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Aderans Company Limited

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A d e r a n s V I T A L H A I R

A d e r a n s H a i r C l u b

P i n p o i n t F i x

H a i r S u p p o r t A q u a

e v e F i n e

S i f o r e A r o m a

V A L A N

F o n t a i n e

N O R I K O C O L L E C T I O N

A m o r e

On a sure-footed path to growth

Annual Report 2006Aderans

Y e a r e n d e d F e b r u a r y 2 8 , 2 0 0 6

49

For Further Information Contact:Investor Relations Division, Aderans Co., Ltd. 6-3, Shinjuku 1-chome, Shinjuku-ku, Tokyo 160-8429, Japan

Tel. 03-3350-3268 Fax. 03-3356-3052 E-mail. [email protected]

Chairman & CEOTakayoshi Okamoto*

President & COOKatsuji Tokumaru*

Senior Managing DirectorMamoru Mino

In charge of sales and marketing management division

Managing DirectorNoboru Kaneko

In charge of business planning headquarters

DirectorsTsuguo Tanaka

In charge of corporate planning headquarters

Hiroyasu YamakawaGeneral manager of administrative division

Senkichi YagiGeneral manager of sales and marketing management division

Mutsuo MinowaGeneral manager of overseas division

Supreme Advisors and DirectorsNobuo NemotoHaruo Okita

Standing Corporate AuditorsFumio AraiYuji Hirano

Corporate AuditorsMasaaki KatagiriIwao Toigawa

*Representative director

Directors and AuditorsAderans Company Limited As of May 26, 2006

Aderans Company Limited As of February 28, 2006

Corporate Data

0

2 ,000

4 ,000

6 ,000

8 ,000

10 ,000

14 ,000

12 ,000 4 ,200

0

700

1 ,400

2 ,100

2 ,800

3 ,500

4 ,900

4 5 6 8 9 10 12 2117053

061

Trading Volume (Thousands of shares)

Stock Price (¥)

Head Office6-3, Shinjuku 1-chome, Shinjuku-ku, Tokyo 160-8429

EstablishedMarch 1, 1969

Paid-in Capital¥12,944 million

Number of Shares Authorized138,000,000

Number of Shares Issued41,713,388

Number of Shareholders7,277

Principal Shareholders

Number of Shares and Shareholding Ratio

Thousands of Name Shares %

Steel Partners Japan Strategic Fund (Offshore) LP 6,797 17.35

Nobuo Nemoto 4,642 11.85

State Street Bank and Trust Company 4,322 11.03

The Master Trust Bank of Japan, Limited (Trust Account) 2,243 5.72

Japan Trustee Services Bank, Limited (Trust Account) 2,132 5.44

State Street Bank and Trust Company 505019 943 2.40

The Dai-Ichi Mutual Life Insurance Company 726 1.85

Trust & Custody Services Bank, Limited (Security Investment Trust Account) 570 1.45

The Bank of New York Treaty JASDEC Account 532 1.35

Japan Trustee Services Bank, Limited(Trust Account 4) 468 1.19

Notes: 1. The Company holds of 2,456 thousand shares of its own shares in treasury stock.2. Those shares held by the Master Trust Bank of Japan, Limited, Japan Trustee

Services Bank, Limited, and Trust & Custody Services Bank, Ltd. are the sharesrelating to their trust businesses.

Stock ListingsFirst Section of Tokyo Stock ExchangeFirst Section of Osaka Securities Exchange

Transfer Agent and RegistrarThe Chuo Mitsui Trust and Banking Company, Limited,

Securities Department8-4, Izumi 2-chome, Suginami-ku, Tokyo 168-0063

Number of Outlets233

Number of Employees1,976

Stock Price Range

Established in 1969, Aderans Co., Ltd., is a comprehensive provider of hair-replacement products and hair-related services for men and women. The Company maintains Japan’s leading brand of custom-made hair-replace-ment products for both sexes and has also built a solid presence in the women’s fashion wig market through Fontaine Co., Ltd., a domestic subsidiary.

We augment our mainstay custom-made wigs for men and women with a rich selection of complementary products and hair-related services. Seeking to cement a position at the forefront of the hair-trans-plant and hair-growth markets, we have reinforced our presence in the U.S. hair-transplant business with promising research and development on hair regeneration. This move underpins steady expansion of Group operations beyond wigs and hair-replacement products to hair-growth treatments and therapeutic remedies.

Domestic Women’s Market

Domestic Men’s Market

1986Commenced Produc-tion in ThailandOpened production facility, Aderans Thai. which now boasts world’s highest wig production capacity.

Overseas Markets

Strength 1:

Solid Brand Reputation

Strength 3:

Comprehensive Array of Products and Services

1969Aderans Established Rapidly expanded custom-made wig market with nationwide network in Japan.

The Aderans Group

Aderans heads a group of 28 consolidated subsidiaries — three operating in Japan and 25 overseas — which together employ more than 5,400 people. Members of the Group in the United States and Europe have captured higher market shares, especially in women’s fashion wig wholesaling. This achievement is complemented by sales of men’s wigs in Taiwan, South Korea and other areas of Asia.

CONTENTS

1 Consolidated Financial Highlights 4 Message from the Management

8 On a Sure-Footed Path to Growth 8 Strategy for the Domestic Men’s Market 10 Strategy for the Domestic Women’s Market 13 Strategy for Other Domestic Hair-Related Businesses 14 Strategy for Overseas Markets

16 Research and Development 18 Aderans in Society 19 Financial Section 44 Corporate Governance 48 Subsidiaries 49 Directors and Auditors, Corporate Data

1979Entered U.S. MarketEstablished foothold in the U.S. market with local represen-tative office.

1985Began Promoting Custom-Made WigsWomen’s custom-made wigs were first advertised through media such as magazines.

FontaineBrought Fontaine, a leading name in ladies’ ready-made wigs, under the Aderans umbrella through equity purchase.

Strength 2:

Global Presence

Three key strengths — solid brand reputation, global presence and a comprehensive array of products and services — are the signposts of success on our sure-footed path to growth.

0

10

20

30

Message from the Management

Fiscal Summary

F iscal 2006, ended February 28, 2006, was a year charac-

terized by persistently difficult conditions that threatened to

erode demand for hair-related products and services at home

and abroad. It was also the first year of a new medium-term

management plan for the Aderans Group, and we all worked

diligently to reach stated targets. Our efforts were rewarded,

with higher consolidated net sales, which rose 2.9%, to

¥72.6 billion, and more importantly, our return to a net

income position (¥6.1 billion) after a net loss in fiscal 2005.

It is immensely gratifying to close the chapter on down-

ward trends in sales and income that had plagued us over

the past two fiscal years. Our new management plan has

gotten off to a great start, and we are confident that the per-

formance recovery in fiscal 2006 is not a temporary

accomplishment but the beginning of continued improve-

ment.

Situation Leading Up to Fiscal 2006

Aderans’ forté fieldInitially, Aderans was established to address the needs of the

domestic men’s market, where “Aderans” has since become a

synonym for men’s wigs and hair-replacement products. We

also introduced services to promote healthy hair growth.

Later, we applied our expertise to the domestic women’s mar-

ket, trailblazing a path in the hair industry, with ladies’ wigs,

products to create fuller-looking hair and services to encour-

age healthy hair growth. We also explored overseas markets.

The high quality and sophisticated technologies of

Aderans’ mainstay products — custom-made wigs — and

related services have earned the Company an enviable repu-

tation, one that has reinforced its position at the top of the

wig market in Japan. This reputation is fully demonstrated

by strong domestic sales, which comprise about 70% of

consolidated net sales.

But the composition of domestic sales is changing. In

recent years, we have noticed a change in consumer prefer-

ences, highlighting narrower demand for wigs from

middle-aged men — our core client demographic — and

wider demand from women. Indeed, in fiscal 2002 sales to

women surpassed sales to men, and overall demand from

men tended toward services, such as Hair Support, which is

directed toward younger men.

4

Recent business conditionsOver the past few years, domestic sales, particularly to new

clients — both male and female — have sloped downward

on our performance charts. In the men’s market, this trend

mirrors increasingly fierce competition, paralleling the diver-

sification of hair-related products and services and reduced

latent demand caused by declining birthrates. In the women’s

market, the situation reflects a slower-than-expected response

to new offerings among women outside our main target age

range of 60 to 70.

Aderans currently enjoys top share in the domestic mar-

ket, but this position is not as secure as it once was. We face

escalating challenges to our lead, exemplified by the recent

introduction of an oral hair-growth treatment.

Overseas, steady investment activities are showing posi-

tive results. But in fiscal 2004 and fiscal 2005, the picture

was not so rosy, owing to the unavoidable impact of negative

external developments, particularly the war in Iraq, the

growing threat of terrorist attacks and the spread of Severe

Acute Respiratory Syndrome (the SARS virus), which put a

damper on consumer spending and consequently sidelined

opportunities for better annual performances.

To address the difficulties of this operating environment

at home and abroad, we initiated a new medium-term man-

agement plan that aims to have the Aderans Group travel the

high road of corporate development again as a global provider

of comprehensive hair-related products and services.

Medium-term Management Plan

O ur medium-term management plan hinges on two points.

The first is to get back on track to growth by revitalizing

domestic results and establishing a profit-oriented structure

for overseas operations. The second is to undertake a full

range of hair-related businesses, from practical products and

services that alleviate concerns about hair, or lack thereof, to

fashionable hairpieces.

Through the implementation of business strategies fine-

tuned to market demands, we will achieve a higher level of

satisfaction not only among clients but also among share-

holders and employees. Aderans will epitomize the “good

company” ideal, guided by a mission statement emphasizing

the Group’s development into a trustworthy organization

with products and services in constant demand from clients

and society as a whole.

1

Consolidated Financial Highlights

Net Income (Loss) and Net Income (Loss) Per Share

Net Sa les and Net Income to Net Sa les Rat io

–10

0

5

10

15

–5

Net Sales (left scale)Net Income (Loss) to Net Sales Ratio (right scale)

–40

0

40

60

–20

20

Return on Assets and Return on Equi ty

Return on EquityReturn on Assets

Sales by Product Category(Mi l l ions o f yen ) (Mi l l ions o f yen )

(%)(B i l l ions o f yen )

2005 2006200420032002

–120

0

60

120

180

–60

Net Income (Loss) (left scale)Net Income (Loss) per Share (right scale)

–5.0

0

5.0

7.5

–2.5

2.5

(Yen)(B i l l ions o f yen )

2005 2006200420032002

–10

0

10

15

–5

5

(%)

2005 2006200420032002

a Custom-made wigs ¥32,624

d Service revenues ¥18,784c Other products ¥5,812b Ready-made wigs ¥14,963

HAIR-RELATED BUSINESSES ¥72,185

Total ¥72,690 Total ¥72,690

OTHER BUSINESS ¥505

c Europe ¥3,311d Asia excluding Japan ¥495

a Japan ¥56,241b North America ¥12,641

Sales by Region

a

ab

b

c

c

d

d

This annual report has been prepared for non-Japanese investors and contains forward-looking statements that are based on management’sestimates, assumptions and projections at the time of publication. Aderans cautions you that a number of factors could cause actual results to differmaterially from expectations.

Thousands ofMillions of yen U.S. dollars

2006 2005 % change 2006

Net sales ¥72,690 ¥70,625 2.9% $625,188

Operating income 10,319 8,468 21.9 88,756

Net income (loss) 6,149 (3,568) — 52,890

PER COMMON SHARE AMOUNTS (yen and dollars):

Net income (loss) ¥150.51 ¥(88.02) —% $ 1.29

Cash dividends applicable to the year 44.00 38.00 15.8 0.37

Total assets ¥87,490 ¥83,140 5.2% $752,477

Shareholders’ equity 69,239 67,477 2.6 595,507

Net cash provided by operating activities 10,399 7,868 32.2 89,440

Depreciation and amortization 2,012 2,322 –13.4 17,304

Capital expenditures 2,565 2,704 –5.2 22,066

OTHER YEAR-END DATA:

Number of shares outstanding (thousand) 39,256 40,371 –2.8% —

Number of employees 5,418 5,457 –0.7 —

Notes: 1. The U.S. dollar amounts represent the arithmetical results of translating yen into U.S. dollars at the rate of ¥116.27 to US$1.2. Net income per share is calculated based on the new accounting standard described in Note 13 on page 39.

5

Group will strive to encourage more men to come to the

same conclusion.

In the women’s market, Aderans and its consolidated

subsidiary Fontaine Co., Ltd., joined marketing forces in a

reciprocal agreement wherein we promote the ready-made

wigs of Fontaine to our clients, and in return, our subsidiary

suggests our custom-made wigs to its clients. Covering a

broader range of clients and potential clients, this approach

enhances the ability of both companies to meet the hair-

related needs of all women and should stimulate new inter-

est in the Group’s products.

Excellent products and services are essential to business

success, but marketing is equally crucial. The most impor-

tant aspect of our marketing strategy hinges on advertising.

We will apply proven results regarding content, time slot,

volume of advertising and other factors to create strategic

advertising that generates new demand.

As for numerical targets, we will work toward

consolidated net sales of ¥80 billion and a ratio of

consolidated net sales to recurring profit of 15% by

February 29, 2008, taking into account higher

expenses, including a larger advertising budget

needed to capture the interest of new clients. But in

the long term, we remain committed to achieving a

consolidated recurring profit ratio of 20% and con-

solidated return on equity of at least 10%.

Priorities for Fiscal 2007

I n fiscal 2006, we achieved higher sales and

income. Regrettably, however, we did not reach our

targets. The primary obstacle to better results was

undoubtedly our inability to attract as many new

clients in the domestic women’s market as we would

have liked.

This underlines another issue that we cannot

ignore. In the domestic men’s market, sales to new

male clients increased in fiscal 2006, but only mar-

ginally, which, in conjunction with poor demand

from new female clients, highlights the fact that we

rely on replacement demand to keep sales stable in

Japan. Needless to say, it is essential for our corpo-

rate survival that we generate more demand from

new clients, both male and female, to guarantee a

base of repeat clients in the future.

As a concrete response to this situation, in March 2006,

we introduced an appropriately innovative product line —

custom-made wigs featuring Aderans Vital Hair, a new, super-

high-quality artificial hair for men’s wigs that is even more like

natural hair than our very own Cyberhair, itself an artificial

hair with properties very similar to natural hair.

To companies in the hair business, men with concerns

about hair loss are a key source of stable earnings. Custom-

made wigs for men are our core business, a high-profit seg-

ment of operations that will underpin continuous growth for

the Aderans Group into the future. It is therefore imperative

that we revitalize new client demand in 30–40s age group,

the key demographic upon which our future repeat client

business is based.

Even today, with such a variety of products and services

available, wigs remain the most viable solution for any man

with thinning hair or a receding hairline. We believe wigs

are truly an exceedingly viable option, and the Aderans

Takayoshi OkamotoKatsuji Tokumaru

Top Share in Japan

Total Hair Solution Company

We pursue activities from a client-oriented perspective and work to elicit a higher level of satisfaction not only from clients but also from shareholders and employees. Our efforts are based on a mission state-ment that emphasizes our development into a trustworthy organization with products and services in constant demand from clients and society as a whole. Indeed, we seek to epitomize the “good company” ideal.

1992Entered European Market Marked start of operations in Europe, with establishment of Aderans Europe to promote Aderans’ wig business.

2001Hair-Transplant BusinessAcquired Bosley Medical Institute (now, Bosley), a leader in the U.S. hair-transplant market.

2002Hair-Regeneration TechnologyBegan research on hair-regeneration procedures, with establishment of Aderans Research Institute in the United States.

2002Aderans Hair ClubCoinciding with the debut of the membership-style Aderans Hair Club (formerly Aderans Fathers Club), launched television commercials to enhance the image of wigs among men.

2004Hairskin and Hair-Transplant Business in JapanIntroduced Hairskin, a hair-volumizing product, and started promoting hair transplants in Japan through tie-ups with local clinics.

2006Aderans Vital HairThe Company’s new proprietary artificial hair, Aderans Vital Hair, released to market.

2003Sifore Series Custom-Made WigsDebuted Sifore series to attract atten-tion of women in their 40s to 50s to complement the Eve series, adopting a two-brand system for women’s custom-made wigs.

Fontaine Became Wholly Owned SubsidiaryTo facilitate more strategic business development in the ladies’ wig market the remaining equity in Fontaine was acquired.

1990Eve Series Custom-Made Wigs Launched Eve series and promoted rapid expansion of the women’s market with the introduction of new products on a two-year cycle.

1991CyberhairSuccessfully completed development of proprietary artificial hair Cyberhair.

1990

Established Aderans Inc. (Taiwan) Expanded Asian presence outside Japan, with establishment of Aderans Taiwan.

1987Healthy Hair-Growth Service for MenBegan healthy hair-growth services for men in response to a widening range of hair-related concerns among men.

Mission and Goals

Solutions to Hair Concerns — A Market with Growth Potential

1987Accelerated U.S. Market Business Acquired International Hairgoods.

1998Hair Support FaréDebuted healthy hair-growth services for women.Introduced Hair Support Faré.


Latent demand for solutions to hair loss concerns is extremely high worldwide, particularly in Western countries. The situation in Japan, where about 13 million men admit to hair loss, is similar to that in other Asian countries, where the hair loss ratio is large and growing, in line with changes to diet and levels of stress.

HAIR LOSS RATIO IN JAPAN

JapanGermanyFranceUSACanada UKRussiaHong KongTaiwanSouth Korea

26.0541.2439.1039.0437.4236.0333.2924.6822.5922.37

12.912.6

7.840.2

4.47.6

16.20.61.7

3.3

Million%(%)

INTERNATIONAL COMPARISON(estimate)(Millions)

Number of men suffering hair loss (right)

Ratio (left)

2001 20041998199519820

10

20

0

10

20

26.05%

Aderans boasts the top share of Japan’s custom-made wig market and has maintained this status for many years. The door into this market can be unlocked only with excellent technical capabilities, and having amassed the necessary qualifications, Aderans has established a solid sales structure with the steadfast support of repeat clients.

PRINCIPAL PRODUCT SALES (Non-Consolidated)

2005 20062004200320020

16

Male New Repeat

Female New Repeat

00.00

Source: Aderans

15.60%

(Billions of yen)

9.7

11.8

16.5

12.4

8

21.5

4.0

0

10

20

30

6

Medium-termManagement Plan 2008The new medium-term management plan for the Aderans Group, which runs from March 1, 2005, to

February 29, 2008, will underpin growth into the future. Here are the details our three-year plan.

Get back on track to growth by improving domestic results and establishing a profit-oriented

structure for overseas operations.

Undertake a full range of hair-related businesses, from practical products and services that

alleviate concerns about hair, or lack thereof, to fashionable hairpieces.

Groupwide Medium-term Goals

2OO8 Net Sales

1O% up

February 2006 February 2008Targets (achieved) (goal)

Consolidated

Net sales ¥72.6 billion ¥80.0 billionRecurring profit ratio 15.2% 15.0%

Medium-term Strategies1. In the domestic men’s market, boost demand by maximizing position as total hair solution provider

with a full range of products, from wigs to medical procedures.

2. In the domestic women’s market, undertake joint efforts with Fontaine, a leader in the fashion wig

market.

3. In other domestic hair-related businesses, strengthen our network of high-value-added salons,

particularly new-concept salons, which carry wigs and other products.

4. In overseas markets, work toward higher market shares and enhanced profitability by raising wig sales

and promoting the hair-transplant business.

アデランス　アニュアルＲ　2006

１折

１

Message from the Management

Fiscal Summary

F iscal 2006, ended February 28, 2006, was a year charac-

terized by persistently difficult conditions that threatened to

erode demand for hair-related products and services at home

and abroad. It was also the first year of a new medium-term

management plan for the Aderans Group, and we all worked

diligently to reach stated targets. Our efforts were rewarded,

with higher consolidated net sales, which rose 2.9%, to

¥72.6 billion, and more importantly, our return to a net

income position (¥6.1 billion) after a net loss in fiscal 2005.

It is immensely gratifying to close the chapter on down-

ward trends in sales and income that had plagued us over

the past two fiscal years. Our new management plan has

gotten off to a great start, and we are confident that the per-

formance recovery in fiscal 2006 is not a temporary

accomplishment but the beginning of continued improve-

ment.

Situation Leading Up to Fiscal 2006

Aderans’ forté fieldInitially, Aderans was established to address the needs of the

domestic men’s market, where “Aderans” has since become a

synonym for men’s wigs and hair-replacement products. We

also introduced services to promote healthy hair growth.

Later, we applied our expertise to the domestic women’s mar-

ket, trailblazing a path in the hair industry, with ladies’ wigs,

products to create fuller-looking hair and services to encour-

age healthy hair growth. We also explored overseas markets.

The high quality and sophisticated technologies of

Aderans’ mainstay products — custom-made wigs — and

related services have earned the Company an enviable repu-

tation, one that has reinforced its position at the top of the

wig market in Japan. This reputation is fully demonstrated

by strong domestic sales, which comprise about 70% of

consolidated net sales.

But the composition of domestic sales is changing. In

recent years, we have noticed a change in consumer prefer-

ences, highlighting narrower demand for wigs from

middle-aged men — our core client demographic — and

wider demand from women. Indeed, in fiscal 2002 sales to

women surpassed sales to men, and overall demand from

men tended toward services, such as Hair Support, which is

directed toward younger men.

4

Recent business conditionsOver the past few years, domestic sales, particularly to new

clients — both male and female — have sloped downward

on our performance charts. In the men’s market, this trend

mirrors increasingly fierce competition, paralleling the diver-

sification of hair-related products and services and reduced

latent demand caused by declining birthrates. In the women’s

market, the situation reflects a slower-than-expected response

to new offerings among women outside our main target age

range of 60 to 70.

Aderans currently enjoys top share in the domestic mar-

ket, but this position is not as secure as it once was. We face

escalating challenges to our lead, exemplified by the recent

introduction of an oral hair-growth treatment.

Overseas, steady investment activities are showing posi-

tive results. But in fiscal 2004 and fiscal 2005, the picture

was not so rosy, owing to the unavoidable impact of negative

external developments, particularly the war in Iraq, the

growing threat of terrorist attacks and the spread of Severe

Acute Respiratory Syndrome (the SARS virus), which put a

damper on consumer spending and consequently sidelined

opportunities for better annual performances.

To address the difficulties of this operating environment

at home and abroad, we initiated a new medium-term man-

agement plan that aims to have the Aderans Group travel the

high road of corporate development again as a global provider

of comprehensive hair-related products and services.

Medium-term Management Plan

O ur medium-term management plan hinges on two points.

The first is to get back on track to growth by revitalizing

domestic results and establishing a profit-oriented structure

for overseas operations. The second is to undertake a full

range of hair-related businesses, from practical products and

services that alleviate concerns about hair, or lack thereof, to

fashionable hairpieces.

Through the implementation of business strategies fine-

tuned to market demands, we will achieve a higher level of

satisfaction not only among clients but also among share-

holders and employees. Aderans will epitomize the “good

company” ideal, guided by a mission statement emphasizing

the Group’s development into a trustworthy organization

with products and services in constant demand from clients

and society as a whole.

1

Consolidated Financial Highlights

Net Income (Loss) and Net Income (Loss) Per Share

Net Sa les and Net Income to Net Sa les Rat io

–10

0

5

10

15

–5

Net Sales (left scale)Net Income (Loss) to Net Sales Ratio (right scale)

–40

0

40

60

–20

20

Return on Assets and Return on Equi ty

Return on EquityReturn on Assets

Sales by Product Category(Mi l l ions o f yen ) (Mi l l ions o f yen )

(%)(B i l l ions o f yen )

2005 2006200420032002

–120

0

60

120

180

–60

Net Income (Loss) (left scale)Net Income (Loss) per Share (right scale)

–5.0

0

5.0

7.5

–2.5

2.5

(Yen)(B i l l ions o f yen )

2005 2006200420032002

–10

0

10

15

–5

5

(%)

2005 2006200420032002

a Custom-made wigs ¥32,624

d Service revenues ¥18,784c Other products ¥5,812b Ready-made wigs ¥14,963

HAIR-RELATED BUSINESSES ¥72,185

Total ¥72,690 Total ¥72,690

OTHER BUSINESS ¥505

c Europe ¥3,311d Asia excluding Japan ¥495

a Japan ¥56,241b North America ¥12,641

Sales by Region

a

ab

b

c

c

d

d

This annual report has been prepared for non-Japanese investors and contains forward-looking statements that are based on management’sestimates, assumptions and projections at the time of publication. Aderans cautions you that a number of factors could cause actual results to differmaterially from expectations.


2006 2005 % change 2006

Net sales ¥72,690 ¥70,625 2.9% $625,188

Operating income 10,319 8,468 21.9 88,756

Net income (loss) 6,149 (3,568) — 52,890

PER COMMON SHARE AMOUNTS (yen and dollars):

Net income (loss) ¥150.51 ¥(88.02) —% $ 1.29

Cash dividends applicable to the year 44.00 38.00 15.8 0.37

Total assets ¥87,490 ¥83,140 5.2% $752,477

Shareholders’ equity 69,239 67,477 2.6 595,507

Net cash provided by operating activities 10,399 7,868 32.2 89,440

Depreciation and amortization 2,012 2,322 –13.4 17,304

Capital expenditures 2,565 2,704 –5.2 22,066

OTHER YEAR-END DATA:

Number of shares outstanding (thousand) 39,256 40,371 –2.8% —

Number of employees 5,418 5,457 –0.7 —

Notes: 1. The U.S. dollar amounts represent the arithmetical results of translating yen into U.S. dollars at the rate of ¥116.27 to US$1.2. Net income per share is calculated based on the new accounting standard described in Note 13 on page 39.

5

Group will strive to encourage more men to come to the

same conclusion.

In the women’s market, Aderans and its consolidated

subsidiary Fontaine Co., Ltd., joined marketing forces in a

reciprocal agreement wherein we promote the ready-made

wigs of Fontaine to our clients, and in return, our subsidiary

suggests our custom-made wigs to its clients. Covering a

broader range of clients and potential clients, this approach

enhances the ability of both companies to meet the hair-

related needs of all women and should stimulate new inter-

est in the Group’s products.

Excellent products and services are essential to business

success, but marketing is equally crucial. The most impor-

tant aspect of our marketing strategy hinges on advertising.

We will apply proven results regarding content, time slot,

volume of advertising and other factors to create strategic

advertising that generates new demand.

As for numerical targets, we will work toward

consolidated net sales of ¥80 billion and a ratio of

consolidated net sales to recurring profit of 15% by

February 29, 2008, taking into account higher

expenses, including a larger advertising budget

needed to capture the interest of new clients. But in

the long term, we remain committed to achieving a

consolidated recurring profit ratio of 20% and con-

solidated return on equity of at least 10%.

Priorities for Fiscal 2007

I n fiscal 2006, we achieved higher sales and

income. Regrettably, however, we did not reach our

targets. The primary obstacle to better results was

undoubtedly our inability to attract as many new

clients in the domestic women’s market as we would

have liked.

This underlines another issue that we cannot

ignore. In the domestic men’s market, sales to new

male clients increased in fiscal 2006, but only mar-

ginally, which, in conjunction with poor demand

from new female clients, highlights the fact that we

rely on replacement demand to keep sales stable in

Japan. Needless to say, it is essential for our corpo-

rate survival that we generate more demand from

new clients, both male and female, to guarantee a

base of repeat clients in the future.

As a concrete response to this situation, in March 2006,

we introduced an appropriately innovative product line —

custom-made wigs featuring Aderans Vital Hair, a new, super-

high-quality artificial hair for men’s wigs that is even more like

natural hair than our very own Cyberhair, itself an artificial

hair with properties very similar to natural hair.

To companies in the hair business, men with concerns

about hair loss are a key source of stable earnings. Custom-

made wigs for men are our core business, a high-profit seg-

ment of operations that will underpin continuous growth for

the Aderans Group into the future. It is therefore imperative

that we revitalize new client demand in 30–40s age group,

the key demographic upon which our future repeat client

business is based.

Even today, with such a variety of products and services

available, wigs remain the most viable solution for any man

with thinning hair or a receding hairline. We believe wigs

are truly an exceedingly viable option, and the Aderans

Takayoshi OkamotoKatsuji Tokumaru

Top Share in Japan

Total Hair Solution Company

We pursue activities from a client-oriented perspective and work to elicit a higher level of satisfaction not only from clients but also from shareholders and employees. Our efforts are based on a mission state-ment that emphasizes our development into a trustworthy organization with products and services in constant demand from clients and society as a whole. Indeed, we seek to epitomize the “good company” ideal.

1992Entered European Market Marked start of operations in Europe, with establishment of Aderans Europe to promote Aderans’ wig business.

2001Hair-Transplant BusinessAcquired Bosley Medical Institute (now, Bosley), a leader in the U.S. hair-transplant market.

2002Hair-Regeneration TechnologyBegan research on hair-regeneration procedures, with establishment of Aderans Research Institute in the United States.

2002Aderans Hair ClubCoinciding with the debut of the membership-style Aderans Hair Club (formerly Aderans Fathers Club), launched television commercials to enhance the image of wigs among men.

2004Hairskin and Hair-Transplant Business in JapanIntroduced Hairskin, a hair-volumizing product, and started promoting hair transplants in Japan through tie-ups with local clinics.

2006Aderans Vital HairThe Company’s new proprietary artificial hair, Aderans Vital Hair, released to market.

2003Sifore Series Custom-Made WigsDebuted Sifore series to attract atten-tion of women in their 40s to 50s to complement the Eve series, adopting a two-brand system for women’s custom-made wigs.

Fontaine Became Wholly Owned SubsidiaryTo facilitate more strategic business development in the ladies’ wig market the remaining equity in Fontaine was acquired.

1990Eve Series Custom-Made Wigs Launched Eve series and promoted rapid expansion of the women’s market with the introduction of new products on a two-year cycle.

1991CyberhairSuccessfully completed development of proprietary artificial hair Cyberhair.

1990

Established Aderans Inc. (Taiwan) Expanded Asian presence outside Japan, with establishment of Aderans Taiwan.

1987Healthy Hair-Growth Service for MenBegan healthy hair-growth services for men in response to a widening range of hair-related concerns among men.

Mission and Goals

Solutions to Hair Concerns — A Market with Growth Potential

1987Accelerated U.S. Market Business Acquired International Hairgoods.

1998Hair Support FaréDebuted healthy hair-growth services for women.Introduced Hair Support Faré.


Latent demand for solutions to hair loss concerns is extremely high worldwide, particularly in Western countries. The situation in Japan, where about 13 million men admit to hair loss, is similar to that in other Asian countries, where the hair loss ratio is large and growing, in line with changes to diet and levels of stress.

HAIR LOSS RATIO IN JAPAN

JapanGermanyFranceUSACanada UKRussiaHong KongTaiwanSouth Korea

26.0541.2439.1039.0437.4236.0333.2924.6822.5922.37

12.912.6

7.840.2

4.47.6

16.20.61.7

3.3

Million%(%)

INTERNATIONAL COMPARISON(estimate)(Millions)

Number of men suffering hair loss (right)

Ratio (left)

2001 20041998199519820

10

20

0

10

20

26.05%

Aderans boasts the top share of Japan’s custom-made wig market and has maintained this status for many years. The door into this market can be unlocked only with excellent technical capabilities, and having amassed the necessary qualifications, Aderans has established a solid sales structure with the steadfast support of repeat clients.

PRINCIPAL PRODUCT SALES (Non-Consolidated)

2005 20062004200320020

16

Male New Repeat

Female New Repeat

00.00

Source: Aderans

15.60%

(Billions of yen)

9.7

11.8

16.5

12.4

8

21.5

4.0

0

10

20

30

6

Medium-termManagement Plan 2008The new medium-term management plan for the Aderans Group, which runs from March 1, 2005, to

February 29, 2008, will underpin growth into the future. Here are the details our three-year plan.

Get back on track to growth by improving domestic results and establishing a profit-oriented

structure for overseas operations.

Undertake a full range of hair-related businesses, from practical products and services that

alleviate concerns about hair, or lack thereof, to fashionable hairpieces.

Groupwide Medium-term Goals

2OO8 Net Sales

1O% up

February 2006 February 2008Targets (achieved) (goal)

Consolidated

Net sales ¥72.6 billion ¥80.0 billionRecurring profit ratio 15.2% 15.0%

Medium-term Strategies1. In the domestic men’s market, boost demand by maximizing position as total hair solution provider

with a full range of products, from wigs to medical procedures.

2. In the domestic women’s market, undertake joint efforts with Fontaine, a leader in the fashion wig

market.

3. In other domestic hair-related businesses, strengthen our network of high-value-added salons,

particularly new-concept salons, which carry wigs and other products.

4. In overseas markets, work toward higher market shares and enhanced profitability by raising wig sales

and promoting the hair-transplant business.

アデランス　アニュアルＲ　2006

１折

１

In fiscal 2007, we expect to boost both interim and year-

end dividends by ¥3 per share, for an annual dividend of

¥50 per share and a consolidated payout ratio of 30% or

more.

In Closing

I t seems as if we are in a race — a business marathon. The

Aderans Group must constantly enhance its capabilities and

move steadily toward the leaders’ pack — the world’s top

businesses — as a global organization with a comprehensive

range of hair-related products and services.

On behalf of the Board of Directors, we ask sharehold-

ers, investors and business associates for their continued

encouragement and support as the Aderans Group strives to

follow a sure-footed path to growth.

June 2006

Takayoshi Okamoto

Chairman and Chief Executive Officer

Katsuji Tokumaru

President and Chief Operating Officer

7

Takayoshi OkamotoChairman and Chief Executive Officer1975 Joined Aderans Co., Ltd. 1983 Director of the Company1987 Managing Director of the Company1991 Director of the Company1995 President of the Company1999 General Manager of sales and marketing headquarters2004 Chairman and Chief Executive Officer of the Company

(present post)

Katsuji TokumaruPresident and Chief Operating Officer1983 Joined Aderans Co., Ltd. 1996 General Manager of Chugoku branch1998 General Manager of Kansai sales division2002 General Manager of corporate planning division2003 Director of the Company2004 President and Chief Operating Officer of the Company

(present post)

Overseas in fiscal 2006, our wig and hair-transplant

businesses encountered favorable demand, which local sub-

sidiaries successfully converted into higher sales. A long-

term goal is to achieve a 50:50 ratio in domestic-to-overseas

sales, so our next task must be to raise profit ratios.

As we strive to maintain the corporate vitality that

brought the downward trend in overseas sales to an end,

we will effectively tackle our No. 1 priority of stimulating

demand from new clients, both male and female, in Japan.

We expect these efforts to deliver a performance that exceeds

our estimates for fiscal 2007.

Raising Shareholder Value

T he Aderans Group consistently seeks to enhance corporate

governance and in this task strives to uphold management

transparency and provide timely and impartial disclosure of

corporate information to all stakeholders.

In its financial strategies, the Group’s basic policy is to

maintain liquid capital at about ¥20 billion, on a non-

consolidated basis, to be applied toward mergers and acqui-

sitions (M&As), research and development and capital

expenditures that will increase corporate value.

One of our top management priorities is the return of

profits to shareholders, so we aim to raise the payout ratio

and aggressively implement treasury stock buybacks. Up to

and including fiscal 2006, our shareholder return ratio was

based on 50% or more of non-consolidated net income, but

from fiscal 2007, we will make the basic benchmark total

shareholder returns, which comprises consolidated divi-

dends and treasury stock buybacks, and work toward a con-

solidated payout ratio of 30% or more and a total

shareholder return ratio of 50% or more.

However, if no large applications of funds are required

for M&As or other major investments over the next two fis-

cal years — that is, until the end of the current medium-

term management plan in February 2008 — then we will go

for a payout ratio of 30% or more and a 100% total share-

holder return ratio.

Fiscal 2006 marked the 13th consecutive year that

Aderans plans to increase dividends per share. The annual

dividend will be ¥44 per share, for a payout ratio of 28.0%

and a total shareholder return ratio of 88.5%. Return on

equity was 9.0%.

8


MAIN OBJECTIVE: Boost demand by maximizingposition as a total hair solution providerwith a full range of products, from wigs tomedical procedures

Advert is ing Expenses and Number of New Cl ients

0

2,000

3,000

5,000

1,000

4,000

Number of new clients

Pr inc ipa l Product Sa lesto Male C l ients in Japan

0

12

20

16

4

8

2005 2006200420032002

1st ha l f

2ndha l f

1s t ha l f

2ndha l f

1s t ha l f

2ndha l f

Advertising expenses (left scale)NewRepeat

0

1.0

2.0

2.5

0.5

1.5

2005 20062004

(B i l l ions o f yen )Non-conso l idated Non-conso l idated(B i l l ions o f yen )

this strategy had unfavorable side-effects: a drop in orders

from new clients and a downturn in demand for replace-

ment products.

Consequently, we are stressing promotional activities,

particularly advertising, during the three years of the current

medium-term management plan. As in fiscal 2006, our efforts

in fiscal 2007 will hinge on three points that should deliver

success in advertising: the development of content highlight-

ing wigs and hair-volumizing products for middle-aged and

older men, the use of eye-catching promotional materials

and well-known entertainment personalities, and an appro-

priate volume of television commercials.

The Internet is proving to be a fantastic complement to

traditional, direct inquiry methods, by telephone and post-

card. Sales through our web site have grown annually in

recent years, settling at ¥1.3 billion in fiscal 2006. To

encourage more hits on our web site, we will continue to

revamp our marketing pages, for both men and women. We

will also review advertising content that promotes our web

site, and even perhaps the media through which we adver-

tise, to cultivate new marketing channels.

Two-Layer Structure of AderansVITAL HAIRUtilizing advanced biomimetics, Aderans combined artificial fibers with differ-

ent properties into a proprietary two-layer structure that boasts characteristics

previously unattainable for artificial hair. For example, when wet, Aderans Vital

Hair takes on a texture incredibly similar to that of natural hair, and while still a

memory-retentive material, this artificial hair offers the potential for creating

different hairstyles.

Strategy for the Domestic

Men’s Market

Aderans Technology

Overview

S urveys show that as many as 13 million adult men in

Japan have thinning hair, presenting a huge demographic of

largely untapped demand. But this potential market is not

necessarily receptive to the best solution available — wigs.

Indeed, trends over the past few years indicate that men,

especially young men, still cringe at the thought of wearing a

wig even though wigs are an exceedingly viable solution to

the problem of hair loss.

With this in mind, Aderans made the goal of attracting

new clients a centerpiece of its current medium-term man-

agement plan. Over the three years of this plan, we will

direct marketing efforts toward two segments of the popula-

tion: men in their 30s and up, who represent a key demand

group for wigs and other hair-volumizing products; and

young men, who are increasingly keen on products and ser-

vices that promote healthy hair growth.

Maximize the effect of advertising

A fundamental aspect of business for Aderans is to encour-

age men concerned about hair loss to contact the Company.

Promotional activities, especially advertising, are therefore a

vital marketing tool. For several years, we limited our adver-

tising budget to enhance operating efficiency. Unfortunately,

Aderans VITAL HAIRProprietary two-layer

structure

Natural hair Three-layer

structure

Conventional artificial hair

Single-layer structure

Modacrylic, vinyl chloride,

polyester

Cuticle

Cortex Medulla Core

Sheath

9

Aderans is synonymous withmen’s wigs — the nameenjoys an enviably high levelof brand recognition.

Aderans Group Solutions for Men in Japan

Custom-made wigs and hair-volumizing products

New products

Hair-Transplant Business

Main Target Age Groups

Aderans Vital Hair, the new artificial hair introduced in March 2006, improves

upon conventional artificial hair and facilitates the creation of excellent

custom-made wigs that retain overall hair structure while facilitating

different presentations.

3Osand up

Mult i faceted solut ions

Associated clinics will introduce Bosley's hair-transplant procedures in Japan and

add a new dimension to its menu of multifaceted solutions to tackle hair loss

concerns.

Hair Support AquaMain Target Age Group

2Os

10


MAIN OBJECTIVE: Undertake joint efforts withFontaine, a leader in the fashion wig market

Reinforce the hair-transplant business

O ur domestic hair-transplant business got started in

February 2004 through an associated clinic in Tokyo. Cur-

rently, this is our only active location in Japan, but it is rec-

ognized by the authorities as a medical corporation and has

increased its staff of physicians in anticipation of demand.

The concept of hair transplants is still new in Japan, so

we are using advertising to raise awareness of this option

among men. The solid technical capabilities afforded to

our affiliated clinic through our ties to Bosley, Inc., in the

United States, will support a steady improvement in treat-

ment revenues.

We aim to take this business nationwide and intend to

open clinics in major urban centers, such as Osaka and

Nagoya, as soon as possible.

Overview

D emand from women in Japan for custom-made wigs was

sluggish in fiscal 2006, leading to a slight decrease in sales

year-on-year.

Expand main target group with peer-specific measures

C urrently, women in their 60s and 70s form our main tar-

get age group for Aderans-brand ladies’ custom-made wigs,

and one of the important issues is to expand this target age

range. We will achieve this goal through our two-brand

strategy for custom-made wigs, with the Eve Series directed

toward women in their 60s and up and the Sifore Series

aimed at women in their 40s and 50s.

Gear product development to market needs

C yberhair, an artificial hair with properties very similar to

natural hair, debuted in 1991 as a revolution in artificial hair

technology. In the years since then, Aderans has acquired

patents on this achievement in 10 countries and has earned

high praise from clients everywhere.

With breakthrough technology, however, Aderans took

artificial hair to a new level of excellence, and in March

2006, the Company introduced custom-made wigs featuring

Aderans Vital Hair.

Aderans Vital Hair, an artificial hair even more like nat-

ural hair than Cyberhair, improves on its predecessor with

an extraordinary ability to accept various forms. Until this

point, memory-retentiveness was a characteristic of artificial

hair that prevented a wig from losing its customized shape,

which meant that wearers had to be content with a set

hairstyle. With Aderans Vital Hair, strand thickness and

rigidity can be matched precisely to each client’s hair struc-

ture for custom-made wigs with superior performance.

We will create advertising materials that spotlight the

qualities of Aderans Vital Hair to catch the attention of men

over 30. We expect our new wigs to generate the kind of

interest that underpins an increase in new clients.

From a medium- to long-term growth perspective, men

in their 30s and 40s are the main target for Aderans’ custom-

made wig business, and we vigorously target this age group

to secure a stable profit base for the future. The parallel

strategy for our hair support

business, for which the main

target group is men in their

20s, is to promote research,

including pharmaceutical

studies, and develop innova-

tive products and services to

promote healthy hair growth

and distinguish us from our

rivals in the industry.

Under 20s20s30s40sOver 50s

Breakdown of Sa les to New Male C l ients by AgeNon-conso l idated(%)

2005 2006200420032002

0

25

75

50

Strategy for the Domestic

Women’s Market

11

Aderans Group Solutions for Women in Japan

AderansCustom-made wigs


60s and70sEve Series launched in 1990

New Marketing ApproachEvery year at a number of major cities nationwide we stage wig

fairs and try-on events, where clients can try out our custom-

made wigs from both the Eve and Sifore series, aided by our

professional staff.

FontaineReady-made wigs

1985Joined Aderans group under merger.

2003Aderans acquired 100% equity andturned company into wholly ownedsubsidiary.The Aderans Group has

the combined capabilities to meet thediverse needs of the women’s market.

Poste

Wig


40s and50sSifore Series launched in 2003

Enhance Fontaine’s business

F ontaine caters to women of all ages, from young to middle-

aged and older, and distributes ready-made wigs through

three key channels, all with national coverage — counters in

department stores, directly operated salons, and a network

of beauty salons supplied under the company’s wholesale-

based Beauty Support System. The company also makes its

products available by mail order.

Aderans also sells custom-made wigs through alliances

with beauty salons, but in March 2005, the Company trans-

ferred the activities of its barber and beauty salon network to

Fontaine. This move is designed to consolidate the beauty

salon distribution channels of the Group and boost market-

ing efficiency.

But to successfully promote Aderans’ custom-made wigs,

staff at Fontaine’s salons will need a solid understanding of

the business, including product knowledge, haircutting

techniques and other know-how basic to Aderans’ custom-

made wig business but irrelevant to the ready-made wig

business. This is a medium-term task that Fontaine must

address to facilitate sales of custom-made wigs.

12

eve Finewith Germanium

Aderans Technology

Pr inc ipa l Product Sa lesto Female C l ients in Japan

0

20

10

30

2005 2006200420032002

Aderans RepeatAderans NewFontaine

Breakdown of Sa les to New Female C l ients by Age

2005 2006200019951990

Under 50s60s

50sOver 70s

Non-conso l idated(B i l l ions o f yen ) (%)

0

25

75

50

To attract more clients to each brand, Aderans has intro-

duced new lines under both brands every two years and geared

advertising activities specifically to each target group so as to

enhance recognition of the brands among clients in respective

segments.

Toward this end, in March 2006, we launched Eve Fine,

a custom-made wig featuring germanium to catch the inter-

est of increasingly health-conscious older women.

Turn untapped interest into real demand withFontaine’s products

A crucial task in the effort to attract new female clients is to

maximize the combined capabilities of the Group. A key

component of this effort is the joint marketing approach

taken by Aderans, which specializes in custom-made wigs,

and its consolidated subsidiary Fontaine, which concentrates

on ready-made wigs.

In December 2005, staff at Aderans’ directly operated

salons throughout Japan began suggesting Fontaine’s ready-

made wigs to cost-conscious clients who shied away from

the purchase of a custom-made wig. As a result, nearly 400

women visiting Aderans’ salons placed orders for ready-

made wigs in the fourth quarter of fiscal 2006.

The market for women’s hair-related products and ser-

vices is driven by two types of demand: demand from

women who are truly concerned about their hair, and

demand from women who consider wigs and hair acces-

sories an extension of fashion. If prevailing trends persist,

the women’s market could well overtake the men’s market as

a growth segment.

To take full advantage of the opportunities afforded by

this situation, Aderans will complement efforts to promote

Fontaine’s lineup at directly operated salons and with prod-

uct introductions at its national wig fairs and try-on events,

as well. Demand for the Group’s varied selection of ladies’

wigs is sure to expand.


Germanium exhibits minimal energy output (at a surface temperature of about 32°C) and is said to have

no reflective properties and no worry of side effects or allergic reactions. An inorganic substance, it has

the ability to amplify and regulate the balance of electrical potential. It is featured in the base of Eve Fine,

a line of custom-made wigs that debuted in March 2006, and makes the wig more comfortable to wear.

MAIN OBJECTIVE: Strengthen network of high-value-added salons, particularly new-conceptsalons, which carry wigs and other products

13

New-Concept Salons

Strategy for Other Domestic

Hair-Related Businesses

Collaboration strategy with an M&A perspective

F or Aderans, advertising, particularly television commer-

cials, is the best marketing tool for highlighting the special

features of products and generating interest from new

clients. But this reliance on advertising underscores a nag-

ging question for management: How do we fuel demand

while keeping advertising expenses in check?

One answer is the new-concept salon, which comple-

ments our network of directly operated salons, and facili-

tates client access to conventional barber and hairdressing

services as well as the products and hair accessories of the

Aderans Group. As of February 28, 2006, this evolving

nationwide network comprised 10 locations.

Developing the network from scratch is a lesson in

investment — an investment of time and money as well as

human resources. We are therefore pursuing a strategy of

collaboration with existing barber shops and beauty salons

outside the current Aderans Group with a view toward M&A

that will shorten the time involved in setting up a new-con-

cept salon, limit start-up expenses, secure skilled staff and

properly address demand from women of all ages.

Providers of typical haircut and styling services face

intense competition in Japan today, and the situation is

unlikely to improve. To minimize the impact of this operat-

ing environment, we aim to expand our network of high-

value-added salons quickly and cost-efficiently by bringing

existing locations under the Aderans umbrella. We have sev-

eral salons under consideration now.

Domestic Marketing System

Strategic Advertising

Consultations+

Hair Check(Free)

Custom-made wigs and

Hair Support

Services via Nationwide Network

Non-Consolidated Sales Network(As of February 28, 2006)

Counseling Offices 9Regular Salons 140Ladies’ Salons 24Satellite Salons 50New-Concept Salons 10

Aderans utilizes three primary sales channels in Japan: directly operated salons, which are located in major urban centers

throughout the country; satellite salons, which cater to clients outside large cities; and new-concept salons, which offer

Aderans’ services as well as typical barber and hairdressing services.

Aderans ’ domest ic market ing e f fo r ts h inge on adver t i s ing

strategies but encompass informal consultat ion services by

telephone and postcard as well. Existing and potential clients

may also fill out the online Hair Check form and make appoint-

ments through our web site.

● TV ● Magazines ● Web site● Telephone ● Postcard

After-sales services

Before

After

14


Strategy for

Overseas MarketsMAIN OBJECTIVE: Work toward higher marketshares and enhanced profitability by raisingwig sales and promoting the hair-transplantbusiness

Topics in the medium-term management plan

C onsolidated sales from overseas operations, after interseg-

ment elimination, reached ¥16.4 billion in fiscal 2006 and

represented about 23% of consolidated net sales. Our long-

term goal is to boost this contribution to 50% as quickly as

we can, and toward this end, overseas operations are tasked

with a two-point mission during the current three-year man-

agement plan: to secure top share — that is, 40% or more —

in each market where we already have a presence, and to

establish a profit structure that ensures a ratio of net sales to

operating income between 10% and 15%.

To further support efforts to reach a 50:50 split in con-

tributions from domestic and overseas operations, we have

entertained the possibility of entering the huge markets of

Russia and the People’s Republic of China (PRC). In February

2006, we made our move, setting up our first local represen-

tative office in the PRC.

We will carefully watch evolving trends in these coun-

tries and neighboring regions to ascertain the feasibility of

additional offices and identify M&A opportunities here.

The wig business

T o reinforce our wig business abroad, we are taking a

region-specific approach.

In North America, our objectives are to expand the

wholesale business, explore new retailing formats and empha-

size certain activities over others to improve profitability.

Toward this end, the regional spotlight will shine on General

Wig Manufacturers, Inc., a consolidated subsidiary plagued

by operating losses, as this company seeks to enhance sales in

its competitive market by focusing on its wholesales business

with a new designer’s wig line, human hair extensions and

products for ethnic — or non Caucasian — market. The com-

pany will also strive to trim selling, general and administrative

expenses, in particular by downsizing its unprofitable mail-

order and mass-merchandising divisions, in order to boost

profitability. A series of these activities will eventually lead to

the further expansion of the wholesale business with profits.

In Europe, we aim to boost profitability through

stronger sales and distribution networks, raise operating effi-

ciency and cultivate new demand with investments in areas,

such as Russia, and Northern, Central, Eastern and Southern

Europe, where we do not yet have a presence.

A key to higher profitability in Europe is the German

market, where our subsidiaries will endeavor to achieve

independent breakeven point in profits. Subsidiaries here as

well as in France and England will strengthen promotional

activities and maximize client bases. Seeking to utilize the

fashion wig brand power of the Group, European sub-

sidiaries and Thai production facilities are now working

together to create a fashion wig brand for Europe.

In Asia, excluding Japan, our goal is to strengthen the

marketing structure, make operations more efficient, boost

the number of clients, maximize the potential of advertising,

and utilize the Internet to promote products.

Here, Aderans Inc. (Taiwan), our key marketing sub-

sidiary in Asia outside Japan, is working to fortify its mar-

keting structure and make operations more efficient. In early

2006, the company released a new television commercial

designed to stimulate interest from new clients. Concerted

efforts are paying off, substantiated by signs of recovery in

the second half of fiscal 2006.

Expanding share of hair-transplant market, taking business around the world

U .S.-based Bosley, Inc., a leader in the hair-transplant busi-

ness, enjoys a share of just under 10% in the local market,

and aims to expand this share and go public. The company

also intends to extend its business reach to neighboring

Mexico and Canada, and perhaps even further afield, to cap-

italize on emerging demand.

In fiscal 2006, Bosley raised sales about 10% with a

database approach to marketing. The company also endeav-

ored to pinpoint the right balance between two kinds of

advertising — infomercials, with refreshed content to attract

new interest, and 60-second spots — with some measure of

success.

To enhance accessibility to clients, Bosley plans to open

new offices in Detroit, Michigan, and Raleigh, North

Carolina, and relocate their Dallas, Texas office to a larger

and more modern facility. Bosley may add locations to its

network in the future.

15

The Aderans Group Abroad

Basic Strategy: To establish a presence in Europe and North America, primarily through mergers

with and acquisitions of wholesalers, and to create new markets in Asia, excluding Japan,

through the establishment of retailing outlets based on the business model used in Japan.

North America: A total of 10 companies, including Aderans Holding

Co., Inc., four wholesalers of men’s and women’s wigs, as well

as Aderans, Inc., which operates retail stores, Bosley, Inc.,

which is engaged in the hair-transplant business, and Aderans

Research Institute, Inc., which is pursuing advances in hair-

regeneration technology.

Europe: A total of 11 companies, including holding company

Aderans Europe B.V., in the Netherlands, which oversees

subsidiaries in France, Germany, Belgium, the Netherlands,

England and Sweden.

Asia, excluding Japan: Subsidiaries in Taiwan, Thailand, South Korea, Singapore and the PRC, which

concentrate on retail operations.

Group Production Bases: Aderans Thai., Ltd., World Quality Co., Ltd., and Aderans Philippines, Inc.,

world-class facilities with an aggregate annual capacity of about 1,200,000 wigs and a

combined workforce of about 7,000 people.

Aderans (Shanghai) Company, Ltd.In February 2006, Aderans (Shanghai) Company, Ltd., commenced operations in the PRC, to provide

the local market with hair-replacement products, primarily high-value-added custom-made wigs

produced at our own production facilities in Thailand, and haircare services for healthy hair growth.

This company will raise the profile of the Aderans brand in the PRC and set the stage for future

expansion of the sales network in other urban centers of this country.

15

16

Research and Development

In JapanR&D Headquarters

T he development of products and technologies for the

Aderans Group centers the activities of the research and

development headquarters in Niigata Prefecture. The

progress achieved here is indispensable to the fabrication of

high-quality Aderans-brand wigs and other hair-replacement

products. Molding technology, for example, ensures a per-

fect fit through faithful reproduction of head shape, flow of

hair, whorls, hairline and other characteristics unique to

each client. The polyurethane base of Aderans’ products is a

safe and hygienic artificial skin with color and texture

extremely close to that of real skin.

Artificial Hair

Cyberhair, an artificial hair developed by Aderans in 1991

and patented in 10 countries, is remarkably similar to natural

hair, with excellent durability, heat-resistance, water absorp-

tion and stable light-refraction qualities, in addition to

natural luster and texture. In March 2006, the Company

debuted Aderans Vital Hair, which surpasses even the out-

standing properties of Cyberhair.

North AmericaHair-Regeneration Research

T he Aderans Group includes Aderans Research Institute

Inc. (ARI), a California-based company focusing on hair-

regeneration R&D. The company’s two laboratories, one in

Philadelphia and the other in Atlanta, are the world’s only

facilities solely dedicated to research on hair-regeneration

technology. To date, progress has been on track. ARI com-

pleted preclinical trials with animals, which paves the way

for Phase I human clinical trials. At present, the company is

engaged in preparing applications to gain approval from the

U.S. Food and Drug Administration for the Phase 1 clinical

trial. Therefore, a practical date for commercialization will

be in 2008 or later, and efforts are directed earnestly toward

this goal.

Custom-made wigs

Professional Skills

After-sales services, which we call “aftercare,” represent an

e x t r e m e l y i m p o r t a n t p a r t o f o u r b u s i n e s s . T h i s i s

substantiated by the fact that some 60% of our employees

are involved in service-related activities such as haircuts for

people who have purchased custom-made wigs. To ensure

that we can provide products and services when and where

needed, our professionals, located at more than 200 directly

opera ted sa lons and o ther locat ions in Japan, rece ive

dedicated training each time we launch a new product, in

addition to their regular training.

What is the differ-ence between hairregeneration andhair transplants?

Aderans Technology

17

Hair Regeneration

Hair Transplants

A hair transplant is a process whereby a thin strip of the patient’s own scalp with healthy hair roots issurgically removed from the back or side of the head and relocated, one graft at a time, to areas where hair isthin or the scalp is completely bald.

Hair regrowthCulture of hair follicle cells Injection of cultivated hairfollicle cells into baldingareas.

Extraction of hair folliclecells, under the root of thehair.

Total Hair Solution Service

Aderans Research Institute is developing and testing follicle neogenesis, a new treatment for hair loss,

based on state-of-the-art tissue-engineering techniques. During a conventional procedure, doctors will

remove a small amount of tissue, from which hair-forming cells will be extracted and allowed to multiply

under controlled conditions. After enough new cells have formed, they will be placed into the patient’s scalp,

providing the patient with many more hair-forming cells than were originally taken from the scalp. Hair

regeneration is a medical procedure for people who exhibit male- or female-pattern hair loss.

18

Aderans in Society

A common thread that runs through our corporate fabric asa globally active provider of comprehensive hair-relatedproducts and services is the return of corporate value backto society. An obvious example of this commitment is thegift of custom-made wigs to children who have lost hair dueto sickness or injury. But we also contribute to societythrough the Tokyo Hair Beauty College, where tomorrow’shair stylists learn the skills required to meet the haircareneeds of society.

In addition, we strive to be a good employer by ensur-ing a healthy work environment for our employees, and wesupport regional societies overseas through the creation ofstable jobs, particularly in Asia.

At our production facilities in Thailand and the Philip-pines, we participate a range of environmental protectionactivities, such as those outlined below.

In 2001, we worked with Japan’s Ministry of Economy,Trade and Industry to establish the Japan Hair IndustryAssociation as a regulatory body advocating stability andtransparency in the disclosure practices of domestic compa-nies providing wigs, products to create the illusion ofgreater hair volume and products to promote healthy hairgrowth.

The formation of this association highlights the fact thatthe industry has developed to a point where providers ofhair-related products and services have a significant impacton society. Takayoshi Okamoto, Aderans Chairman andCEO, is the association’s representative director and hismandate is to inspire greater consumer confidence in theindustry while promoting sound development of the indus-try itself.

Major community activities in fiscal 2006

June Sponsored the 4th Aderans Wellness Open on the Senior Professional Golf AssociationTour circuit

July Sponsored the 11th Aderans Boys & GirlsSoccer Festival

August Sponsored the 9th Aderans Summer HolidaysChildren’s Golf Events

October– Sponsored the 21st Aderans Love CharityNovember campaign

November Sponsored the 21st Aderans Human Forum

Env i ronmenta l p ro tec t i on and qua l i t y con t ro l a tAderans Thai and World Quality

A derans Thai and World Quality were quick to tackle envi-ronmental protection and quality control issues. In 1999,the International Standards Organization certified both pro-duction facilitates with ISO 14001 for environmental protec-tion systems and ISO 9002 for quality control.

Major environmental protection efforts at Aderans Thai andWorld Quality

• Prevent water pollution by factory wastewater• Prevent air pollution within the facility• Ensure safe processing of industrial waste• Promote effective use of available resources• Improve working conditions within the facility

CONTENTS

19 Consolidated Five-Year Summary

20 Consolidated Financial Review

28 Consolidated Financial Statements

41 Report of Independent Auditors

42 Non-Consolidated Five-Year Summary

43 Non-Consolidated Operating Data

Financial Section

Millions of yen

2006 2005 2004 2003 2002

Net sales ¥ 72,690 ¥ 70,625 ¥ 73,881 ¥ 77,112 ¥ 74,181

Cost of sales 12,690 12,326 13,146 13,080 13,324

Gross profit 60,000 58,299 60,734 64,032 60,856

Selling, general and administrative expenses 49,680 49,830 49,938 51,058 44,197

Operating income 10,319 8,468 10,796 12,973 16,659

Income (loss) before income taxes 10,889 (192) 10,229 12,742 15,788

Net income (loss) 6,149 (3,568) 5,001 6,173 9,200

Capital expenditures 2,565 2,704 5,078 2,537 2,715

Research and development expenses 977 703 591 519 315

Depreciation and amortization 2,012 2,322 2,368 2,285 2,270

Net income (loss) ¥ 150.51 ¥ (88.02) ¥ 120.46 ¥ 147.82 ¥ 224.76

Shareholders’ equity 1,760.45 1,671.40 1,798.67 1,737.41 1,678.28

Cash dividends applicable to the year 44.00 38.00 32.00 30.00 28.00

Current assets ¥ 35,257 ¥ 36,492 ¥ 35,029 ¥ 39,282 ¥ 33,830

Current liabilities 12,546 10,214 11,778 13,638 14,966

Interest-bearing debt — — — — 145

Shareholders’ equity 69,239 67,477 73,884 70,303 68,577

Total assets 87,490 83,140 91,048 92,864 92,284

Operating income to net sales 14.1 12.0 14.6 16.8 22.5

Net income (loss) to net sales 8.4 (5.1) 6.8 8.0 12.4

Shareholders’ equity to total assets 79.1 81.2 81.2 75.7 74.3

Return on equity 8.9 (5.0) 6.9 8.9 14.1

Return on assets 7.2 (4.1) 5.4 6.7 10.4

Interest-bearing debt ratio — — — — 0.2

Number of shares outstanding (thousand) 39,256 40,371 40,997 40,357 40,861

Number of employees 5,418 5,457 5,373 5,406 5,172

Note: Net income (loss) per share and shareholders’ equity per share for 2006, 2005, 2004 and 2003 are calculated based on the newaccounting standard described in Note 13 on page 39.

Consolidated Five-Year SummaryAderans Company Limited and Consolidated SubsidiariesYears ended the last day of February

Results of Operations

Amounts per Share of Common Stock (in yen)

Financial Position

Key Ratios (%)

Other Year-End Data

19

20

Consolidated Financial Review

The scope of consolidation for this review of fiscal 2006, ended February 28, 2006, covers Aderans Co.,Ltd. (hereafter inferred in the terms “the Company,” “the parent company” and “non-consolidated”), and27 consolidated subsidiaries, comprising three domestic subsidiaries, including Fontaine Co., Ltd., and24 overseas subsidiaries. In fiscal 2006, Carl M Lundh AB was added to the scope of consolidationthrough acquisition, while Bosley Healthy Hair Institute, Inc., was removed, owing to its merger withanother consolidated subsidiary.

The efforts of companies under this consolidated umbrella at home and abroad led to higher salesand profits, on a consolidated basis.

Dramatic improvement in sales by operations in North America and Europe complemented a smallimprovement in non-consolidated results, to boost net sales 2.9%, to ¥72,690 million ($625 million),over fiscal 2005.

Millions of yen

Operating Data 2006 2005 % Change

Net sales ¥72,690 ¥70,625 2.9%Operating income 10,319 8,468 21.9Net income (loss) 6,149 (3,568) —Net sales per employee 13.4 12.9 3.7Net income (loss) per employee 1.14 (0.65) —Number of employees 5,418 5,457 –0.7

Cost of sales grew 3.0%, to ¥12,690 million ($109 million), but with higher net sales, the cost ofsales ratio held steady at 17.5%.

Selling, general and administrative (SGA) expenses edged down 0.3%, to ¥49,680 million ($427 mil-lion), with advertising expenses accounting for ¥12,199 million ($104 million), down 1.9%, andpersonnel expenses accounting for ¥19,759 million ($169 million), up 2.3%.

Cost of Sales and Selling, General Millions of yen

and Administrative Expenses 2006 2005 % Change

Cost of sales ¥12,690 ¥12,326 3.0%Selling, general and administrative expenses 49,680 49,830 –0.3

Advertising expenses 12,199 12,440 –1.9Personnel expenses 19,759 19,316 2.3Other 17,722 18,072 –1.9

Net Sales, Expenses and Profitability

0

15

30

45

60

75

–5.0

–2.5

2.5

0

5.0

7.5

–10

–5

0

5

10

15

(%) (%)Cost o f Sa les , SGA Expenses and Operat ing Income to Net Sa les Rat ios

Net Income (Loss) , and Net Income (Loss) to Net Sa les Rat io

18.0 17.0 17.8 17.5 17.559.6 66.2 67.6 70.5 68.322.5 16.8 14.6 12.0 14.1

Cost of sales ratio SGA expenses ratio Operating income ratio Net income (loss) to

net sales ratio (%)

9.2 6.1 5.0 (3.5) 6.1

12.4 8.0 6.8 (5.1) 8.4

(Billions of yen)

2005 2006200420032002 2005 2006200420032002

Net income (loss) (Billions of yen)

21

As a result, operating income rebounded 21.9%, to ¥10,319 million ($88 million). Without the ¥6,889 million in impairment losses recorded in fiscal 2005, net other expenses were

much lower, retreating 92.6%, to ¥700 million ($6 million). A higher net sales starting point and a reduced expense burden enabled the Group to recolor its bot-

tom line from the red of a ¥192 million net loss before income taxes and minority interests to the solidblack of ¥10,889 million ($93 million) in net income before income taxes and minority interests.Underpinned by this result, net income settled at ¥6,149 million ($52 million) and demonstrated anexcellent turnaround from the net loss of ¥3,568 million recorded in fiscal 2005.

Net income per share was ¥150.51 ($1.29).Capital expenditures fell 5.2%, to ¥2,565 million ($22 million). Funds were applied to the establish-

ment, relocation and remodeling of salons by the parent company, and to the opening of directlyoperated salons by Fontaine, as well as to the installation of equipment in Bosley’s offices and at the hair-regeneration research facility in the United States. Depreciation and amortization reached ¥2,012 million($17 million).

Yen

Per Share Data 2006 2005 % Change

Net income (loss) ¥ 150.51 ¥ (88.02) —%Shareholders’ equity 1,760.45 1,671.40 5.3Cash dividends 44.00 38.00 15.8

North America, Japan Europe and Asia Average/Total

Key Ratios by Geographic Area 2006 2005 2006 2005 2006 2005

Sales growth ratio 0.8% –4.5% 11.0% –3.9% 2.9% –4.4%Operating income (loss) to net sales 22.7% 22.0% 6.9% 1.4% 19.1% 17.7%Operating income (loss) (millions of yen) ¥12,768 ¥12,266 ¥1,143 ¥212 ¥13,911 ¥12,479Asset turnover ratio (times) 1.03 0.91 1.07 0.89 1.03 0.90Operating income (loss) to total assets 23.3% 20.0% 7.4% 1.3% 19.8% 16.0%

The figures above, except sales growth rate, represent those before adjustments for and eliminations of unallocated corporate expensesand assets.

Net Sales by Region

0

15

30

45

60

75

(Billions of yen)Net Sa les by Region

Japan Asia North America Europe Total

64.0 61.8 58.4 55.8 56.20.7 0.7 0.5 0.4 0.47.5 12.4 12.1 11.7 12.61.8 2.1 2.6 2.6 3.3

74.1 77.1 73.8 70.6 72.6

0

4,000

8,000

12,000

20,000

16,000

(Millions of yen)Operat ing Income (Loss)

Japan Asia North America Europe EliminationsTotal

2005 2006200420032002 2005 2006200420032002

12,266 793 (688)107

(4,010)8,468

12,768 1,000

(75)218

(3,591)10,319

19,696 1,433 (450)(68)

(3,952)16,659

16,509 1,371 (1,343)

(11)(3,552)12,973

14,560988

(1,045)4

(3,712)10,796

Note: The above figures exclude intersegment transactions.

22

ADERANS’ PERFORMANCENon-consolidated net sales inched upward again after a drop in fiscal 2005, showing a 0.2% improve-ment, to ¥44,990 million ($386 million). This result reflects a positive change in the men’s market,where the Company’s enhanced advertising activities attracted interest from new male clients, which inturn spurred higher sales from repeat clients. and led to a 1.4% increase in sales to men. In the women’smarket, the Company encountered steady replacement demand but a soft response from new clients,which led to a 0.2% dip in sales to women.

Cost of sales grew 1.7%, to ¥7,602 million ($65 million), for a cost of sales ratio of 16.9%, up 0.2percentage point from fiscal 2005.

On the cost front, advertising expenses fell 8.8%, to ¥8,976 million ($77 million). As a percentage ofoverall advertising expenses, advertising directed at men was 44% and at women, 56%. Personnelexpenses decreased 1.3%, to ¥9,451 million ($81 million). Consequently, SGA expenses dropped 3.2%,to ¥29,793 million ($256 million).

Millions of yen

Aderans’ Net Sales Product Category 2006 2005 2004 2003 2002

Custom-made wigs ¥29,247 ¥29,588 ¥31,599 ¥32,950 ¥33,435Hair Fix 115 132 108 167 233Pinpoint 1,987 1,585 1,908 2,300 3,010Hair Support 5,564 5,520 5,516 5,997 6,460Physical Esthé 1,210 1,105 1,191 1,455 1,513Subtotal 38,125 37,933 40,325 42,872 44,653

Other custom-made wigs 77 63 84 68 67Ready-made wigs 74 23 8 16 1,899Other sales 3,985 4,161 4,687 5,449 6,064Service revenues 2,728 2,702 2,652 2,482 2,590Total ¥44,990 ¥44,883 ¥47,757 ¥50,888 ¥55,275

Japan Sales from operations in Japan are generated by Aderans and Fontaine, which special-ize in custom-made wigs and ready-made wigs, respectively, as well as two other

consolidated subsidiaries, which are involved in activities other than hair-related businesses. Aggregate domestic sales, including intersegment sales, reached ¥56,303 million ($484 million) in

fiscal 2006, up 0.8% year-on-year, and accounted for 77.5% of consolidated net sales. A breakdown of sales by main product shows that sales of custom-made wigs — a mainstay category —

inched up 0.2%, to ¥31,473 million, thanks to stable replacement demand for Aderans’ products. Salesof ready-made wigs climbed 4.5%, to ¥9,885 million, paralleling greater interest in Fontaine’s products.Sales of other hair-related products decreased 4.2%, to ¥4,847 million. Service revenues rose 1.9%, to¥9,530 million, on a recovery in demand for services designed by Aderans for young men to promotehealthy hair growth. Other business income slipped 1.3%, to ¥505 million, while intersegment salesrallied 8.7%, to ¥61 million.

As a result, operating income excluding intersegment transactions reached ¥12,768 million ($109million), up 4.1% from fiscal 2005.

23

Operating income rebounded, rising 14.7%, to ¥7,594 million ($65 million). Early application of the impairment loss accounting standard in fiscal 2005 had an effect on both

consolidated and non-consolidated statements of income. Aderans incurred ¥224 million in impairmentlosses and ¥12,493 million in unrealized losses on investment in subsidiaries. However, no such expenseswere recorded in fiscal 2006. Consequently, the Company was able to return to a net income position, at¥6,700 million ($57 million), from the net loss of ¥6,813 million in fiscal 2005.

In fiscal 2006, capital expenditures amounted to ¥2,694 million ($23 million), up 31.3%, with fundsallocated primarily toward the opening of one satellite salon, the relocation of 13 salons and the expan-sion or renovation of two other existing salons. Depreciation and amortization decreased 8.6%, to ¥1,450million ($12 million).

Interim and year-end dividends went up ¥3.00 per share, to ¥22.00 in each six-month period, for anannual dividend of ¥44.00 per share. This ¥6.00 year-on-year gain marked the 13th consecutive year thatAderans has raised dividends.

0

4

8

12

16

20Aderans’ Pr inc ipa l Product Sa les by Gender

23.1 23.3 22.3 21.6 21.521.4 19.5 17.9 16.2 16.5

Female Male

0

5

10

15

25

20

(Billions of yen)Aderans’ Pr inc ipa l Product Sa les to New and Repeat C l ients

20.8 18.5 15.6 13.8 13.723.7 24.3 24.7 24.0 24.3

New Repeat

(Billions of yen)

2005 2006200420032002 2005 2006200420032002

(%)

Aderans ’ New MaleCl ients by Age

Under 20 2.5%20s 43.730s 26.940s 13.750s 7.560s 4.070 and over 1.7

(%)

Aderans ’ New Female C l ients by Age

Under 20 0.5%20s 0.930s 1.840s 4.350s 16.060s 36.870 and over 39.7

FONTAINEFontaine is a sales subsidiary with the top share — about 30% — of the women’s fashion wig market inJapan. The company utilizes various marketing channels, including mail order, but focuses on three keydistribution routes — department stores, directly operated salons and beauty salons — to reach its mar-ket. As of February 28, 2006, the company reached the market through 170 department store counters, anationwide network of 37 directly operated salons, and wholesale access to some 100,000 beauty salonsand fine cosmetics stores across the country.

During fiscal 2006, Fontaine introduced new products and conducted demonstrations at departmentstores and directly operated salons to expand interest and encourage purchases among new and existingclients, while working to promote greater use of its Beauty Support System in wholesale circles. Theseefforts paid off with higher sales through all distribution channels, for a total of ¥11,062 million ($95million), up 6.2% over fiscal 2005.

Operating income fell 4.1%, to ¥1,454 million ($12 million), largely because of a temporary increasein personnel expenses following the assumption of Aderans’ salon division in fiscal 2006.

Asia In Asia, outside Aderans’ home base of Japan, the Company has established a solid presence in Taiwan, Singapore, Thailand, South Korea and the Philippines.

Consolidated subsidiaries are Aderans Inc. (Taiwan), which markets wigs; Aderans Thai., Ltd., andWorld Quality Co., Ltd., which manufacture wigs and hair-replacement products in Thailand; andAderans Philippines, Inc., which produces wigs and hair-replacement products in the Philippines.

Efforts to reinforce the marketing structure at Aderans (Taiwan) led to pleasing results in the secondhalf of fiscal 2006, as the subsidiary welcomed a long-awaited end to the downward sales trend thatplagued the company and returned to an operating income position. Unfortunately, while sales were upon a full-year basis when translated into yen, sales were below the fiscal 2005 level on a local currencybasis.

Overall, regional sales grew 16.2%, to ¥4,929 million ($42 million). A breakdown shows that sales ofcustom-made wigs decreased 3.9%, to ¥248 million, while sales of ready-made wigs climbed 13.2%, to¥83 million, and sales of other hair-related products jumped 30.0%, to ¥73 million. Service revenuesrallied 3.5%, to ¥91 million. Intersegment sales expanded 17.7%, to ¥4,433 million, paralleling anincrease in sales by Aderans Thai to Fontaine and Group companies in Europe and the United States.

The upsurge in intersegment sales fueled a 26.1% rise in operating income, to ¥1,000 million ($8million).

In North America, the Aderans Group is represented by 10 consolidated subsidiariesunder the Aderans Holding Co., Inc., umbrella, including four that wholesale men’sand women’s wigs; Aderans, Inc., involved in retailing; Bosley, engaged in the hair-

transplant business; and Aderans Research Institute, Inc., which is pursuing the development ofhair-regeneration technology.

Aggregate sales in this market grew 10.4%, to ¥13,595 million ($116 million). A breakdown by product reveals that sales of custom-made wigs benefited from the introduction of

new items, which nudged sales up 0.7%, to ¥374 million, but demand for ready-made wigs was sluggish,despite concerted efforts to revitalize sales to large-scale retailing chains, leading to a 0.2% dip in sales, to¥2,858 million. In the hair-transplant business, service revenues rose 10.1%, to ¥9,068 million. Sales ofother hair-related products jumped 36.3%, to ¥341 million. Intersegment sales skyrocketed 61.1%, to¥953 million.

Among developments at principal subsidiaries in the United States, Bosley and General WigManufacturers, Inc., deserve special mention. Bosley lifted sales by 10.1%, largely through the success ofinfomercials, which drew increased attention to the company’s hair-transplant services, and the use of aclient database to reinforce marketing efforts. The rewards were clearly evident in the second half of thefiscal year. Meanwhile, General Wig Manufacturers delayed its planned introduction of new products,which prevented the company from reaching its sales goal, but ongoing efforts to trim expenses effectivelynarrowed its operating loss.

The overall operating loss for operations in North America shrank considerably, from ¥688 million infiscal 2005 to ¥75 million ($0.6 million) in fiscal 2006. This reflects better sales and reduced amortiza-tion of consolidation difference account, through early application of the impairment loss accountingstandard last year.

Europe The Aderans Group’s European presence is maintained by 10 consolidated sub-sidiaries, with operations in France, Germany, Belgium, the Netherlands, the

United Kingdom and most recently, Sweden. Aggregate sales from these businesses climbed 26.2%, to ¥3,312 million ($28 million) in fiscal 2006.

The biggest factor contributing to higher sales was derived from the acquisition of Sweden’s Carl MLundh, which was complemented by efforts to expand sales through the debut of high-value-addedproducts and the use of direct mail to promote products.

By product, sales of custom-made wigs skyrocketed 148.0%, to ¥528 million, and sales of ready-made wigs grew 3.8%, to ¥2,136 million. Sales of other hair-related products surged 84.8%, to ¥550million, and service revenues soared 73.1%, to ¥95 million.

24

Excluding Japan

NorthAmerica

25

Cash Flow Status

On the profit front, the combined results of the Group’s two subsidiaries in Germany finally returnedto the black. With this recovery in Germany, all the Group’s European subsidiaries showed operatingincome in fiscal 2006. All told, operating income after amortization of the consolidation differenceaccount reached ¥218 million ($1 million), up 104.0%.

Cash and cash equivalents at February 28, 2006, stood at ¥15,896 million ($136 million), up 19.0%from a year earlier.

Net cash provided by operating activities jumped 32.2%, to ¥10,339 million ($89 million). Thischange is largely represented by ¥10,889 million in income before income taxes and minority interestsand ¥2,082 million in depreciation and amortization on the assets side, and ¥3,209 million in paymentof income taxes on the liabilities side.

Net cash used in investing activities tumbled 69.7%, to ¥2,532 million ($21 million). This consider-able reduction reflects the fact that ¥18,692 million received in proceeds from sales of marketablesecurities was more than offset by outlays of ¥11,995 million to buy marketable securities, ¥2,017 mil-lion to acquire property, plant and equipment, and ¥7,283 million to purchase investment securities.

Net cash used in financing activities soared 96.3%, to ¥5,545 million ($47 million). This dramaticincrease reflects cash outflow of ¥1,648 million to pay dividends and ¥4,977 million to acquire treasurystock, and cash inflow of just ¥1,080 million in proceeds from the sale of treasury stock.

Millions of yen

Summary of Cash Flows Statements 2006 2005 % Change

Net cash provided by operating activities ¥10,399 ¥ 7,868 32.2%Net cash used in investing activities (2,532) (8,354) –69.7Net cash used in financing activities (5,545) (2,825) 96.3Net change in cash and cash equivalents 2,540 (3,324) –176.4Cash and cash equivalents at the beginning of year 13,356 16,819 –20.6Cash and cash equivalents at the end of year 15,896 13,356 19.0

Gross cash flows = Net income + Depreciation and amortization

Net cash flows provided by operating activities Net cash flows used in investing activities Free cash flows

9.4 9.7 7.5 7.8 10.3

(4.7) (3.3) (6.3) (8.3) (2.5)4.6 6.3 1.2 (0.4) 7.8

Free cash flows = Net cash flows provided by operating activities + Net cash flows used in investing activities

–3

0

3

6

9

12Gross Cash F lows and Capi ta l Expendi tures

11.9 8.5 7.5 (1.0) 8.22.7 2.5 5.0 2.7 2.5

Gross cash flows Capital expenditures

–10

–5

0

5

15

10

(Billions of yen)Free Cash F lows

(Billions of yen)

2005 2006200420032002 2005 2006200420032002

26

(Times)Asset Turnover Rat io

0

5

10

15

20

25

0

0.2

0.4

0.6

0.8

1.0

0

60

120

180

240

300

33.8 39.2 35.0 36.4 35.214.9 13.6 11.7 10.2 12.518.8 25.6 23.2 26.2 22.7

226.0 288.0 297.4 357.3 281.0

Working Capi ta l and Current Rat io

0.84 0.83 0.80 0.81 0.85Asset turnover ratio

Working capitalCurrent ratio (%)

(Billions of yen) (%)

2005 2006200420032002 2005 2006200420032002 Current assetsCurrent liabilities

14.1 8.9 6.9 (5.0) 8.910.4 6.7 5.4 (4.1) 7.2

–10

–5

0

5

10

15

0

0.05

0.15

0.10

0.20

0.25

(%)Return on Equi ty and Return on Assets

Interest-Bear ing Debt Rat io andDebt to Equi ty Rat io

Return on equityReturn on assets

Interest-bearing debt ratioDebt to equity ratio

145 — — — —

0.2 — — — —0.2 — — — —

(%)

2005 2006200420032002 2005 2006200420032002

Interest-bearing debt (Millions of yen)

At February 28, 2006, total assets were ¥87,490 million ($752 million), up 5.2% from a year earlier.Total liabilities, as of the same date, were ¥18,153 million ($156 million), up 16.5%.

Current assets retreated 3.4%, to ¥35,257 million. The main reason for this change is a decrease inmarketable securities.

Fixed assets rose 12.0%, to ¥52,233 million. The breakdown of tangible fixed assets was generallythe same as in fiscal 2005, with the total slipping just slightly, from ¥26,955 million to ¥26,902 million,while the breakdown of intangible assets grew 11.9%, to ¥5,478 million, because of an increase in theconsolidation difference account.

Current liabilities jumped 22.8%, to ¥12,546 million. As a result, the current ratio (ratio of currentassets to current liabilities) dropped 76.3 percentage points, to 281%.

Total shareholders’ equity inched up 2.6%, to ¥69,239 million ($595 million). The equity ratio fell2.1 percentage points, to 79.1%.

Millions of yen

Summary of Financial Position 2006 2005 % Change

Total assets ¥87,490 ¥83,140 5.2%Total liabilities 18,153 15,577 16.5%Shareholders’ equity 69,239 67,477 2.6%Shareholders’ equity to total assets (%) 79.1 81.2 —

Financial Position

27

(1) RELIANCE ON OVERSEAS PRODUCTION AND CERTAIN PRODUCTS

i. Aderans’ principal wig production facilities are located overseas, in Thailand and the Philippines.If the production capabilities of these facilities were undermined by fire, natural disaster, laborunrest or some other obstacle to normal operations, or if the supply of products or access to nec-essary materials were hampered by a change in the political or economic environment in theaforementioned countries, Aderans would have difficulty procuring alternative products since theGroup’s wigs and hair-replacement products require the Company’s proprietary know-how in theproduction process. Therefore, the inability to make and/or distribute and export wigs and hair-replacement products could have a serious impact on Aderans’ fiscal results.

ii. If competitors were to develop and bring to market such products as revolutionary topical hairgrowth agents and oral remedies, or develop and commercialize medical techniques superior toprevailing hair transplant procedures, the impact on Aderans’ fiscal results would be considerable.

(2) R&DAderans’ R&D activities are currently directed toward the pursuit of hair regeneration techniques.The Company cannot guarantee that its efforts to develop such techniques will be successful, or thatsuch efforts, if they were successful, would generate profits in the short term. In addition, it is diffi-cult to predict with accuracy at the present time what the scale of demand might be for hairregeneration techniques, should such methods be marketable at some point in the future.

(3) INFORMATION MANAGEMENT

The Company is engaged in businesses for ordinary citizens who have concerns about their hair. Ifinformation about clients should leak outside of the Company’s system, the disclosure could causeconsiderable psychological or emotional anguish to those clients and could significantly affect theCompany’s business activities.

(4) MAINTAINING TALENT

The business activities of Aderans are subject to laws and regulations pertaining to barber and beautysalon services, and 60% of the Company’s employees are qualified barbers and beauticians. If theCompany is unable to retain skilled barbers and beauticians at its salons, the resulting shortage ofessential personnel could adversely affect the Company’s ability to provide services.

Risk Information

One of the Company’s top management priorities is the return of profits to shareholders. The primaryobjective is, obviously, to maintain stable dividends, but realistically, the goal is to raise the payout ratio.Toward this end, we must pursue growth opportunities, so while we seek to return profits to sharehold-ers through the repurchase of treasury stock, we also need to boost retained earnings to fund investmentstrategies, such as the development of activities that enhance business content and reinforce financialposition over the medium to long term.

Our targets are a payout ratio of at least 30% and a total shareholder return ratio, including treasurystock buybacks, of at least 50%, based on consolidated net income.

However, if the Group does not execute any large applications of funds over the next two fiscal years— that is, the terms ending February 2007 and February 2008 — then, notwithstanding the existingposition regarding retained earnings, Aderans will apply all of consolidated net income to the shareholderreturn ratio.

Millions of yen

2006 2005 2004 2003 2002

Treasury stock buybacks* ¥3,695 ¥1,400 ¥(3,194)† ¥1,986 ¥1,250Dividends 1,744 1,534 1,287 1,210 1,144Total shareholder returns 5,439 2,934 (1,907) 3,196 2,394Consolidated net income 6,149 (3,568) 5,001 6,173 9,200Payout ratio (%) 28.3 — 25.7 19.6 12.4Total shareholder return ratio (%) 88.4 — — 51.7 26.0Return on equity (%) 9.0 — 6.9 8.9 14.1

* Treasury stock buybacks = treasury stock acquired - treasury stock disposed ofNote:The ¥3,194 million in treasury stock buybacks for fiscal 2004 reflects the exchange for the common stock of Fontaine acquired to

turn the company into a consolidated subsidiary as well as treasury stock held by the company.

Dividend Policy

28

Consolidated Balance SheetsAderans Company Limited and Consolidated Subsidiaries For the years ended February 28, 2006 and 2005

Assets


2006 2005 2006

Current assets:Cash and time deposits (Note 4) ¥ 14,238 ¥ 13,626 $ 122,458Marketable securities (Note 6) 9,306 12,199 80,043Notes and accounts receivable 5,167 4,815 44,446Allowance for doubtful accounts (96) (54) (831)Inventories (Note 5) 4,046 3,787 34,800Deferred tax assets (Note 8) 1,262 984 10,860Other current assets 1,332 1,134 11,457

Total current assets 35,257 36,492 303,234Investments and long-term loans:

Long-term loans receivable 31 90 273Investment securities (Note 6) 10,053 5,082 86,465

Total investments and long-term loans 10,085 5,173 86,739Property, plant and equipment, at cost:

Land 11,611 11,616 99,870Buildings and structures 30,346 30,840 260,996Machinery and equipment 6,602 5,795 56,787Construction in progress 50 66 431Other 156 156 1,345

Total 48,767 48,475 419,431Less accumulated depreciation (21,864) (21,520) (188,050)

Property, plant and equipment, net 26,902 26,955 231,380Intangible assets 5,478 4,897 47,116Security deposits 3,752 3,788 32,275Deferred tax assets (Note 8) 2,712 2,780 23,333Other assets 3,376 3,131 29,036Allowance for doubtful accounts (74) (77) (639)

Total assets ¥ 87,490 ¥ 83,140 $ 752,477

Current liabilities:Notes and accounts payable ¥ 1,408 ¥ 1,253 $ 12,111Accrued income taxes (Note 8) 3,246 1,281 27,925Accrued expenses 1,093 975 9,402Deferred tax liabilities (Note 8) 4 5 39Other current liabilities 6,793 6,698 58,430

Total current liabilities 12,546 10,214 107,910Long-term liabilities:

Accrued severance and retirement benefits—employees (Note 7) 3,552 3,362 30,553Accrued severance and retirement benefits—directors and corporate auditors 813 855 6,998

Deferred tax liabilities 19 — 170Other long-term liabilities 1,220 1,144 10,499

Total long-term liabilities 5,606 5,362 48,221Total liabilities 18,153 15,577 156,131

Minority interests 97 85 837Shareholders’ equity (Note 9):

Common stock, no par value Authorized—138,000 thousand shares for 2006 and 2005Issued—41,713 thousand shares for 2006 and 2005 12,944 12,944 111,327Additional paid-in capital 13,157 13,157 113,162Retained earnings 51,206 46,905 440,408Unrealized gain on available-for-sale securities 626 230 5,384Foreign currency translation adjustments (1,379) (2,140) (11,862)Treasury stock, at cost (7,314) (3,618) (62,911)

Total shareholders’ equity 69,239 67,477 595,507Total liabilities, minority interests and shareholders’ equity ¥ 87,490 ¥83,140 $ 752,477

See Notes to the Consolidated Financial Statements.

Liabilities andShareholders’ Equity

29


2006 2005 2006

Net sales ¥72,690 ¥70,625 $625,188Cost of sales 12,690 12,326 109,146

Gross profit 60,000 58,299 516,041

Selling, general and administrative expenses (Note 12) 49,680 49,830 427,285Operating income 10,319 8,468 88,756

Other income (expenses):Interest and dividend income 180 97 1,554Interest expenses (11) (11) (100)Devaluation of land — (1,755) —Impairment losses — (6,889) —Unrealized loss on investment securities — (190) —Exchange gain on foreign currency translation 325 — 2,798Exchange loss on foreign currency translation — (203) —Loss on disposal of property, plant and equipment (162) (83) (1,399)Other income and expenses, net 238 374 2,047

Total other income (expenses) 569 (8,660) 4,899

Income (loss) before income taxes and minority interests 10,889 (192) 93,655Income taxes (Note 8)

Current 5,152 4,373 44,310Deferred (412) (873) (3,544)

Minority interests — 124 —Net income (loss) ¥ 6,149 ¥(3,568) $ 52,890

Net income (loss) per common share (Note 13) (in the whole yen) ¥150.51 ¥(88.02) $ 1.29


Consolidated Statements of IncomeAderans Company Limited and Consolidated SubsidiariesFor the years ended February 28, 2006 and 2005

30


2006 2005 2006

Common stock:Balance, beginning of year ¥12,944 ¥12,944 $111,327Balance, end of year(2006—41,713,388 shares; 2005—41,713,388 shares) ¥12,944 ¥12,944 $111,327

Additional paid-in capital:Balance, beginning of year ¥13,157 ¥13,157 $113,162Balance, end of year ¥13,157 ¥13,157 $113,162

Retained earnings:Balance, beginning of year ¥46,905 ¥52,265 $403,416Increase in retained earnings:

Net income 6,149 — 52,890Decrease in retained earnings:

Net loss — 3,568 —Cash dividends 1,647 1,424 14,169Bonuses to directors and corporate auditors — 178 —Deletion of consolidation of a subsidiary — 188 —Loss on consolidation of new subsidiary — — —Loss on exchange of treasury stock 201 0 1,729

Balance, end of year ¥51,206 ¥46,905 $440,408

Unrealized gain (loss) on available-for-sale securities: Balance, beginning of year ¥ 230 ¥ 16 $ 1,980Net change 395 213 3,403Balance, end of year ¥ 626 ¥ 230 $ 5,384

Foreign currency translation adjustments:Balance, beginning of year ¥ (2,140) ¥ (2,279) $ (18,410)Net change 761 ¥139 6,547Balance, end of year ¥ (1,379) ¥ (2,140) $ (11,862)

Treasury stock:Balance, beginning of year ¥ (3,618) ¥ (2,218) $ (31,124)Net change (3,695) (1,400) (31,787)Purchases of treasury stock — — —Exchange for the common stock of Fontaine Co., Ltd. — — —Treasury stock held by Fontaine Co., Ltd. — — —Balance, end of year(2006—2,456,597 shares; 2005—1,341,555 shares) ¥ (7,314) ¥ (3,618) $ (62,911)


Consolidated Statements of Shareholders’ EquityAderans Company Limited and Consolidated Subsidiaries For the years ended February 28, 2006 and 2005

31


2006 2005 2006

Cash flows from operating activities:Income (loss) before income taxes and minority interests ¥10,889 ¥ (192) $ 93,656Depreciation and amortization 2,082 2,510 17,914Impairment losses — 6,889 —Loss on retirement of fixed assets 264 226 2,278Amortization for consolidation difference 631 838 5,431Change in allowance for employees’ bonus 139 (122) 1,200Devaluation of land — 1,755 —Change in accrued severance benefits—employees 184 349 1,586Unrealized loss on investment securities — 190 —Interest and dividend income (180) (97) (1,554)Interest expenses 11 11 100Change in notes and accounts receivable (235) 801 (2,023)Change in inventories (21) 51 (184)Change in notes and accounts payable 60 275 518Change in guarantee deposits 53 139 459Bonuses to directors and corporate auditors — (178) —Other (449) 222 (3,865)

Subtotal 13,431 13,670 115,518Proceeds from interest and dividend income 188 76 1,624Payment of interest (11) (11) (100)Payment of income taxes (3,209) (5,866) (27,601)

Net cash provided by operating activities 10,399 7,868 89,440

Cash flows from investing activities:Change in time deposits 131 (4,131) 1,131Payment for purchase of marketable securities (11,995) (9,996) (103,170)Proceeds from sales of marketable securities 18,692 10,596 160,766Payment for purchase of property, plant and equipment (2,017) (2,453) (17,353)Payment for purchase of intangible assets (475) (580) (4,086)Payment for purchase of investment securities (7,283) (2,144) (62,645)Proceeds from sales of investment securities 1,056 245 9,085Other (640) 111 (5,509)

Net cash used in investing activities (2,532) (8,354) (21,781)

Cash flows from financing activities:Payment to acquire treasury stock (4,977) (1,401) (42,807)Cash dividends paid (1,648) (1,424) (14,180)Other 1,080 0 9,290

Net cash used in financing activities (5,545) (2,825) (47,696)

Effects of exchange rate changes on cash and cash equivalents 219 (13) 1,884Net change in cash and cash equivalents 2,540 (3,324) 21,847Cash and cash equivalents at the beginning of year 13,356 16,819 114,871Derease in cash and cash equivalents due to deletion of consolidation of a subsidiary — (139) —

Cash and cash equivalents held by newly consolidated subsidiary at beginning of year — — —

Cash and cash equivalents at the end of year ¥15,896 ¥13,356 $136,719


Consolidated Statements of Cash FlowsAderans Company Limited and Consolidated SubsidiariesFor the years ended February 28, 2006 and 2005

32

The accompanying consolidated financial statements of Aderans Company Limited (the “Company”) andits consolidated subsidiaries have been prepared in accordance with accounting principles generallyaccepted in Japan, and from consolidated financial statements filed with the Minister of Finance, asrequired by the Securities and Exchange Law of Japan.

Certain items presented in the original financial statements have been reclassified for the convenienceof readers outside Japan.

As permitted under the Securities and Exchange Law of Japan, amounts of less than one million yenhave been omitted. As a result, the totals shown in the accompanying financial statements (both in yenand in dollars) do not necessarily agree with the sum of the individual amounts. The accompanying con-solidated financial statements include the accounts of the Company and its significant subsidiaries.

(a) Principles of consolidationThe accompanying consolidated financial statements include the accounts of the Company and its signifi-cant subsidiaries (the “Companies”).

All significant intercompany transactions and unrealized profits among the Companies have beeneliminated in consolidation. The difference between the cost and underlying net equity of investments inconsolidated subsidiaries is deferred and amortized within 10 years.

Investments in remaining non-consolidated subsidiaries are not accounted for by the equity methodbecause of the immaterial effect on the consolidated financial statements.

Fiscal year end of two domestic consolidated subsidiaries and all overseas consolidated subsidiaries isDecember 31, which differ from that of the Company; however, the accounts of these subsidiaries havebeen consolidated with appropriate adjustments for the intercompany transactions and events to the endof fiscal year.

(b) Cash and cash equivalents For the purpose of consolidated statements of cash flows, the Companies consider all highly liquid lowrisk investments with maturities of three months or less when purchased to be cash equivalents.

(c) Marketable and investment securities Marketable and investment securities are classified and accounted for, depending on management intent.Based on the examination of the intent of holding, the Company classified those securities as held-to-maturity debt securities, equity securities issued by non-consolidated subsidiaries and available-for-salesecurities.

Held-to-maturity debt securities are stated at amortized cost. Equity securities issued by non-consoli-dated subsidiaries are stated at cost by the moving average method.

Available-for-sale securities are with available fair market values are stated the market value.Unrealized gains or losses on those securities are reported, net of applicable income taxes, as a separatecomponent of shareholders’ equity. Realized gains and losses on sale of such securities are computed bythe moving average method. Available-for-sale securities without available fair market value are stated atcost by the moving average method.

(d) Allowance for doubtful accounts Allowance for doubtful accounts are stated at an amount considered to be appropriate based on theCompanies’ past credit loss experience and an evaluation of potential losses in the receivables outstand-ing. Overseas consolidated subsidiaries provide for doubtful accounts at the estimated amount ofuncollectible receivables.

(e) Inventories Custom-made goods are stated at cost on the basis of specific identification method. Ready-made goodsare stated at cost on the basis of average method. Raw materials and work in process are stated at lower ofcost (first-in, first-out) or market, or lower of moving average cost or market. Supplies are principallystated at cost on the basis of specific identification method.

(f) Property, plant and equipmentProperty, plant and equipment of the Companies have been principally depreciated by the declining-bal-ance method, at rates based on the estimated useful lives of the assets.

However, the straight-line method has been applied to buildings, excluding building fixtures,acquired after April 1, 1998 at rates based on the estimated useful lives of assets. The straight-linemethod is used for some domestic consolidated subsidiaries.

Note 1.

Basis of PresentingConsolidated FinancialStatements

Note 2.

Summary of Significant Accounting Policies

Notes to the Consolidated Financial StatementsAderans Company Limited and Consolidated Subsidiaries

33

The straight-line method is principally used for overseas consolidated subsidiaries. Expenditures formaintenance and repairs are charged to operating expenses as incurred. Upon the disposal of property,plant and equipment, the cost and accumulated depreciation are removed from the accounts and anygain or loss is recorded as income or expenses.

(g) Intangible assetsIntangible assets are carried at cost less accumulated amortization, which is calculated by the straight-linemethod over the estimated useful lives. (five years for software)

(h) Allowance for employees’ bonusesThe Company and its domestic consolidated subsidiaries provide allowance for employees’ bonuses atthe estimated-amount-method based on the bonuses to be paid subsequent to the balance sheet dates.This allowance amounted to ¥1,422 million ($12,235 thousand) at February 28, 2006 and ¥1,283 mil-lion at February 28, 2005 and was included in other current liabilities in the consolidated balance sheets.

(i) Warranty reserveA warranty reserve is provided based upon prior actual experience, while the Companies provide a war-ranty on its goods. This reserve amounted to ¥137 million ($1,183 thousand) at February 28, 2006 and¥126 million at February 28, 2005 and was included in other current liabilities in the consolidated bal-ance sheets.

(j) Allowance for returned goodsOne of the Japanese subsidiaries, Fontaine Co., Ltd., sets allowance for returned goods up. Thisallowance is provided based on accounts receivable multiplied by an average of sales returns rate refer-ring current and previous year and gross profit rate of current year. Amounted to ¥98 million ($842thousand) at February 28, 2006 and ¥96 million at February 28, 2005 and was included in other currentliabilities in the consolidated balance sheets.

(k) Accrued severance and retirement benefits—employeesThe Company and its consolidated subsidiaries accounted for the liability for retirement benefit based onthe projected benefit obligations and plan assets at the balance sheet date.

Past benefit liabilities are amortized from the time they accrue by the straight-line method for a givennumber of years (five years) within employees’ average remaining years of service.

Actuarial difference is amortized using the straight-line method over the estimated average remainingservice lives (five years) of employees commencing with the following period.

(l) Accrued severance and retirement benefits—directors and corporate auditorsThe Company, one domestic consolidated subsidiary and some overseas consolidated subsidiaries haverecorded retirement benefits for directors and corporate auditors accruing the full amount at the balancesheet date.

In May 2005, the Board of Directors of the Company resolved to abolish the unfunded retirementbenefit plans for directors and corporate auditors, and proposed to make and calculated the amounts oflump-sum payments upon abolishment of the plan for their duties up to May 2005.

(m) Translation of foreign currency accountsBalance sheets of consolidated overseas subsidiaries are translated into Japanese yen at the current rate atthe end of year except for shareholders’ equity accounts, which are translated at historical rates. State-ments of income of consolidated overseas subsidiaries are translated at the average rate. Differencesarising from such translation are disclosed under “Foreign currency translation adjustments” on the state-ment of consolidated shareholders’ equity and accumulated in the shareholders’ equity section of theconsolidated balance sheet.

(n) Derivative financial instrumentsIn accordance with the accounting standard for financial instruments, all derivative financial instruments,recognized as either assets or liabilities and measured at fair value, and gains or losses on derivative trans-actions are recognized in the consolidated statement of income.

(o) LeasesFinance leases which do not transfer ownership to lessees (and do not have bargain purchase provisions)are accounted for in the same manner as operating leases under accounting principles generally acceptedin Japan.

(p) Research and development costsResearch and development costs are charged to income when incurred.

34

Note 6.

Marketable andInvestment Securities

(q) ReclassificationsIn preparing the accompanying consolidated financial statements, certain reclassifications have beenmade to the consolidated financial statements for the year ended February 28, 2006 issued domestically.In addition, the consolidated financial statements for 2005 have been retroactively restated to conform tothe 2006 presentation.

The financial statements are stated in Japanese yen. The U.S. dollar amounts included in the financialstatements and notes thereto represent the arithmetical results of translating yen into U.S. dollars at therate of ¥116.27 to U.S.$1. This is the approximate rate of exchange in effect on February 28, 2006.

Reconciliation of cash and time deposits in the consolidated balance sheets and cash and cash equivalentsshown in the consolidated statements of cash flows at February 28, 2006 and 2005 were as follows:


2006 2005 2006

Cash and time deposits ¥14,238 ¥13,626 $122,458Cash equivalents included in marketable securities 4,501 2,502 38,718Time deposits with maturities more than three months (2,843) (2,772) (24,457)Cash and cash equivalents ¥15,896 ¥13,356 $136,719

At February 28, 2006 and 2005, inventories consisted of the following: Thousands of

Millions of yen U.S. dollars

2006 2005 2006

Finished goods ¥2,760 ¥2,591 $23,742Work in process 197 212 1,701Raw materials and supplies 1,087 983 9,355Total ¥4,046 ¥3,787 $34,800

(1) The following tables summarize acquisition costs, book values and fair value of securities at February28, 2006 and 2005.

(a) Held-to-maturity debt securitiesFebruary 28, 2006

Millions of yen Thousands of U.S. dollars

Book value Fair value Difference Book value Fair value Difference

Securities with available fairvalues exceeding book values

Bonds ¥ 1,400 ¥ 1,400 ¥ 0 $12,040 $12,048 $ 7Subtotal 1,400 1,400 0 12,040 12,048 7

Securities other than the aboveBonds 9,606 9,528 (77) 82,624 81,954 (670)

Subtotal 9,606 9,528 (77) 82,624 81,954 (670)Total ¥11,006 ¥10,929 ¥(77) $94,665 $94,002 $(663)

February 28, 2005Millions of yen

Book value Fair value Difference

Securities with available fair values exceeding book values

Bonds ¥7,503 ¥7,511 ¥ 8Subtotal 7,503 7,511 8

Securities other than the aboveBonds 1,700 1,697 (2)

Subtotal 1,700 1,697 (2)Total ¥9,203 ¥9,209 ¥ 5

Note 5.

Inventories

Note 4.

Cash and CashEquivalents

Note 3.

U.S. Dollar Amounts

35

(b) Available-for-sale securitiesFebruary 28, 2006

Millions of yen Thousands of U.S. dollars

Book value Fair value Difference Book value Fair value Difference

Securities with book values exceedingacquisition costs

Equity securities ¥1,453 ¥2,509 ¥1,055 $12,502 $21,581 $9,078Subtotal 1,453 2,509 1,055 12,502 21,581 9,078

Securities other than the aboveEquity securities — — — — — —

Subtotal — — — — — —Total ¥1,453 ¥2,509 ¥1,055 $12,502 $21,581 $9,078


Book value Fair value Difference

Securities with book values exceeding acquisition costs

Equity securities ¥775 ¥1,143 ¥387Subtotal 775 1,143 387

Securities other than the aboveEquity securities 2 2 (0)

Subtotal 2 2 (0)Total ¥757 ¥1,145 ¥387

(2) Total sales of available-for-sale securities sold for the year ended February 28, 2006 amounted to ¥5million ($46 thousand) and February 28, 2005 amounted to ¥183 million. The related gains andlosses for the year ending 2006 amounted to ¥4 million ($41 thousand) and no loss, and 2005amounted to ¥61 million and no loss.

(3) The following tables summarize book values of securities with no available fair values at February 28,2006 and 2005.


2006 2005 2006

Held-to-maturity debt securitiesCommercial paper ¥3,998 ¥4,998 $34,391

Available-for-sale securitiesMoney management funds ¥1,502 ¥1,502 $12,926

(4) Available-for-sale securities with maturities and held-to-maturity debt securities were as follows:

February 28, 2006Millions of yen Thousands of U.S. dollars

Within Within Within Over Within Within Within Overone year five years ten years ten years one year five years ten years ten years

Bonds ¥3,805 ¥4,700 ¥2,000 ¥501 $32,725 $40,423 $17,201 $4,315Others 3,998 — — — 34,391 — — —Total ¥7,803 ¥4,700 ¥2,000 ¥501 $67,117 $40,423 $17,201 $4,315


Within Within Within Overone year five years ten years ten years

Bonds ¥ 5,698 ¥3,505 ¥— ¥—Others 4,998 — — —Total ¥10,696 ¥3,505 ¥— ¥—

36

Employees who terminate their service with the Company or one of the domestic consolidated sub-sidiaries are entitled to defined benefit pension plans, i.e., tax-qualified pension plans and lump-sumpayment plans determined by reference to basic rates of pay, length of service and conditions underwhich the termination occurs. Another domestic subsidiary has maintained unfounded lump-sum pay-ment plans, whereas certain overseas subsidiaries have defined contribution pension plans or non-fundedlump-sum payment plans.

The following table sets forth the founded and accrued status of the retirement benefits, and theamounts recognized in the consolidated balance sheets as of February 28, 2006 and 2005:


2006 2005 2006

(a) Projected retirement benefit obligation ¥(5,198) ¥(5,641) $(44,707)(b) Pension assets at fair value 2,251 2,108 19,364(c) Unfunded retirement benefit obligation (a)+(b) (2,946) (3,533) (25,343)(d) Unrecognized actuarial differences (160) 170 (1,381)(e) Unrecognized past benefit liabilities (445) — (3,828)(f) Accrued employees’ severance and retirement benefits (c)+(d)+(e) ¥(3,552) ¥(3,362) $(30,553)

The component of retirement benefit costs for the years ended February 28, 2006 and 2005 were asfollows:


2006 2005 2006

(a) Service cost ¥330 ¥441 $2,840(b) Interest cost 112 106 964(c) Expected return on plan assets (21) (19) (181)(d) Amortization for actuarial difference 96 112 827(e) Amortization for past benefit liabilities (111) — (957)

Total ¥406 ¥640 $3,494

The assumptions used to calculate relating to retirement benefit liabilities were as follows:

(a) Method of allocation of estimated retirement benefits Straight–line method(b) Discount rate 2.00%(c) Expected rate of return on pension assets 1.00%(d) Amortization period of actuarial difference 5 years(e) Amortization period of past benefit liabilities 5 years

The Company and domestic consolidated subsidiaries are subject to a number of taxes based on income,which in the aggregate amount to statutory tax rates of approximately 40.7% for the year of 2006 and2005. Foreign consolidated subsidiaries are subject to income taxes of countries in where they operate.

However, income taxes as shown in the accompanying consolidated statements of income differ fromthe amounts computed by applying the above-mentioned statutory tax rates to “income before incometaxes”. The principal reason for this difference is the effect of timing differences in the recognition of cer-tain expenses for tax and financial reporting purposes and the effect of permanent non-deductibleexpenses.

Note 8.

Income Taxes

Note 7.

Accrued Severance andRetirement Benefits—Employees

37

Note 9.

Shareholders’ Equity

Significant components of the deferred tax assets and liabilities held by the Company and its consoli-dated subsidiaries as of February 28, 2006 and 2005 were summarized as follows:


2006 2005 2006

Deferred tax assets:Unrealized profits on inventories ¥ 173 ¥ 141 $ 1,495Excess of retirement allowance 1,342 1,220 11,548Accrued severance benefits for directors 331 347 2,848Enterprise tax payable 245 126 2,114Excess of allowance for employees’ bonuses 573 517 4,928Warranty reserve 55 51 481Allowance for returned goods 39 39 342Excess of depreciation 493 227 4,243Unrealized loss on golf club memberships 126 126 1,091Accumulated impairment losses 489 1,690 4,212Devaluation of land 714 714 6,144Net loss carry forward 1,258 1,089 10,825Other 891 602 7,666

Total deferred tax assets 6,736 6,895 57,942Valuation allowance (2,661) (3,095) (22,894)Net deferred tax assets 4,074 3,799 35,047

Deferred tax liabilities:Reserve for special depreciation 17 18 151Other 106 21 913

Total deferred tax liabilities 123 40 1,064Net deferred tax assets ¥ 3,951 ¥ 3,759 $ 33,983

An analysis of the difference between the statutory tax rate and the Company’s effective tax rate forthe year ended February 28, 2006 was as follows. The analysis for the year ended February 28, 2005 hasbeen omitted as loss before income taxes and minority interests was recorded.

2006 2005

Statutory tax rate 40.7% —%Permanently non-deductible expenses 0.4 —Inhabitant tax on capita basis 1.3 —Others 1.1 —The Company’s effective income tax rate 43.5% —%

Under the Commercial Code of Japan, the entire amount of the issue price of shares is required to beaccounted for as common stock, although a company may, by resolution of its board of directors,account for an amount not exceeding one-half of the issue price of the new shares as additional paid-incapital.

Effective October 1, 2001, the Japanese Commercial Code provides that an amount equal to at least10% of cash dividends and other cash appropriations shall be appropriated and set aside as a legalreserve until the total amount of legal reserve and additional paid-in capital equals 25% of commonstock. The legal reserve and additional paid-in capital may be used to eliminate or reduce a deficit byresolution of the shareholders’ meeting or may be capitalized by resolution of the board of directors.

On condition that the total amount of legal reserve and additional paid-in capital remains being equalto or exceeding 25% of common stock, they are available for distributions and certain other purposes bythe resolution of shareholders’ meeting.

Legal reserve is included in retained earnings in the accompanying consolidated financial statements.The maximum amount that the Company can distribute as dividends is calculated based on the uncon-solidated financial statements of the Company in accordance with the Code.

38

The Company utilizes currency option contracts primarily to hedge their exposure to fluctuations in for-eign exchange rates. As a matter of policy, the Company does not speculate in derivatives.

Derivative transactions are controlled by the Treasury Office of the Company based on internal rules.The contract amounts and unrealized gain or loss at February 28, 2006 and 2005 of outstanding

derivative transactions were as follows:

Currency-related transactions Thousands ofMillions of yen U.S. dollars

2006 2005 2006

Options:Call options, sold:

Yen—Notional amount ¥— ¥314 $—Fair value — (29) —

Put options, purchased:Yen—Notional amount — 104 —Fair value — 0 —

Total—Notional amount — 418 —Unrealized loss ¥— ¥ (29) $—

The notional amounts of derivatives which are shown in the above table do not represent theamounts exchanged by the parties and do not measure the Company’s exposure to risk.

(1) Finance LeasesFuture lease payments and lease payments under finance lease at February 28, 2006 and 2005 wereas follows:


2006 2005 2006

Outstanding finance lease paymentsWithin one year ¥17 ¥21 $150Over one year 20 32 174Total 37 53 324

Lease payments ¥21 ¥96 $188

A summary of assumed amounts of acquisition cost, accumulated depreciation and net bookvalue at February 28, 2006 and 2005 were as follows:

February 28, 2006Millions of yen Thousands of U.S. dollars

Acquisition Accumulated Net book Acquisition Accumulated Net bookcost depreciation value cost depreciation value

Equipment ¥ 73 ¥44 ¥29 $629 $379 $249Vehicle 30 21 8 258 184 74Total ¥103 ¥65 ¥37 $887 $563 $324


Acquisition Accumulated Net bookcost depreciation value

Equipment ¥ 98 ¥54 ¥44Vehicle 44 35 8Total ¥142 ¥89 ¥53

Note 11.

Leases

Note 10.

Derivative FinancialInstruments

39

(2) Operating LeasesFuture lease payments under operating lease at February 28, 2006 and 2005 were as follows:


2006 2005 2006

Outstanding lease paymentsWithin one year ¥ 565 ¥ 475 $ 4,867Over one year 3,258 2,907 28,022Total ¥3,824 ¥3,382 $32,889

Research and development costs included in selling, general and administrative expenses for the yearended February 28, 2006 and 2005 amounted to ¥977 million ($8,406 thousand) and ¥703 million,respectively.

Basic net income per share is computed by dividing net income available to common shareholders by theweighted-average number of common stock shares outstanding for the period.

The Company did not have securities or contingent stock agreements that could potentially dilute netincome per common share in the year ended February 28, 2006 and 2005.

(1) Business SegmentsAs the ratios of “Hair-related business” against the total sales, operating income and assets of all seg-ment exceed 90%, information by business segment is not prepared or disclosed.

(2) Geographical Segments

Millions of yenYear ended February 28, 2006 Japan North America Europe Asia Total Elimination Consolidated

Sales Outside customers ¥56,241 ¥12,641 ¥3,311 ¥ 495 ¥72,690 ¥ — ¥72,690Intersegment 61 953 0 4,433 5,449 (5,449) —

Total 56,303 13,595 3,312 4,929 78,140 (5,449) 72,690Operating expenses 43,534 13,671 3,094 3,929 64,229 (1,858) 62,370Operating income ¥12,768 ¥ (75) ¥ 218 ¥1,000 ¥13,911 ¥ (3,591) ¥10,319Total assets ¥54,404 ¥ 5,793 ¥3,278 ¥7,210 ¥70,687 ¥16,802 ¥87,490

Thousands of U.S. dollarsYear ended February 28, 2006 Japan North America Europe Asia Total Elimination Consolidated

Sales Outside customers $483,715 $108,728 $28,480 $ 4,264 $625,188 $ — $625,188Intersegment 529 8,200 8 38,131 46,870 (46,870) —

Total 484,245 116,929 28,489 42,395 672,059 (46,870) 625,188Operating expenses 374,429 117,580 26,610 33,792 552,412 (15,980) 536,432Operating income $109,815 $ (651) $ 1,878 $ 8,603 $119,646 $ (30,890) $ 88,756Total assets $467,919 $ 49,825 $28,200 $62,016 $607,961 $144,516 $752,477

Millions of yenYear ended February 28, 2005 Japan North America Europe Asia Total Elimination Consolidated

Sales Outside customers ¥55,800 ¥11,724 ¥2,624 ¥ 476 ¥70,625 ¥ — ¥70,625Intersegment 56 592 — 3,767 4,416 (4,416) —

Total 55,856 12,316 2,624 4,243 75,041 (4,416) 70,625Operating expenses 43,590 13,004 2,517 3,450 62,562 (405) 62,156Operating income ¥12,266 ¥ (688) ¥ 107 ¥ 793 ¥12,479 ¥ (4,010) ¥ 8,468Total assets ¥55,251 ¥ 5,214 ¥3,252 ¥6,108 ¥69,826 ¥13,314 ¥83,140

Note 14.

Segment Information

Note 12.

Research andDevelopment Costs

Note 13.

Net Income per CommonShare

40

(3) Overseas Sales

Millions of yenYear ended February 28, 2006 North America Europe Asia Others Total

Overseas sales ¥12,409 ¥3,539 ¥438 ¥80 ¥16,468Consolidated net sales ¥72,690Share of overseas sales 17.1% 4.9% 0.6% 0.1% 22.7%

Thousands of U.S. dollarsYear ended February 28, 2006 North America Europe Asia Others Total

Overseas sales $106,729 $30,444 $3,775 $693 $141,642Consolidated net sales $625,188Share of overseas sales 17.1% 4.9% 0.6% 0.1% 22.7%

Millions of yenYear ended February 28, 2005 North America Europe Asia Others Total

Overseas sales ¥11,484 ¥2,889 ¥432 ¥35 ¥14,841Consolidated net sales ¥70,625Share of overseas sales 16.3% 4.1% 0.6% 0.0% 21.0%

Transactions with related parties for the years ended February 28, 2006 and 2005 were as follows:Thousands of

Millions of yen U.S. dollars

2006 2005 2006

KK Keiho Shoji:Travel expenses ¥— ¥1 $—

Kowa Shoji KK:Rental income 2 2 17

On May 25, 2006, the shareholders of the Company approved payment of a year-end cash dividend of¥22.00 ($0.18) per share to holders of recorded at February 28, 2006, totaling ¥864 million ($7,428thousand).

Note 16.

Subsequent Events

Note 15.

Related PartyTransactions

41

To the Board of Directors ofAderans Company Limited:

We have audited the accompanying consolidated balance sheets of Aderans Company Limited and con-solidated subsidiaries (the Company) as of February 28, 2006 and 2005, and the related consolidatedstatements of income, shareholders’ equity, and cash flows for the years then ended, all expressed in yen.These consolidated financial statements are the responsibility of the Company’s management. Ourresponsibility is to independently express an opinion on these consolidated financial statements based onour audits.

We conducted our audits in accordance with auditing standards, procedures and practices generallyaccepted and applied in Japan. Those standards, procedures and practices require that we plan and per-form the audit to obtain reasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclo-sures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presenta-tion. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all materialrespects, the financial position of Aderans Company Limited and consolidated subsidiaries at February28, 2006 and 2005, and the results of their operations and their cash flows for the years then ended inconformity with accounting principles and practices generally accepted in Japan.

The U.S. dollar amounts in the accompanying consolidated financial statements with respect to theyear ended February 28, 2006, are presented solely for convenience. Our audit also included the transla-tion of yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made on thebasis described in Note 3 to the consolidated financial statements.

Tokyo, Japan May 25, 2006

Report of Independent Auditors

42

Millions of yen

2006 2005 2004 2003 2002

Net sales ¥ 44,990 ¥ 44,883 ¥ 47,757 ¥ 50,888 ¥ 55,275

Cost of sales 7,602 7,475 7,998 8,483 10,642

Gross profit 37,388 37,408 39,758 42,405 44,633

Selling, general and administrative expenses 29,793 30,787 30,553 31,414 30,601

Operating income 7,594 6,620 9,205 10,990 14,031

Income (loss) before income taxes 10,283 (3,920) 9,957 11,313 12,081

Net income (loss) 6,700 (6,813) 5,671 6,476 6,952

Capital expenditures 2,694 2,051 5,709 1,831 1,979

Research and development expenses 1,044 735 620 467 314

Depreciation and amortization 1,450 1,587 1,684 1,582 1,553

Net income (loss) ¥ 164.74 ¥(168.03) ¥ 137.85 ¥ 159.86 ¥ 169.86

Shareholders’ equity 1,617.11 1,537.28 1,746.10 1,644.23 1,548.98

Cash dividends applicable to the year 44.00 38.00 32.00 30.00 28.00

Current assets ¥ 17,777 ¥ 20,087 ¥ 19,586 ¥ 24,449 ¥ 20,979

Current liabilities 8,800 7,084 9,072 9,374 9,242

Interest-bearing debt — — — — —

Shareholders’ equity 63,594 62,062 71,880 66,357 63,293

Total assets 76,526 73,098 84,606 78,976 75,561

Operating income to net sales 16.9 14.8 19.3 21.6 25.4

Net income (loss) to net sales 14.9 (15.2) 11.9 12.7 12.6

Shareholders’ equity to total assets 83.1 84.9 85.0 84.0 83.8

Return on equity 10.6 (10.2) 8.2 10.0 11.2

Return on assets 8.9 (8.6) 6.9 8.4 9.2

Interest-bearing debt ratio — — — — —

Number of shares outstanding (thousand) 39,256 40,371 41,081 40,357 40,861

Number of employees 1,976 2,018 2,103 2,137 2,068

High ¥ 4,190 ¥ 2,620 ¥ 2,485 ¥ 4,250 ¥ 4,720

Low 2,225 2,075 1,664 2,180 3,410

Year-end close 3,220 2,475 2,200 2,225 4,050

Note: Net income (loss) per share and shareholders’ equity per share for 2006, 2005, 2004 and 2003 are calculated based on the newaccounting standard as described in Note 13 on page 39.

Non-Consolidated Five-Year SummaryAderans Company LimitedYears ended the last day of February

Results of Operations

Amounts per Share of Common Stock (in Yen)

Financial Position

Key Ratios (%)

Other Year-End Data

Common Stock Prices (in Yen)

43

Non-Consolidated Operating Data

Millions of yen

2006 2005 2004 2003 2002

Custom-made wigs ¥29,247 ¥29,588 ¥31,599 ¥32,950 ¥33,435

Hair Fix 115 132 108 167 233

Pinpoint 1,987 1,585 1,908 2,300 3,010

Hair Support 5,564 5,520 5,516 5,997 6,460

Physical Esthé 1,210 1,105 1,191 1,455 1,513

Total ¥38,125 ¥37,933 ¥40,325 ¥42,872 ¥44,653

Custom-made wigs ¥10,757 ¥11,134 ¥12,420 ¥14,321 ¥15,586

Hair Fix 17 19 15 18 30

Pinpoint 834 651 825 1,145 1,796

Hair Support 1,855 1,778 2,036 2,582 2,939

Physical Esthé 334 311 315 469 544

Total ¥13,799 ¥13,895 ¥15,614 ¥18,539 ¥20,897

Custom-made wigs ¥18,489 ¥18,454 ¥19,178 ¥18,628 ¥17,849

Hair Fix 98 113 93 149 202

Pinpoint 1,152 933 1,083 1,155 1,214

Hair Support 3,709 3,741 3,480 3,414 3,520

Physical Esthé 876 793 875 985 968

Total ¥24,325 ¥24,037 ¥24,710 ¥24,333 ¥23,755

Custom-made wigs ¥ 9,378 ¥ 9,497 ¥10,538 ¥10,916 ¥11,606

Hair Fix 108 129 102 154 225

Pinpoint 1,908 1,527 1,849 2,241 2,936

Hair Support 3,925 4,038 4,264 4,908 5,337

Physical Esthé 1,210 1,105 1,174 1,320 1,380

Total ¥16,531 ¥16,299 ¥17,928 ¥19,541 ¥21,485

Custom-made wigs ¥19,869 ¥20,090 ¥21,060 ¥22,033 ¥21,829

Hair Fix 6 2 6 13 8

Pinpoint 78 58 59 59 74

Hair Support 1,638 1,482 1,252 1,089 1,123

Physical Esthé 0 0 17 134 132

Total ¥21,593 ¥21,633 ¥22,396 ¥23,330 ¥23,168

Counseling offices 9 9 9 9 9

Regular outlets 140 139 138 136 134

Ladies’ salons 24 26 25 25 25

Satellite salons 50 52 52 50 50

New-concept salons 10 10 10 6 4

Total 233 236 234 226 222

Male 781 796 886 967 1,028

Female 521 508 517 507 495

Total 1,303 1,304 1,403 1,474 1,523

Sales of PrincipalProducts

Principal Product Salesto New Clients

Principal Product Salesto Repeat Clients

Principal Product Salesto Male Clients

Principal Product Salesto Female Clients

Number of Outlets

Number of Client Visits (Thousand)

44

Corporate Governance

Basic PolicyAderans actively works to enhance corporate governance. Toward this end, we have applied particulareffort to the establishment of a flexible organization primed for speedy decisions on business strategiesand their implementation and the execution of clear, timely and impartial disclosure of corporate infor-mation on business activities to all stakeholders.

StatusInternal structures pertaining to the formation, execution and supervision of decisions by the executive teamare described below.

Aderans maintains a corporate auditor system. Under this system, the following two executive teamsensure that business activities are undertaken in accordance with prevailing laws and the Company’sArticles of Incorporation.

We have clearly defined the responsibility for making decisions and implementing them, with theChief Executive Officer (CEO) accountable for long-term Group strategies and the Chief OperatingOfficer (COO) accountable for executing measures aimed at achieving the goals of stated strategies.

Board of DirectorsChaired by the president and COO, this highest decision-making authority on business strategies meetsat least once a month to discuss key matters of business and determine responses necessary to moveahead. The president or the director responsible for the business activity in question will ensure thatappropriate steps are taken to execute proposed measures.

Board of AuditorsThe Board of Auditors comprises two full-time auditors and two external auditors, who get together onthe day the Board of Directors has met to exchange opinions on the appropriateness of decisions formedby the Board of Directors. The full-time auditors offer the external auditors various updates, including areport on the content of topics explored by the Executive Committee, a recap of items discussed in theReporting Sessions, updates on the execution of business activities by the Board of Directors and operat-ing divisions, the results of audits executed by the Internal Auditing Division, staffed by five people, anddata obtained at various meetings, including those of the Executive Committee. As a group, the Board ofAuditors discusses the information brought to the table by the full-time auditors.

Executive CommitteeChaired by the president and COO, the Executive Committee comprises managing directors and the full-time auditors. The committee meets one week prior to the Board of Directors’ meeting to select topics fordiscussion at that meeting and to engage in preliminary discussions of these topics to confirm validityunder prevailing laws and Articles of Incorporation as well as acceptability vis à vis established socialstandards. The committee will call upon outside experts when specialized knowledge is required.

Reporting SessionsChaired by the president and COO, these sessions are attended by managing directors, directors respon-sible for executing operations and the full-time auditors. Sessions convene twice a month.

These sessions provide opportunities for directors to get regular updates on actual business activitiesand to confirm the content of reports with other members. When necessary, general managers will beinvited to provide progress on activities in their respective divisions. General managers may also be askedto clarify new business proposals, which session participants will evaluate in terms of feasibility and legal-ity as well as potential interest to clients and acceptance in society in general.

Outside experts will be called on for their opinions when specialized knowledge is required.

Corporate Structure

45

The Board of Directors determines basic policy for internal controls, in accordance with the Company’sstated business philosophy and business direction. Policy content is presented below.

Ensuring the activities of directors and staff conform to prevailing laws and the Company’sArticles of IncorporationActivities will be guided by a level of ethics and values demanded by society, based on respect for thelaw, of course, as well as corporate philosophy and the business parameters of the Group.

Decisions on important matters that impact the Company or the Group as a whole will be formedthrough discussions by the Executive Committee and in reporting sessions, in line with established rulesgoverning duties and powers. The Company relies on its directors to undertake their respective duties inall sincerity, but audits by corporate auditors will verify that said duties have been executed lawfully.

Custody and management of information related to directors’ dutiesInformation relating to the execution of duties will be stored and maintained in line with rules governingthe handling of information assets. The paper or electronic documents to be kept are listed below, andthe custody period will be based on times set forth in rules for document management.• Minutes from the General Meeting of Shareholders and related materials• Minutes from Board of Directors’ meetings and related materials• Minutes from meetings chaired by directors and related materials• Key documents relating to other executive duties• Internal memos passed around to directors to obtain overall approval of a decision

Directors and general managers will provide these documents whenever an auditor or someoneworking on an audit at the instruction of an auditor asks to look at or copy a document deemed neces-sary to the audit.

Ensuring efficient execution of directors’ dutiesRepresentative directors will require all directors to execute their duties, based on a division of duties andin line with the authority allocated to directors to undertake said duties.

Important matters that impact the operations of the Company or the Group as a whole will be clari-fied by directors or general managers at regularly scheduled reporting sessions with directors inattendance. If an obstacle to the efficient execution of duties exists, a solution will be presented to theappropriate executive forum.

Other measures to control risk leading to lossesTo preempt the appearance of risk leading to losses that would impede the sustainable corporate devel-opment, the Company established a structure that prevents risk from turning into crisis. This structurehinges on the In-House Improvement Committee and an in-house hotline for reporting alleged illegalactivities or socially unacceptable behavior by directors or employees.

Directors ascertain the status of risk management efforts in respective areas of responsibility and pro-vide updates at regularly scheduled reporting sessions. The risk of losses and measures to control suchrisk are always under the direct review of members of reporting sessions.

If information were to leak out or an emergency, such as an accident or natural disaster, were to arise,an emergency response team would convene immediately under the direction of the president to ensure aswift and accurate response to the situation.

Ensuring fair business practices of listed companies as well as the corporate group thatcomprises the parent company and its subsidiariesTransactions between companies under the Group umbrella must be appropriate and comply with prevail-ing laws, accounting principles, tax requirements and social standards as well as in-house managementrules for affiliated companies.

At meetings of the Group executive and at meetings for overseas affiliates, the CEO will indicate thedirection of Group policy and the path that should be taken in executing operations. Local executiveswill implement said policy and ensure that operations follow the designated path.

While respecting the autonomy of each company, the Treasury Division, the ManufacturingHeadquarters and the Overseas Division at Aderans’ headquarters will verify budgets and the success ofbusiness plans on a quarterly basis.

Internal Controls

46

Corporate auditors, as members of the Board of Auditors, will maintain a close relationship with theCompany’s accounting firm, the Treasury Division, the Manufacturing Headquarters and the OverseasDivision to expedite effective, accurate audits of the Aderans Group’s consolidated businesses.

Matters related to the system for employees asked by auditors to assist in directors’ auditsand these employees’ neutrality vis à vis directorsAuditors may ask the Internal Auditing Division to provide items pertinent to the execution of an audit.In addition, depending on the importance of a specific audit, auditors may require the assistance ofemployees to facilitate the process, and in such cases, directors must cooperate with the auditors’ assis-tants. Employees asked by corporate auditors to provide items pertinent to the execution of an audit shallaccept neither guidance nor orders from directors or the manager of the Internal Auditing Division thatpertain to the execution of said audit.

Auditors will provide directors with reports on the business skills and work attitude of the employeeswho assist them, and directors will include these reports in their evaluation of the employees.

System for directors and employees to report to auditors or the Board and other systems forreporting to auditors Reports to auditors cover the following items.• Reports on handling responses in the event risks, such as accidents or natural disasters, arise. • Status reports on audits by the Internal Auditing Division.• Reports containing questions from auditors and confirmed answers.• Other items that require reports from directors and general managers.

Monitoring information To date, directors and departments responsible for disclosure have sifted through risks and highlightedpertinent data for distribution. From now on, however, risks faced by operating divisions will also beexamined in detail. A list of relevant information will be prepared and each risk will be graded accordingto importance and then monitored.

Aderans recently established the Information Protection Committee to safeguard information assets,including personal data.

As its name implies, this committee has a mandate to protect information collected by the Company.It is responsible for preventing leaks and, in the unlikely event that data is errantly disclosed, it will pin-point the breach and initiate improvements to preclude a second incident.

The activities of the committee are supported by an information protection discussion group, whichutilizes cross-sectional representation to identify key information in each division for safeguarding andundertakes awareness programs to prevent leaks.

Aderans is currently restructuring its risk information management system. The switch to the newsystem — anytime from fiscal 2007 — will soundly reinforce information management.

If information were to leak out or an unforeseen accident or a scandal were to arise, an emergencyresponse team, headed by the president, would convene immediately to deal with the situation and exe-cute appropriate risk management responses. Depending on the circumstances, investors and the marketat large may require explanations, and we have a system in place to handle this as well. In addition, weare enhancing in-house training programs to promote greater understanding of compliance among direc-tors and employees and make management and staff conscious of behavior conforming to all applicablelaws and social standards.

Disclosing information Aderans actively discloses business information essential to a solid reputation for management trans-parency. The process hinges on close ties among the Investor Relations Division, which is responsible fordisclosing information, the Legal Affairs Division, which confirms prior to disclosure that the content ofbusiness activities undertaken by the Company conforms to prevailing laws and the Company’s Articlesof Incorporation, and the Treasury Division, which monitors financial data for the Company and its sub-sidiaries.

Risk Management —Information Monitoringand Disclosure

47

Structure to EnsureEfficient Execution of Other Audits by Corporate Auditors

Private, Capital andBusiness Relationships or Conflict of InterestBetween the Companyand Its External Directorsand External Auditors

Accounting Firm forAderans

Total annual remuneration for directors ¥392 millionTotal annual remuneration for auditors ¥28 millionPortion paid to external auditors ¥13 millionBonuses based on services described in Article 2-1 of the Certified Public Accountants Law ¥24 million

No bonuses were paid for services other than those noted under the aforementioned law.

Cooperation with accounting firm Corporate auditors receive status updates from the Company’s accounting firm at the end of the interimand year-end audit of accounts and may ask questions of accounting firm auditors.

In addition, in situations where the participation of both the accounting firm and corporate auditorsis deemed necessary, they may work together.

Cooperation with Internal Auditing Division The Internal Auditing Division is an in-house auditing department under the direct supervision of thepresident, and as such, it does not fall within the corporate auditors’ chain of command and is not sub-ject to direct requests from corporate auditors. The results of business audits undertaken by the InternalAuditing Division are provided to the president and the full-time auditor and may be of help to corporateauditors in their own business audits.

Corporate auditors may confirm internal control–related issues and ambiguities with the InternalAuditing Division and, when necessary, ask for advice.

Corporate auditors’ audits parallel those of the Internal Auditing Division, which occur at irregularintervals, based on a yearly division schedule, to ascertain routine audit status.

Appointment of external auditors Of the four corporate auditors, two — a lawyer and a certified public accountant — are appointed fromoutside the Company. From their respective professional perspectives, they confirm that the Company isadhering to established laws and its Articles of Incorporation, and they carefully watch to make sure thatthe Company maintains business activities and strategies based on the premise that a company exists onlyas long as it has clients.

Aderans does not appoint external directors. The Company does have two external auditors, but it doesnot maintain private, capital or business relationships with these auditors nor does any other potentialconflict of interest exist between the Company and these external auditors.

Aderans maintains an audit contract with Kyobashi & Co., which undertakes audits of the Company asrequired under the Commercial Code and the Securities and Exchange Law.

The names of the certified public accountants who participated in the audit of Aderans’ books for fis-cal 2006 and the number of consecutive years these accountants have audited Aderans’ books as well asthe composition of the team assisting these accountants in the audit are listed below.

Names of certified public accountants who undertook audit and number of consecutive yearsauditing AderansIsao Kishi, representative and managing partner 20 yearsYutaka Ishihara, representative and managing partner 4 yearsTsukasa Komiyama, representative and managing partner 3 years

Composition of team assisting accounting auditors 8 certified public accountants

Remuneration forDirectors and Auditors

48

Subsidiaries (Consolidated Companies)As of May 31, 2006

(a) Established

(b) Capital

(c) Percentage of parent company’s ownership

Japan● FONTAINE Co., Ltd.

(a) January 5, 1979 (Became a wholly owned subsidiaryas of December 1, 2003)

(b) ¥1,539 million (c) 100%

■ ADN Co., Ltd.(a) May 1, 1985

(Acquired December 4, 1998)

(b) ¥80 million (c) 83.2%

■ Pal Messe Co., Ltd.(a) June 10, 1991

(Acquired February 10, 2006)

(b) ¥50 million (c) 100%

North America● Aderans Holding Co., Inc.(a) November 23, 1994(b) US$83,000 thousand(c) 100%

Europe● Aderans Europe B.V.

(The Netherlands)

(a) January 9, 1992(b) €24,000 thousand(c) 100%

Asia (excluding Japan)● Aderans Inc. (Taiwan)

(a) January 12, 1990(b) NT$20,000 thousand(c) 100%

● Aderans Thai., Ltd. (Thailand)

(a) October 17, 1986(b) B170,000 thousand(c) 100%

● Aderans Philippines, Inc. (Philippines)

(a) January 31, 2002 (b) P300,000 thousand (c) 100%

● Aderans, Inc.(a) April 19, 2001 (b) US$3,000 thousand (c) 100%

● International Hairgoods, Inc.(a) October 31, 1968 (Acquired June 29, 1987)(b) US$2,546 thousand (c) 100% (Indirect)

● New Concepts Hair Goods, Inc.(a) February 13, 1991 (Acquired March 5, 1998)(b) US$25 (c) 100% (Indirect)

● René of Paris(a) November 1, 1976 (Acquired March 1, 1989)(b) US$1,000 thousand(c) 100% (Indirect)

● General Wig Manufacturers, Inc.(a) June 14, 1963 (Acquired September 28, 1998)(b) US$37 thousand (c) 100% (Indirect)


● Gesmofra SAS (France)

(a) March 1, 1980 (Acquired March 1, 1992) (b) €2,000 thousand (c) 100% (Indirect)

● Création de Paris Camaflex Vertriebs GmbH(Germany)

(a) July 26, 1966 (Acquired March 1, 1992) (b) €800 thousand (c) 100% (Indirect)

● Camaflex S.A. (Belgium)

(a) September 25, 1962 (Acquired March 1, 1992)(b) €70 thousand (c) 100% (Indirect)

● D. van Nooijen B.V. (The Netherlands)

(a) January 1, 1984 (Acquired March 1, 1994) (b) €20 thousand (c) 100% (Indirect)

● Trend Hair Supplies Co., Ltd. (England)

(a) March 26, 1973 (Acquired May 13, 2002) (b) £30 thousand (c) 100% (Indirect)

● Carl M Lundh AB (Sweden)

(a) 1852 (Acquired January 7, 2005) (b) SK100 thousand (c) 100% (Indirect)

● World Quality Co., Ltd. (Thailand)

(a) September 3, 1992(b) B15,000 thousand (c) 100% (Indirect)

● Camaflex SAS (France)

(a) December 5, 1956 (Acquired March 1, 1992)(b) €540 thousand (c) 100% (Indirect)

● Monfair Mode SARL (France)

(a) February 16, 1987 (Acquired March 1, 1992) (b) €10 thousand (c) 100% (Indirect)

● Monfair Moden Vertriebs GmbH (Germany)

(a) December 11, 1985 (Acquired March 1, 1992)(b) €50 thousand(c) 100% (Indirect)

■ Bosley, Inc. (a) August 3, 1989 (Acquired August 1, 2001)(b) US$8,261 (c) 96.2% (Indirect)

■ Sterling Accommodations, Inc.(a) November 8, 1990 (Acquired August 1, 2001)(b) US$20 thousand(c) 100% (Indirect)

■ Bosley Medical Institute Canada, Inc. (a) March 25, 1997 (Acquired August 1, 2001)(b) C$1,000(c) 100% (Indirect)

■ Aderans Research Institute, Inc.(a) June 25, 2002(b) US$400 thousand(c) 100% (Indirect)

● Holding Company

● Marketing Company

■ Hair-Transplant Business

■ Other Business

● Manufacturing Company

● Best Move Co., Ltd. (England)

(a) June 22, 1979 (Acquired January 3, 2006) (b) £115(c) 100% (Indirect)

49

For Further Information Contact:Investor Relations Division, Aderans Co., Ltd. 6-3, Shinjuku 1-chome, Shinjuku-ku, Tokyo 160-8429, Japan

Tel. 03-3350-3268 Fax. 03-3356-3052 E-mail. [email protected]

Chairman & CEOTakayoshi Okamoto*

President & COOKatsuji Tokumaru*

Senior Managing DirectorMamoru Mino

In charge of sales and marketing management division

Managing DirectorNoboru Kaneko

In charge of business planning headquarters

DirectorsTsuguo Tanaka

In charge of corporate planning headquarters

Hiroyasu YamakawaGeneral manager of administrative division

Senkichi YagiGeneral manager of sales and marketing management division

Mutsuo MinowaGeneral manager of overseas division

Supreme Advisors and DirectorsNobuo NemotoHaruo Okita

Standing Corporate AuditorsFumio AraiYuji Hirano

Corporate AuditorsMasaaki KatagiriIwao Toigawa

*Representative director

Directors and AuditorsAderans Company Limited As of May 26, 2006

Aderans Company Limited As of February 28, 2006

Corporate Data

0

2 ,000

4 ,000

6 ,000

8 ,000

10 ,000

14 ,000

12 ,000 4 ,200

0

700

1 ,400

2 ,100

2 ,800

3 ,500

4 ,900

4 5 6 8 9 10 12 2117053

061

Trading Volume (Thousands of shares)

Stock Price (¥)

Head Office6-3, Shinjuku 1-chome, Shinjuku-ku, Tokyo 160-8429

EstablishedMarch 1, 1969

Paid-in Capital¥12,944 million

Number of Shares Authorized138,000,000

Number of Shares Issued41,713,388

Number of Shareholders7,277

Principal Shareholders

Number of Shares and Shareholding Ratio

Thousands of Name Shares %

Steel Partners Japan Strategic Fund (Offshore) LP 6,797 17.35

Nobuo Nemoto 4,642 11.85

State Street Bank and Trust Company 4,322 11.03

The Master Trust Bank of Japan, Limited (Trust Account) 2,243 5.72

Japan Trustee Services Bank, Limited (Trust Account) 2,132 5.44

State Street Bank and Trust Company 505019 943 2.40

The Dai-Ichi Mutual Life Insurance Company 726 1.85

Trust & Custody Services Bank, Limited (Security Investment Trust Account) 570 1.45

The Bank of New York Treaty JASDEC Account 532 1.35

Japan Trustee Services Bank, Limited(Trust Account 4) 468 1.19

Notes: 1. The Company holds of 2,456 thousand shares of its own shares in treasury stock.2. Those shares held by the Master Trust Bank of Japan, Limited, Japan Trustee

Services Bank, Limited, and Trust & Custody Services Bank, Ltd. are the sharesrelating to their trust businesses.

Stock ListingsFirst Section of Tokyo Stock ExchangeFirst Section of Osaka Securities Exchange

Transfer Agent and RegistrarThe Chuo Mitsui Trust and Banking Company, Limited,

Securities Department8-4, Izumi 2-chome, Suginami-ku, Tokyo 168-0063

Number of Outlets233

Number of Employees1,976

Stock Price Range

Established in 1969, Aderans Co., Ltd., is a comprehensive provider of hair-replacement products and hair-related services for men and women. The Company maintains Japan’s leading brand of custom-made hair-replace-ment products for both sexes and has also built a solid presence in the women’s fashion wig market through Fontaine Co., Ltd., a domestic subsidiary.

We augment our mainstay custom-made wigs for men and women with a rich selection of complementary products and hair-related services. Seeking to cement a position at the forefront of the hair-trans-plant and hair-growth markets, we have reinforced our presence in the U.S. hair-transplant business with promising research and development on hair regeneration. This move underpins steady expansion of Group operations beyond wigs and hair-replacement products to hair-growth treatments and therapeutic remedies.

Domestic Women’s Market

Domestic Men’s Market

1986Commenced Produc-tion in ThailandOpened production facility, Aderans Thai. which now boasts world’s highest wig production capacity.

Overseas Markets

Strength 1:

Solid Brand Reputation

Strength 3:

Comprehensive Array of Products and Services

1969Aderans Established Rapidly expanded custom-made wig market with nationwide network in Japan.

The Aderans Group

Aderans heads a group of 28 consolidated subsidiaries — three operating in Japan and 25 overseas — which together employ more than 5,400 people. Members of the Group in the United States and Europe have captured higher market shares, especially in women’s fashion wig wholesaling. This achievement is complemented by sales of men’s wigs in Taiwan, South Korea and other areas of Asia.

CONTENTS

1 Consolidated Financial Highlights 4 Message from the Management

8 On a Sure-Footed Path to Growth 8 Strategy for the Domestic Men’s Market 10 Strategy for the Domestic Women’s Market 13 Strategy for Other Domestic Hair-Related Businesses 14 Strategy for Overseas Markets

16 Research and Development 18 Aderans in Society 19 Financial Section 44 Corporate Governance 48 Subsidiaries 49 Directors and Auditors, Corporate Data

1979Entered U.S. MarketEstablished foothold in the U.S. market with local represen-tative office.

1985Began Promoting Custom-Made WigsWomen’s custom-made wigs were first advertised through media such as magazines.

FontaineBrought Fontaine, a leading name in ladies’ ready-made wigs, under the Aderans umbrella through equity purchase.

Strength 2:

Global Presence

Three key strengths — solid brand reputation, global presence and a comprehensive array of products and services — are the signposts of success on our sure-footed path to growth.

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Uses soybean ink in consideration of the environment

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Annual Report 2006Aderans

Y e a r e n d e d F e b r u a r y 2 8 , 2 0 0 6

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