund investmentsand commercial paper, all of which mature or become due within three months of the date of acquisition.

c. Marketable and Investment Securities-Marketable and investment securities are classified and accounted for, dependingon management’s intent, as follows:

i) held-to-maturity debt securities, which are expected to be held to maturity with the positive intent and ability to hold tomaturity are reported at amortized cost and ii) available-for-sale securities, which are not classified as the aforementionedsecurities, are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separatecomponent of shareholders’ equity.

Non-marketable available-for-sale securities are stated at cost determined by the moving-average method.

For other than temporary declines in fair value, investment securities are reduced to net realizable value by a charge to income.

d. Inventories-Inventories are stated principally at cost, determined by the average method.

e. Property, Plant and Equipment-Property, plant and equipment are stated at cost. Depreciation is computed principally bythe declining-balance method at rates based on the estimated useful lives of the assets. The range of useful lives is principallyfrom 3 to 50 years for buildings and structures and from 4 to 15 years for machinery, equipment and vehicles.

f. Goodwill-The Company, its domestic subsidiaries and an overseas subsidiary record goodwill as cost in excess of the netassets of the acquired company and amortize goodwill by the straight line method. Accounting of impairment of long-livedassets also applies to goodwill.

The Company’s consolidated subsidiary in the U.S. records goodwill according to Financial Accounting Standards BoardStatement No. 142 Goodwill and Other Intangible Assets. The U.S. subsidiary records goodwill as excess of the purchaseprice over the fair value of the enterprise, which is tested for impairment at least annually at reporting unit level.

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g. Long-lived assets-In August 2002, the Business Accounting Council (BAC) issued a Statement of Opinion, Accounting forImpairment of Fixed Assets, and in October 2003 the Accounting Standards Board of Japan (ASBJ) issued ASBJ GuidanceNo.6, Guidance for Accounting Standard for Impairment of Fixed Assets. These new pronouncements were effective for fiscalyears beginning on or after April 1, 2005 with early adoption permitted for fiscal years ending on or after March 31, 2004.

The Company and its domestic subsidiaries adopted the new accounting standard for impairment of fixed assets as of April 1,2004. The Company and its domestic subsidiaries review their long-lived assets for impairment whenever events or changes incircumstances indicate the carrying amount of an asset or asset group may not be recoverable. An impairment loss would berecognized if the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expectedto result from the continued use and eventual disposition of the asset or asset group. The impairment loss would be mea-sured as the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of thediscounted cash flows from the continued use and eventual disposition of the asset or the net selling price at disposition.

h. Retirement and Pension Plans-Each of the employees’ retirement benefits programs of the Company and certain consoli-dated subsidiaries consists of an unfunded lump-sum severance payment plan and a non-contributory trusteed pension planas described in Note 8.

The Group accounted for the liability for retirement benefits based on the projected benefit obligations and plan assets atthe balance sheet date.

Retirement benefits to directors, corporate auditors and executive officers are provided at the amount which would berequired if all directors, corporate auditors and executive officers retired at the balance sheet date.

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

j. Allowance for Accrued Sales Promotion Expenses-An allowance for accrued sales promotion expenses is stated at amountsconsidered to be appropriate based on the purchased quantities of finished products by retail stores, identified by TakaraShuzo Co., Ltd., consolidated subsidiary, multiplied by the past year actual unit cost of the relevant product.

(Additional information)Sales promotion expenses were previously charged to income when the amount payable was determined. It was decided torecord an allowance for accrued sales promotion on expenses, since the system and the procedures to reasonably estimatesuch amount incurred have been developed for the year ended March 31, 2006. The effect of this accounting provision wasto decrease operating income by ¥102 million ($871 thousand) and to decrease income before income taxes and minorityinterests by ¥1,496 million ($12,786 thousand) for the year ended March 31, 2006.

k. Leases-All leases are accounted for as operating leases. Under Japanese accounting standards for leases, finance leasesthat deem to transfer ownership of the leased property to the lessee are to be capitalized, while other finance leases arepermitted to be accounted for as operating lease transactions if certain “as if capitalized” information is disclosed in thenotes to the lessee’s consolidated financial statements.

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

m. Appropriations of Retained Earnings-Appropriations of retained earnings are reflected in the consolidated financialstatements for the following year upon shareholders’ approval.

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

o. Foreign Currency Financial Statements-The balance sheet accounts of the consolidated foreign subsidiaries are translatedinto Japanese yen at the current exchange rate as of the balance sheet date except for shareholders’ equity, which istranslated at the historical rate. The resulting translation differences less those attributable to minority interests are shown as“Foreign currency translation adjustments” in a separate component of shareholders’ equity. Revenue and expense accountsof consolidated foreign subsidiaries are translated into yen at the average exchange rate.

p. Derivative Financial Instruments-The Group uses derivative financial instruments, such as foreign currency forwardcontracts and foreign currency swaps as a means of hedging exposure to foreign currency risks. The Group does not enterinto derivatives for trading or speculative purposes.

Derivative financial instruments and foreign currency transactions are classified and accounted for as follows: a) all derivativesare recognized as either assets or liabilities and measured at fair value, and gains or losses on derivative transactions arerecognized in the income statement and b) for derivatives used for hedging purposes, if derivatives qualify for hedgeaccounting because of high correlation and effectiveness between the hedging instruments and the hedged items, gainsor losses on derivatives are deferred until maturity of the hedged transactions.

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The foreign currency forward contracts are utilized to hedge foreign currency exposures in payments of royalties. Payablesdenominated in foreign currencies are translated at the contracted rates if the forward contracts qualify for hedge accounting.

Foreign currency swaps are utilized to hedge foreign currency exposures in the procurement of raw materials from overseassuppliers. These swaps which qualify for hedge accounting are measured at market value at the balance sheet date and theunrealized gains or losses are deferred until maturity as an other liability or asset.

q. Per Share Information-Basic net income per share is computed by dividing net income available to common shareholdersby the weighted-average number of common shares outstanding for the period.

Diluted net income per share is not disclosed because it is anti-dilutive for the years ended March 31, 2006 and 2005.

Cash dividends per share presented in the accompanying consolidated statements of income are dividends applicable tothe respective years including dividends to be paid after the end of the year.

r. New Accounting PronouncementsBusiness Combination and Business SeparationIn October 2003, the BAC issued a Statement of Opinion, Accounting for Business Combinations, and on December 27, 2005the ASBJ issued Accounting Standard for Business Separations and ASBJ Guidance No.10, Guidance for AccountingStandard for Business Combinations and Business Separations. These new accounting pronouncements are effective for fiscalyears beginning on or after April 1, 2006.

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

(a) the consideration for the business combination consists solely of common shares with voting rights,(b) the ratio of voting rights of each predecessor shareholder group after the business combination is nearly equal, and(c) there are no other factors that would indicate any control exerted by any shareholder group other than voting rights.

For business combinations that do not meet the uniting-of-interests criteria, the business combination is considered to bean acquisition and the purchase method of accounting is required. This standard also prescribes the accounting for combina-tions of entities under common control and for joint ventures. Goodwill, including negative goodwill, is to be systematicallyamortized over 20 years or less, but is also subject to an impairment test.

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

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

This standard requires companies to recognize compensation expense for employee stock options based on the fair valueat the date of grant and over the vesting period as consideration for receiving goods or services. The standard also requirescompanies to account for stock options granted to non-employees based on the fair value of either the stock option or thegoods or services received. In the balance sheet, the stock option is presented as a stock acquisition right as a separatecomponent of shareholders’ equity until exercised. The standard covers equity-settled, share-based payment transactions,but does not cover cash-settled, share-based payment transactions. In addition, the standard allows unlisted companies tomeasure options at their intrinsic value if they cannot reliably estimate fair value.

Bonuses to directors and corporate auditorsPrior to the fiscal year ended March 31, 2005, bonuses to directors and corporate auditors were accounted for as a reductionof retained earnings in the fiscal year following approval at the general shareholders meeting. The ASBJ issued ASBJPractical Issues Task Force (PITF) No.13, Accounting treatment for bonuses to directors and corporate auditors, whichencouraged companies to record bonuses to directors and corporate auditors on the accrual basis with a related charge toincome, but still permitted the direct reduction of such bonuses from retained earnings after approval of the appropriationof retained earnings.

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

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3. MARKETABLE AND INVESTMENT SECURITIES

Marketable and investment securities as of March 31, 2006 and 2005 consisted of the following:Thousands of

Millions of Yen U.S. Dollars2006 2005 2006

Current:Government and corporate bonds ¥ 695 ¥ 613 $ 5,940

Non-current:Investment equity securities ¥33,204 ¥21,633 $283,794Government and corporate bonds 108 118 923Other 100 100 854

Total ¥33,412 ¥21,852 $285,572

The carrying amounts and aggregate fair values of marketable and investment securities at March 31, 2006 and 2005 wereas follows:

Millions of YenUnrealized Unrealized Fair

March 31, 2006 Cost Gain Loss Value

Securities classified as—Available-for-sale:

Equity securities ¥6,819 ¥23,417 ¥4 ¥30,233Debt securities 582 5 577

March 31, 2005

Securities classified as—Available-for-sale:

Equity securities ¥6,375 ¥11,788 ¥47 ¥18,116Debt securities 460 2 458

Thousands of U.S. DollarsUnrealized Unrealized Fair

March 31, 2006 Cost Gain Loss Value

Securities classified as—Available-for-sale:

Equity securities $58,282 $200,145 $34 $258,401Debt securities 4,974 42 4,931

Available-for-sale securities and held-to-maturity securities whose fair value is not readily determinable as of March 31, 2006and 2005 were as follows:

Carrying AmountThousands of

Millions of Yen U.S. Dollars2006 2005 2006

Available-for-sale:Equity securities ¥2,970 ¥3,517 $25,384Debt securities 108 118 923Other 100 100 854

Held-to-maturity 117 155 1,000Total ¥3,297 ¥3,891 $28,179

Proceeds from sales of available-for-sale securities for the years ended March 31, 2006 and 2005 were ¥21 million ($179thousand) and ¥1,563 million, respectively. Gross realized gains on these sales, computed on the moving average cost basis,were ¥18 million ($153 thousand) and ¥895 million for the years ended March 31, 2006 and 2005, respectively.

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The carrying values of debt securities by contractual maturities for securities classified as available-for-sale and held-to-maturity at March 31, 2006 were as follows:

Thousands ofMillions of Yen U.S. Dollars

Available Held to Available Held tofor Sale Maturity for Sale Maturity

Due in one year or less ¥577 ¥117 $4,931 $1,000Due after one year through five years 60 512

Total ¥638 ¥117 $5,452 $1,000

4. INVENTORIES

Inventories at March 31, 2006 and 2005 consisted of the following:Thousands of

Millions of Yen U.S. Dollars2006 2005 2006

Finished products and merchandise ¥12,758 ¥12,560 $109,042Semi-finished products 7,605 7,196 65,000Work in process 1,478 1,210 12,632Raw materials and supplies 3,345 2,756 28,589

Total ¥25,188 ¥23,724 $215,282

5. LONG-LIVED ASSETS

The Group reviewed its long-lived assets for impairment as of the year ended March 31, 2005 and, as a result, recognized animpairment loss for buildings and structures, and land. With respect to the related land and structures listed below, whichwere purchased by the Group for the purpose of constructing a factory with drainage and other structures completed, only aportion is utilized and most of such property remains unused. Probability for utilization is remote, and there is material declinein the market value of land.

Millions of YenLocation Description Classification Impairment Loss

Nishigo-mura, Nishi-shirakawa-gun, Fukushima Idle property Buildings and structures ¥ 112Nishigo-mura, Nishi-shirakawa-gun, Fukushima Idle property Land 3,357

Total ¥3,469

The recoverable amount was measured at its net selling price determined by quotation from a real-estate appraiser.

See Note 18.(1).b.

6. SHORT-TERM BANK LOANS AND LONG-TERM DEBT

Short-term bank loans consisted principally of bank overdrafts and bore interest at annual rates ranging from 0.426% to1.375% and from 0.400% to 1.375% at March 31, 2006 and 2005, respectively.

Long-term debt at March 31, 2006 and 2005 consisted of the following:Thousands of

Millions of Yen U.S. Dollars2006 2005 2006

Loans principally from banks, due serially to January 2022 with interest rates ranging from 0% to 1.75% (0% to 1.75% in 2005):

Collateralized ¥ 300 ¥ 1,118 $ 2,564Unsecured 5,435 435 46,452

1.40% unsecured bonds, due July 2005 5,0001.79% unsecured bonds, due July 2007 5,000 5,000 42,7352.21% unsecured bonds, due July 2010 5,000 5,000 42,7350.89% unsecured bonds, due May 2013 5,000 5,000 42,7350.44% unsecured bonds, due May 2008 5,000 5,000 42,735

Total 25,735 26,553 219,957Less current portion 144 5,057 1,230Long-term debt, less current portion ¥25,590 ¥21,495 $218,717

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Annual maturities of long-term debt as of March 31, 2006 for the next five years and thereafter were as follows:Thousands of

Year Ending March 31 Millions of Yen U.S. Dollars

2007 ¥ 144 $ 1,2302008 5,044 43,1112009 5,044 43,1112010 45 3842011 10,045 85,8542012 and thereafter 5,410 46,239

Total ¥25,735 $219,957

At March 31, 2006, building and structures of ¥502 million ($4,290 thousand) and land of ¥250 million ($2,136 thousand) werepledged as collateral for long- term debt (including current portion of long-term debt) of ¥300 million ($2,564 thousand).

7. LIQUOR TAXES PAYABLE

Liquor taxes are calculated at various rates according to the quantities of categorized beverages containing more than 1% ofalcohol when delivered from manufacturing lots or taken outside of a bonded area. Liquor taxes are included in cost of salesand inventories. The amounts of liquor taxes payable are to be paid by the end of the following two months.

8. RETIREMENT AND PENSION PLANS

The Company and its certain consolidated subsidiaries have severance payment plans for employees, directors, corporateauditors and executive officers.

Under most circumstances, employees terminating their employment are entitled to certain lump-sum severance paymentsbased on their rate of pay at the time of termination, length of service and certain other factors. In most circumstances, if thetermination is involuntary, caused by retirement at the mandatory retirement age or caused by death, employees are entitledto greater payments than in the case of voluntary termination.

In addition, the Company and certain domestic subsidiaries have non-contributory trusteed pension plans covering allemployees. Under the plans, employees terminating their employment are, in most circumstances, entitled to pensionpayments based on their rates of pay at the time of termination and length of service.

The Company’s certain consolidated subsidiary in the United Kingdom operates a defined benefit scheme. During the yearended December 31, 2005, the U.K. subsidiary adopted a new accounting standard for retirement benefits. The full amount ofthe transitional obligations of ¥145 million ($1,239 thousand) was charged to income for the year ended March 31, 2006.

The liability for retirement benefits for directors, corporate auditors and executive officers are ¥729 million ($6,230 thousand)and ¥654 million at March 31, 2006 and 2005, respectively. The retirement benefits for directors and corporate auditors arepaid subject to the approval of the shareholders in accordance with the Japanese Commercial Code (the “Code”).

The liability for employees’ retirement benefits at March 31, 2006 and 2005 consisted of the following:Thousands of

Millions of Yen U.S. Dollars2006 2005 2006

Projected benefit obligation ¥12,550 ¥11,455 $107,264Fair value of plan assets (4,588) (3,385) (39,213)Unrecognized actuarial loss 170 (523) 1,452Prepaid pension cost 9 29 76

Net liability ¥ 8,141 ¥ 7,576 $ 69,581

The components of net periodic benefit costs were as follows:Thousands of

Millions of Yen U.S. Dollars2006 2005 2006

Service cost ¥ 792 ¥748 $ 6,769Interest cost 274 237 2,341Expected return on plan assets (118) (94) (1,008)Recognized actuarial loss 112 61 957Charge for full amount of transitional obligations for retirement benefits 145 1,239

Net periodic benefit costs ¥1,205 ¥953 $10,299

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Assumptions used for the years ended March 31, 2006 and 2005 were set forth as follows:2006 2005

Discount rate mainly 1.6% 2.2%Expected rate of return on plan assets mainly 3.0% 3.0%Recognition period of actuarial gain/loss mainly 15 years 15 years

9. SHAREHOLDERS’ EQUITY

Through May 1, 2006, Japanese companies are subject to the Code.

The Code requires that all shares of common stock be issued with no par value and at least 50% of the issue price ofnew shares is required to be recorded as common stock and the remaining net proceeds are required to be presented asadditional paid-in capital, which is included in capital surplus. The Code permits Japanese companies, upon approval ofthe Board of Directors, to issue shares to existing shareholders without consideration by way of a stock split. Such issuanceof shares generally does not give rise to changes within the shareholders’ accounts.

The Code also provides that an amount of 10% or more of the aggregate amount of cash dividends and certain otherappropriations of retained earnings associated with cash outlays applicable to each period (such as bonuses to directors) shallbe appropriated as a legal reserve (a component of retained earnings) until the total of such reserve and additional paid-incapital equals 25% of common stock. The amount of total legal reserve and additional paid-in capital that exceeds 25% of thecommon stock may be available for dividends by resolution of the shareholders after transferring such excess in accordancewith the Code. In addition, the Code permits the transfer of a portion of additional paid-in capital and legal reserve to thecommon stock by resolution of the Board of Directors.

The Code allows Japanese companies to purchase treasury stock and dispose of such treasury stock upon resolution ofthe Board of Directors. The aggregate purchased amount of treasury stock cannot exceed the amount available for futuredividends plus the amount of common stock, additional paid-in capital or legal reserve that could be transferred to retainedearnings or other capital surplus other than additional paid-in capital upon approval of such transfer at the annual generalmeeting of shareholders.

In addition to the provision that requires an appropriation for a legal reserve in connection with the cash outlays, the Codealso imposes certain limitations on the amount of capital surplus and retained earnings available for dividends. The amountof capital surplus and retained earnings available for dividends under the Code was ¥53,001 million ($453,000 thousand) asof March 31, 2006, based on the amount recorded in the parent company’s general books of account.

Dividends are approved by the shareholders at a meeting held subsequent to the end of the fiscal year to which thedividends are applicable.

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

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

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

Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles ofincorporation of the company so stipulate. Under the Code, certain limitations were imposed on the amount of capital surplusand retained earnings available for dividends. The Corporate Law also provides certain limitations on the amounts availablefor dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to theshareholders, but the amount of net assets after dividends must be maintained at no less than ¥3 million.

(b) Increases decreases and transfer of common stock, reserve and surplusThe Corporate Law requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a componentof retained earnings) or as additional paid-in capital (a component of capital surplus) depending on the equity accountcharged upon the payment of such dividends until the total of aggregate amount of legal reserve and additional paid-incapital equals 25% of the common stock. Under the Code, the aggregate amount of additional paid-in capital and legalreserve that exceeds 25% of the common stock may be made available for dividends by resolution of the shareholders. Underthe Corporate Law, the total amount of additional paid-in capital and legal reserve may be reversed without limitation of suchthreshold. The Corporate Law also provides that common stock, legal reserve, additional paid-in capital, other capital surplusand retained earnings can be transferred among the accounts under certain conditions upon resolution of the shareholders.

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(c) Treasury stock and treasury stock acquisition rights

The Corporate Law also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution ofthe Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to theshareholders which is determined by a specific formula.

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

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

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

On August 1, 2005, the Company’s board of directors resolved to enter into a share exchange agreement with Kawahigashishoji Co., Ltd. an associated company of the Company previously accounted for by the equity method. According to theagreement, the Company acquired 450 thousand shares of Kawahigashi-shoji’s common stock in exchange for 3,735 thousandshares of the Company’s treasury stock on October 1, 2005, and as a result, Kawahigashi shoji Co., Ltd. became a whollyowned subsidiary.

10. RELATED PARTY TRANSACTIONS

Net sales, purchases and interest and dividend income representing transactions of the Group with an unconsolidatedsubsidiary and associated companies for the years ended March 31, 2006 and 2005 were as follows:

Thousands ofMillions of Yen U.S. Dollars

2006 2005 2006

Net sales ¥ 973 ¥1,077 $ 8,316Purchases 1,278 2,363 10,923Interest and dividend income 1 1 8

In connection with the share exchange between Kawahigashi shoji Co., Ltd. as described in Note 9, the Company acquired103,998 shares (transaction amount of ¥606 million ($5,179 thousand)) from the Company’s directors and their close relatives.The exchange ratio is based on calculation by a third party. The transaction amount is based on fair value of the Company’streasury stock exchanged.

11. RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses charged to income were ¥3,574 million ($30,547 thousand) and ¥3,353 million for theyears ended March 31, 2006 and 2005, respectively.

12. INCOME TAXES

The Company and its domestic subsidiaries are subject to Japanese national and local income taxes which, in the aggregate,resulted in a normal effective statutory tax rate of 41% for the years ended March 31, 2006 and 2005. Overseas subsidiaries aresubject to income taxes of the countries in which they operate.

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The tax effects of significant temporary differences and tax loss carryforwards which resulted in deferred tax assets andliabilities at March 31, 2006 and 2005 are as follows:

Thousands ofMillions of Yen U.S. Dollars

2006 2005 2006

Current Deferred Tax Assets:Inventories ¥ 533 ¥ 258 $ 4,555Accrued bonuses 819 852 7,000Allowance for accrued sales promotion expenses 613 5,239Tax loss carryforwards 289 294 2,470Enterprise tax payable 163 254 1,393Unrealized profit on sales of inventories 79 71 675Other 214 158 1,829Less valuation allowance (211) (295) (1,803)

Total ¥ 2,502 ¥ 1,594 $ 21,384Current Deferred Tax Liabilities:

Allowance for doubtful accounts ¥ 28 ¥ 25 $ 239Other 192 1,641

Total ¥ 220 ¥ 25 $ 1,880Net Current Deferred Tax Assets ¥ 2,288 ¥ 1,568 $ 19,555Net Current Deferred Tax Liabilities ¥ 6 $ 51

Non-current Deferred Tax Assets:Retirement benefits ¥ 3,509 ¥ 3,278 $ 29,991Loss on impairment of long-lived assets 1,376 1,376 11,760Tax loss carryforwards 917 7,837Marketable and investment securities 603 770 5,153Depreciation 624 601 5,333Unrealized profit on sales of investments in an associated company 213Other 554 381 4,735Less valuation allowance (3,503) (2,766) (29,940)

Total ¥ 4,082 ¥ 3,855 $ 34,888

Non-current Deferred Tax Liabilities:Unrealized gain on available-for-sale securities ¥ 9,598 ¥ 4,812 $ 82,034Basis difference of acquired intangible assets 1,234 10,547Deferred gain on fixed assets 1,213 913 10,367Deferred gain on fixed assets inherited by corporate division 793 830 6,777Other 47 73 401

Total ¥12,888 ¥ 6,630 $110,153Net Non-current Deferred Tax Assets ¥ 1,719 ¥ 1,796 $ 14,692Net Non-current Deferred Tax Liabilities ¥10,524 ¥ 4,570 $ 89,948

A reconciliation between the normal effective statutory tax rate and the actual effective tax rates reflected in the accompany-ing consolidated statements of income for the years ended March 31, 2006 and 2005 was as follows:

2006 2005

Normal effective statutory tax rate in Japan 41.0% 41.0%Expenses not deductible for income tax purposes 5.6 6.9Increase in valuation allowance 8.7 30.0Gain resulting from changes in ownership in subsidiaries (18.3) (13.9)Other—net (1.3) (0.2)Actual effective tax rate 35.7% 63.8%

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At March 31, 2006, certain subsidiaries have tax loss carryforwards aggregating approximately ¥2,986 million ($25,521thousand) which are available to be offset against taxable income of such subsidiaries. These tax loss carryforwards, if notutilized, will expire as follows:

Thousands ofYear Ending March 31 Millions of Yen U.S. Dollars

2009 ¥ 2 $ 172010 26 2222011 127 1,0852012 583 4,9822013 2,246 19,196

Total ¥2,986 $25,521

13. LEASES

Lessee

The Group leases certain machinery, computer equipment and other assets.

Total rental expenses for the years ended March 31, 2006 and 2005 were ¥2,631 million ($22,487 thousand) and ¥2,820 million,respectively, including ¥708 million ($6,051 thousand) and ¥749 million of lease payments under finance leases, respectively.

The Company and domestic subsidiaries’ pro forma information of leased property such as acquisition cost, accumulateddepreciation, obligations under finance leases and depreciation expense for finance leases that do not transfer ownership ofthe leased property to the lessee on an “as if capitalized” basis for the years ended March 31, 2006 and 2005 was as follows:

Millions of Yen2006

Machinery Furnitureand Vehicles and Fixtures Other Total

Acquisition cost ¥426 ¥1,364 ¥260 ¥2,050Accumulated depreciation 94 813 204 1,111

Net leased property ¥331 ¥ 551 ¥ 55 ¥ 938

Millions of Yen2005

Machinery Furnitureand Vehicles and Fixtures Other Total

Acquisition cost ¥336 ¥2,960 ¥535 ¥3,832Accumulated depreciation 97 1,949 373 2,420

Net leased property ¥238 ¥1,010 ¥162 ¥1,411

Thousands of U.S. Dollars2006

Machinery Furnitureand Vehicles and Fixtures Other Total

Acquisition cost $3,641 $11,658 $2,222 $17,521Accumulated depreciation 803 6,948 1,743 9,495Net leased property $2,829 $ 4,709 $ 470 $ 8,017

Obligations under finance leases as of March 31, 2006 and 2005 were as follows:Thousands of

Millions of Yen U.S. Dollars2006 2005 2006

Due within one year ¥331 ¥ 691 $2,829Due after one year 607 720 5,188

Total ¥938 ¥1,411 $8,017

The amount of obligations under finance leases includes the imputed interest expense portion.

Depreciation expense computed by the straight-line method was ¥708 million ($6,051 thousand) and ¥749 million for the yearsended March 31, 2006 and 2005, respectively.

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Obligations under operating leases as of March 31, 2006 and 2005 were as follows:Thousands of

Millions of Yen U.S. Dollars2006 2005 2006

Due within one year ¥1 ¥1 $ 8Due after one year 3 4 25

Total ¥4 ¥6 $34

Lessor

The amounts of lease receipts under finance leases were ¥45 million ($384 thousand) and ¥65 million for the years endedMarch 31, 2006 and 2005, respectively.

One domestic subsidiary’s information of leased property such as acquisition cost, accumulated depreciation, lessor’sreceivables under finance leases and depreciation expense for finance leases for the years ended March 31, 2006 and 2005was as follows:

Thousands ofMillions of Yen U.S. Dollars

Machinery, Machinery,Vehicles Vehicles

and Other and Other2006 2005 2006

Acquisition cost ¥174 ¥246 $1,487Accumulated depreciation 95 133 811Net leased property ¥ 78 ¥113 $ 666

Lessor’s receivables under finance leases:Thousands of

Millions of Yen U.S. Dollars2006 2005 2006

Due within one year ¥36 ¥ 49 $307Due after one year 50 73 427

Total ¥87 ¥122 $743

The amount of lessor’s receivables under finance leases includes the imputed interest income portion.

Depreciation expense was ¥40 million ($341 thousand) and ¥60 million for the years ended March 31, 2006 and 2005,respectively.

14. CONTINGENT LIABILITIES

At March 31, 2006, the Group was contingently liable for ¥81 million ($692 thousand) of loans guaranteed.

15. DERIVATIVES

The Group enters into foreign currency forward contracts and currency swap agreements to hedge foreign exchange riskassociated with certain liabilities denominated in foreign currencies.

All derivative transactions are entered into to hedge foreign currency exposures incorporated within its business. Accordingly,market risk in these derivatives is basically offset by opposite movements in the value of hedged liabilities.

Because the counterparties to these derivatives are limited to major international financial institutions, the Group does notanticipate any losses arising from credit risk.

Derivative transactions entered into by the Group have been made in accordance with internal policies of the FinanceDepartment which regulate the authorization, purposes, credit limit amount, evaluation of the counterparties and reportingprocedures.

Foreign currency forward contracts and currency swap agreements which qualify for hedge accounting are excluded fromthe disclosure of market value information.

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16. NET INCOME PER SHARE

Basic net income per share (“EPS”) for the years ended March 31, 2006 and 2005 is computed as follows:

Thousands ofMillions of Yen Shares Yen Dollars

WeightedNet Income Average Shares EPS

For the year ended March 31, 2006:Basic EPS

Net income available to common shareholders ¥5,257 215,578 ¥24.39 $0.20For the year ended March 31, 2005:

Basic EPSNet income available to common shareholders ¥ 2,533 215,763 ¥ 11.74

Takara Bio Inc., the Company’s consolidated subsidiary, has stock options outstanding. However, diluted net income pershare for the year ended March 31, 2006 and 2005 are not disclosed because it is anti-dilutive.

17. SUBSEQUENT EVENTS

At the general shareholders’ meeting held on June 29, 2006, the Company’s shareholders approved the following:

Appropriations of retained earnings as of March 31, 2006:Thousands of

Millions of yen U.S. Dollars

Cash dividends, ¥9.0 ($0.07) per share ¥1,950 $16,666Bonuses to directors and corporate auditors 21 179

18. SEGMENT INFORMATION

Information about industry segments and geographical segments of the Company and consolidated subsidiaries for the yearsended March 31, 2006 and 2005 was as follows:

(1) Industry Segmentsa. Sales and Operating Income

Millions of Yen2006

Alcoholic Beverages Eliminations/and Foods Biomedical Other Corporate Consolidated

Sales to customers ¥176,107 ¥16,490 ¥ 3,520 ¥196,119Intersegment sales 518 43 8,455 ¥(9,017)

Total sales 176,626 16,534 11,975 (9,017) 196,119Operating expenses 169,020 18,010 11,282 (8,118) 190,194Operating income (loss) ¥ 7,605 ¥ (1,476) ¥ 693 ¥ (898) ¥ 5,924

Millions of Yen2005

Alcoholic Beverages Eliminations/and Foods Biomedical Other Corporate Consolidated

Sales to customers ¥178,068 ¥13,671 ¥ 3,618 ¥195,359Intersegment sales 208 13 7,272 ¥(7,494)

Total sales 178,277 13,685 10,890 (7,494) 195,359Operating expenses 169,632 14,762 10,256 (6,694) 187,956Operating income (loss) ¥ 8,644 ¥ (1,076) ¥ 634 ¥ (799) ¥ 7,402

Thousands of U.S. Dollars2006

Alcoholic Beverages Eliminations/and Foods Biomedical Other Corporate Consolidated

Sales to customers $1,505,188 $140,940 $ 30,085 $1,676,230Intersegment sales 4,427 367 72,264 $(77,068)

Total sales 1,509,623 141,316 102,350 (77,068) 1,676,230Operating expenses 1,444,615 153,931 96,427 (69,384) 1,625,589Operating income (loss) $ 65,000 $ (12,615) $ 5,923 $ (7,675) $ 50,632

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b. Assets, Depreciation, Impairment loss and Capital ExpendituresMillions of Yen

2006Alcoholic Beverages Eliminations/

and Foods Biomedical Other Corporate Consolidated

Assets ¥116,533 ¥44,443 ¥11,732 ¥39,757 ¥212,466Depreciation 4,275 1,477 120 36 5,910Capital expenditures 4,253 1,264 110 5 5,633

Millions of Yen2005

Alcoholic Beverages Eliminations/and Foods Biomedical Other Corporate Consolidated

Assets ¥115,428 ¥37,427 ¥7,351 ¥30,566 ¥190,773Depreciation 4,127 1,304 137 58 5,628Impairment loss 3,469 3,469Capital expenditures 4,378 2,086 44 1 6,511

Thousands of U.S. Dollars2006

Alcoholic Beverages Eliminations/and Foods Biomedical Other Corporate Consolidated

Assets $996,008 $379,854 $100,273 $339,803 $1,815,948Depreciation 36,538 12,623 1,025 307 50,512Capital expenditures 36,350 10,803 940 42 48,145Notes: 1. Eliminations/Corporate include unallocated operating expenses of ¥983 million ($8,401 thousand) and ¥925 million for the years

ended March 31, 2006 and 2005, respectively, consisting principally of expenses incurred by the Company which is the holdingcompany.

2. Eliminations/Corporate include corporate assets of ¥47,230 million ($403,675 thousand) and ¥34,404 million for the years endedMarch 31, 2006 and 2005, respectively, consisting principally of working funds and investing funds held by the Company and assetsattributed to the Company’s administration headquarters.

(2) Geographical SegmentsMillions of Yen

2006Eliminations

Japan Other Corporate Consolidated

Sales to customers ¥187,689 ¥ 8,429 ¥196,119Intersegment sales 1,383 1,544 ¥ (2,928)

Total sales 189,073 9,973 (2,928) 196,119Operating expenses 182,313 9,766 (1,885) 190,194Operating income ¥ 6,760 ¥ 207 ¥ (1,043) ¥ 5,924Assets ¥146,242 ¥25,347 ¥40,876 ¥212,466

Thousands of U.S. Dollars2006

EliminationsJapan Other Corporate Consolidated

Sales to customers $1,604,179 $ 72,042 $1,676,230Intersegment sales 11,820 13,196 $ (25,025)

Total sales 1,616,008 85,239 (25,025) 1,676,230Operating expenses 1,558,230 83,470 (16,111) 1,625,589Operating income $ 57,777 $ 1,769 $ (8,914) $ 50,632Assets $1,249,931 $216,641 $349,367 $1,815,948Notes: 1. The countries belonging to the classifications of those other than Japan is as follows.

Other .......... United States of America, United Kingdom, China, South Korea, France, Singapore2. Eliminations/Corporate include unallocated operating expenses of ¥983 million ($8,401 thousand) for the year ended March 31, 2006,

consisting principally of working funds and investing funds held by the Company and assets attributed to the Company’sadministration headquarters.

3. Eliminations/Corporate include corporate assets of ¥47,230 million ($403,675 thousand) for the year ended March 31, 2006, consistingprincipally of working funds and investing funds held by the Company and assets attributed to the Company’s administrationheadquarters.

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To the Board of Directors and Shareholders of

Takara Holdings Inc.:

We have audited the accompanying consolidated balance sheets of Takara Holdings Inc. (the “Company”) andconsolidated subsidiaries as of March 31, 2006 and 2005, and the related consolidated statements of income, share-holders’ equity, and cash flows for the years then ended, all expressed in Japanese yen. These consolidated financialstatements are the responsibility of the Company’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosuresin the financial statements. An audit also includes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, theconsolidated financial position of Takara Holdings Inc. and consolidated subsidiaries as of March 31, 2006 and 2005,and the consolidated results of their operations and their cash flows for the years then ended in conformity withaccounting principles generally accepted in Japan.

Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion,such translation has been made in conformity with the basis stated in Note 1. Such U.S. dollar amounts are presentedsolely for the convenience of readers outside Japan.

June 29, 2006

Independent Auditors ’ Report

Deloitte Touche TohmatsuSumitomoseimei Kyoto Building62, Tsukihoko-cho Shinmachi-higashiiru Shijo-dori Shimogyo-ku, Kyoto 600-8492 Japan

Tel: +81 (75) 222 0181 Fax: +81 (75) 231 2703 www.deloitte.com/jp

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Thousands ofMillions of Yen U.S. Dollars

2006 2005 2004 2003 2002 2001 2006

For the years ended March 31:Sales to customers ¥196,119 ¥195,359 ¥196,897 ¥187,394 ¥183,638 ¥184,886 $1,676,230

Alcoholic beverages and foods segment 176,107 178,068 179,675 167,188 164,792 — 1,505,188

Alcoholic beverages and seasonings segment — — — — — 155,661 —

Beverages segment — — — — — 11,472 —Biomedical segment 16,490 13,671 13,560 14,338 14,312 — 140,940Biomedical segment — — — — — 11,469 —Other segment 3,520 3,618 3,661 5,867 4,533 — 30,085Printing segment — — — — — — —Other segment — — — — — 6,283 —

Cost of sales 120,132 119,114 119,023 114,617 112,482 111,381 1,026,769Gross profit 75,986 76,244 77,874 72,776 71,155 73,504 649,452SG&A expenses 70,062 68,841 68,514 64,169 62,460 61,918 598,820Operating income 5,924 7,402 9,360 8,606 8,695 11,585 50,632Income before income taxes and minority interests 7,876 6,813 10,453 6,232 7,173 9,852 67,316

Net income 5,320 2,614 5,668 2,185 3,481 5,092 45,470Depreciation and amortization 6,755 6,393 6,427 6,627 6,443 5,628 57,735Capital expenditures 5,633 6,511 5,243 7,269 10,065 13,337 48,145R&D expenses 3,574 3,353 3,127 3,591 3,699 3,093 30,547

As of March 31:Total assets ¥212,466 ¥190,773 ¥189,416 ¥175,830 ¥179,702 ¥191,844 $1,815,948Interest-bearing debt 39,330 40,347 41,560 38,854 28,331 31,865 336,153Shareholders’ equity 101,839 89,478 88,006 79,888 83,714 84,742 870,418

Per share of common stock (Yen and U.S. Dollars):Net income ¥24.39 ¥11.74 ¥25.93 ¥9.76 ¥16.05 ¥23.47 $0.20Cash dividends 9.00 7.50 7.50 7.50 7.50 7.50 0.07

Ratios (%):Return on assets (ROA) 2.6 1.4 3.1 1.2 1.9 3.0Return on equity (ROE) 5.6 2.9 6.8 2.7 4.1 6.4Equity ratio 47.9 46.9 46.5 45.4 46.6 44.2

Notes 1. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and havebeen made at the rate of ¥117 to $1, the approximate rate of exchange at March 31, 2006.

2. On April 1, 2002, some of the Takara Group’s business operations were restructured into separate companies. To provide appropriatedisclosure of segment information reflecting this change in the Group’s management structure, it was necessary to modify the segmentationused up until the year ended March 2002. The Alcoholic Beverages and Seasonings Segment and the Beverages Segment were merged tocreate the Alcoholic Beverages and Foods Segment. In addition, physical distribution and materials procurement operations relating toalcoholic beverages and foods businesses were shifted from the Other Business Segment to the Alcoholic Beverages and Foods Segment.Segment information for the year ended March 2002 has been recalculated on the basis of specific criteria to reflect this new segmentation.

Six-Year F inancia l Summary

Takara Holdings Inc. and Consolidated Subsidiaries

20 Naginatahoko-cho, Shijo-dori Karasuma Higashi-iru, Shimogyo-ku, Kyoto 600-8688, JapanTelephone: (075) 241-5130http://www.takara.co.jp

Printed in Japan with soy ink on recycled paper