Since fall of last year, growth in the operating results of all companies in the CVS industry in Japan has been lackluster, underscoring the need to increase the customer base by creating new markets. In 2001, we took a pioneering step in the industry with the launch of NATURAL LAWSON, a new format convenience store pitched mainly at women and offering a range of health-oriented products. Since the opening of the first store, we have introduced a variety of innovations and transferred some of the original brand products from this format to our regular LAWSON stores. Last year, we opened another new format, LAWSON STORE100, a convenience store offering perishable foods targeted mainly at housewives and senior citizens. Having won the support of customers, this format is now generating average daily sales on a par with regular LAWSON stores. As we move forward, we plan to use the products and know-how of these two strategic formats in our more than 8,300 regular LAWSON stores nationwide. In this way, we believe we can expand the customer base and thus strengthen our conventional format stores. Effectively, this approach will drive the evolution of regular LAWSON stores into hybrid stores. We have already begun trials in major urban areas whereby we introduce perishable foods and daily foods and value-for-money private brand Value Line merchandise assortments assembled at LAWSON STORE100 stores to regular LAWSON stores. The results have been immediate, with an improvement in both average daily sales and customer numbers due to an increase in the number of female customers. In areas where there is a growing number of elderly, we have also started experimenting with LAWSON stores that serve the needs of these customers; merchandise assortments and store layouts are planned with senior citizens in mind. I am convinced that by innovating in ways that respond to the needs of these customers we can make further progress toward our goal of creating stores that offer even higher levels of convenience for local people in their neighborhood.

In the first half of fiscal 2006, we plan to continue investing in sales promotions and making upfront investments in trials of new formats, aiming to motivate franchise owners and improve their earnings through an increase in customers. As we announced at the start of the current fiscal year, we expect these activities to result in a decrease in recurring profit in the fiscal 2006 interim period. However, we believe that our strategy of moving to increase customers ahead of other companies will translate into higher earnings in the second half of the year and future fiscal years. We ask for your understanding on this point, as we believe this will support the medium- to long-term development of LAWSON.

July 4, 2006

Takeshi Niinami
President and CEO

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