IZUMI Co., Ltd.

Annual Report2008

P R OF I LE

(Billions of yen)Izumi Co., Ltd. (“Izumi” or the “Company”) takes pride in being the predominant retail chain in the Chugoku, Shikoku

500

and Kyushu regions of Japan. Izumi currently operates hypermarkets and food supermarkets at 72 locations. In 1990,
Izumi opened its first You Me Town hypermarket. Since then, the Company has worked to become number one inthese regions in terms of scale and product lineup, with You Me Town contributing significantly to the Company’s
continued growth. In providing one-stop service, featuring a broad shopping lineup as well as an array of restaurants,
amusements, cultural and community offerings and other facilities, You Me Town outlets deliver everything customers want to buy or do, all under one roof. Through the You Me Town business model, Izumi is fully meeting thewishes of an increasing number of customers.
In the fiscal year under review, ended February 29, 2008, Izumi enjoyed an increase in revenues and earnings,
recording its ninth consecutive year of growth, by undertaking more ambitious capital investment compared with theprevious year, including the opening of a flagship You Me Town outlet in Hiroshima, where its business began. In
merchandising, we are redoubling efforts to enhance our ability to respond to changes in the retailing industry.

400

REVENUES AND OPERATING INCOME(Fiscal years ended February 28/29)

Revenues

30

300

20

10
Operating Income
200

0

0
2001

2002

2003

2004

Revenues

346.8

363.7

383.1

407.6

Operating Income

10.3

14.8

16.0

18.1

Q.1
Q.2
Q.3

What is your view of the environmental changes taking place within
the retail industry and what are Izumi’s responses to them?
What are your thoughts with regard to pricing strategies in responseto the changes in the retail environment?
How will you undertake store creation,
the source of Izumi’s growth?

C O N S O L I D AT E D F I N A N C I A L H I G H L I G H T S

Thousands of
U.S. dollars

Millions of yen

Revenues
Operating income
Income before income taxes
and minority interests
Net income
Net income/revenues
Total net assets (Note 2)
Total assets(Note 1)

2008

2007

2006

2005

2004

2003

2002

2008

Mar. 2007–
Feb. 2008

Mar. 2006–
Feb. 2007

Mar. 2005–
Feb. 2006

Mar. 2004–
Feb. 2005

Mar. 2003–
Feb. 2004

Mar. 2002–
Feb. 2003

Mar. 2001–
Feb. 2002–Mar. 2007–
Feb. 2008¥470,698
24,798¥446,821
24,144¥436,825
22,706¥426,437
19,771¥407,648
18,079¥383,098
15,994¥363,714
14,784$4,491,822
236,645

23,40913,664
3.04%
105,646
355,588

19,737
13,1582.94%
105,005
335,545

21,490
11,583
2.65%
88,542313,086

18,0899,601
2.25%
85,519318,893

16,8888,713
2.14%
84,354295,927

11,8345,600
1.46%
76,892
273,484

9,493
223,390
4,832
130,404
1.33%
3.04%
74,132
1,008,178
268,655
3,393,339
U.S. dollars(Note 1)Yen

Per share (Note 3):
Net income—basic
Net income—diluted
Cash dividends declared¥ 135.10
120.1416.00¥ 251.80
223.8832.00¥ 216.60
192.6926.00¥ 166.88
155.0224.00¥ 148.07—
23.00¥ 95.23
94.21
23.00

¥ 81.46
79.40
21.00

$1.29
1.15
0.15

Notes 1: Yen amounts are translated into U.S. dollars, solely for convenience, at the prevailing exchange rate on February 28, 2008, ¥104,79= U.S. $1.
2: By application of the new accounting standard for presentation of net assets in the balance sheet, minority interests in consolidated subsidiaries and gain on deferred hedges are included in
total net assets for the year ended February 28, 2007.
3: See Note 2 (22) of Notes to Consolidated Financial Statements.

2005

2006

2007

2008

426.4

436.8

446.8

470.7

19.8

22.7

24.1

24.8

1

T O O UR S T OC K HO L D E RS

Q.1
A.1

What is your view of the environmental changes taking place within
the retail industry and what are Izumi’s responses to them?

In the fiscal year under review, theJapanese economy was characterized byincreased uncertainty about the future.
Sluggish personal consumption resulted
from downturns in employment andincome. In addition, macro-economic
deterioration, price increases in gasoline
and food products have led to consumers
showing a greater reticence to spend,
dampening household expenditures.

Yasuaki Yamanishi
President

FISCAL 2008 DIGEST

With the aim of maintaining customer satisfaction, the Izumi Group rapidly implemented
innovations in management and operations, resulting in nine consecutive years of revenue and earnings growth.
● Consolidated revenues increased 5.3% year on year to ¥470.6 billion (US$4,492 million)● Consolidated operating income rose 2.7% year on year to ¥24.7 billion (US$237million)● Consolidated net income increased 3.9% year on year to ¥13.6 billion (US$130 million)● Existing store sales struggled, with non-consolidated existing stores managing 98.7% of the previous year’s

sales● Average price per sale stood at 100.8% while upward trends were carried over from the previous year
● Clothing sales slumped due to unseasonable weather while the non-consolidated operating income ratio

decreased 0.1 percentage point year on year to 5.3%
● Consolidated operating income ratio declined 0.2 percentage point year on year to 5.5%
● Consolidated ROE stood at 13.8%, down 0.2 percentage point from the previous fiscal year2

Sales in the first half of 2007 were robust, particularly
in June, and prolonged deflation was expected to end.

consumers are also more health conscious, with foodproduct safety being a top priority.

However, the abolition of temporary tax cuts in June

Regarding competition in the retail industry, changes

2007 has served to increase the trend toward consumers

accompanying the Town and Country Planning Act

exercising caution in terms of spending. Due to its con-demand particular attention. Besides the flurry of rushed

certed efforts to develop You Me Town outlets as pivotal

expansion among large-scale retail store chains, thebusinesses that excel at value appeal, the Company was

number of small retail stores with value appeal is increas-slow to react to changing markets. This consequently

ing, particularly in Kyushu.

manifested itself in customer numbers in the fiscal year

Izumi is boldly implementing measures to broaden theunder review being 98.0% of those of the previous fiscal

appeal of You Me Town outlets, along with rapidly shift-year. Taking into account all general merchandising stores,

ing its strategy from being “responsive to value” tothis represented a year on year decrease of 4%. Despite

placing a greater emphasis on “affordability.”

bolstering efforts to achieve increases in revenues andearnings, from the perspective of the momentum weexperienced between March and June 2007, we have no
choice but to reluctantly acknowledge this situation.
We are aware that this is an era in which the retailingindustry is frequently asked about its “responsiveness tochange.” The rising cost of living, stemming from suchfactors as high oil prices, has led consumers to be increasingly frugal with regards to household spending. Yet,(%)
105
Average Spending per Customer
Average Number of Items Purchased
Average Price per Sales
Number of Customers Counted

100.8%
100

100.0%

98.0%

95
2004

2005

2006

2007

2008

NUMBER OF CUSTOMERS COUNTED, AVERAGE AMOUNT SPENT PER CUSTOMER,AVERAGE PRICE PER SALE, AVERAGE NUMBER OF ITEMS PURCHASED
3

Q.2
A.2

What are your thoughts with regard to pricing strategies in responseto the changes in the retail environment?
From mid-2007 onward, as the signs ofAt the same time, we plan to upgrade high-value-added

consumer cautiousness became moreproducts through improved customer service. In addition,

pronounced, interest in fashion-oriented

with our sights firmly on sales expansion, the Company

clothing declined. Taking unseasonal weather into account,

will shift toward products that are unaffected by weather

sales of seasonal clothing and household goods have also

conditions.

stagnated. High gasoline prices have curtailed the amountIn the household goods segment, we are attemptingof customers who drive to You Me Town outlets from sur-to stand out from our competitors by creating unique mar-rounding areas or on weekends.

keting opportunities and responding with greater effi-

In response to this environment, we initiated what weciency to clear indications of market expansion in thecall the “lifestyle support promise,” developing merchan-merchandising sector, such as in bedding, stationary,dising that is more responsive to prices. In January 2008,

gifts, and kitchen utensil.

we began selling 200 different food products and otherIn the foods segment, in addition to expanding ourdaily items. Owing to favorable reviews, the number of“lifestyle support promise,” we are putting forward value-

campaign-products presently being offered stands at 700.

added approaches unique to Izumi. These approaches

Over and above price strategies that address the needinclude promoting local consumption of local produce tofor greater affordability, we have promoted “safe andmaximize product freshness, changing merchandise on

healthy-oriented” product differentiation by expanding

a weekly basis as well as at regular intervals throughout

sales of “JAS-approved organic vegetables,” non-allergic

the day.

food products and a variety of health food items.

As we continue to be responsive to these changes inIn the clothing segment, Izumi is continuing its focus

our business environment, Izumi aims to create storeson Visual Merchandising as well as making efforts to createthat offer customers the feeling of “freshness, excite-

new channels through which to sell high fashion apparel.

ment and surprise.”

Net sales □ / YOY existing store sales/ Gross Profit Margin by segment:(clothing, household goods, foods and tenants)

Clothing

Foods(Billions of yen)
98.2

90
92.5

60

100.7

(%)

(%)

100

38

99.8

62.1

64.8

65.9

37.8
37.4

96.1
62.6

38.1

(%)

(%)

180

100

27

98.0

37.3

67.2

80

100.4

98.1

100.4

120

37

30

100.4

122.8

126.8

127.7

128.2

130.3

04

05

06

07

08

102.5

102.1

80

26

0

25

26.3

26.3

26.3

04

05

06

8.1

8.1

05

06

26.7

26.7

07

08

8.0

8.0

07

08

60

0

0

04

05

06

07

36

0

04

08

05

06

07

08

Household Goods(Billions of yen)
50
102.0

40
95.3

95.7

31.8

32.1

30

33.9

100.1
34.2

Tenants

(%)

(%)

100

32

(Billions of yen)
31.7
31.5

98.7
34.6

99.5

90

30.9

31

150
120

31.1

80

20

60

30.5

10

86.5

97.5

96.0

98.0

104.6

05

06

(%)

(%)

100

9

80

8

0

7

124.3

8.2

111.8

30

0

0

04

4

(Billions of yen)

37.6

05

06

07

08

30

0

04

05

06

07

08

04

07

08

04

(m2)

800,000

640,000

Sales floor space

480,000(%)
50 320,000
Sales from
Kyushu Area

43.2
39.5

40.8

37.6
34.2

% of Total Sales

25 160,000

Chugoku

Shikoku
Kyushu0

Sales floor space

2004

2005

2006

2007

2008

556,093m2

595,367m2

606,098m2

644,929m2

715,089m2¥125,939
37.6%¥137,219
39.5%¥146,730
40.8%¥163,7545
43.2%

Sales from Kyushu Area ¥109,362% of Total Sales

34.2%

Q.3
A.3

How will you undertake store creation, the source of Izumi’s growth?

Having expanded You Me Town outlets since 1990, theCompany has accumulated a wealth of expertise in adapting to a wide variety of locations and market areas.
Aiming to be the number one store in a given area, You
Me Town outlets create a shopping space that is convenient, comfortable and liberating through the placement of a mixture of stores that enable one-stop service.
In recognition of these efforts, Izumi has worked in

Izumi has limited new store openings to the Chugoku,

concert to increase store openings that stimulate demand

Shikoku and Kyushu areas, and in recent years has

in various regions in response to requests from govern-achieved growth stemming from intensified efforts toments and local communities concerned with reductions

open stores in Kyushu. Looking ahead, we are aiming toin population and purchasing power. An example of thisbecome the dominant retailer in the Chugoku and Shikoku

can be seen in the opening of You Me Town Beppu inareas. Turing to new store openings during the current

November 2007, which is contributing to local purchas-fiscal year, the Company opened the San’in region’s

ing power and the revitalization of the Beppu area, alargest and most impressive shopping center in Izumo,

destination for international tourism.

which features a wide variety of stores and attractions
including a cinema complex. Two additional store openings are being planned for Kagawa Prefecture during thelatter half of fiscal 2009, bringing the total number of You
Me Town outlets in that area to three. These efforts
should secure our dominance there.

You Me Town Izumo
In a market of 400,000 people, the You Me Town Izumo Shopping Town, the largest
and most impressive shopping center in the San’in region, features a 3,100-vehicle
parking lot and 10 million visitors per year. In addition to attracting customers from awide area, we are proud to say that the You Me Town Izumo provides unparalleledconvenience. In addition to Izumi’s commercial space, this shopping
center boasts the San’in region’s first fashion trend zone, featuring thehottest brands, an amusement spot, and the San’in region’s largest
cinema complex, with 10 screens and a seating capacity of 1,800.

6

Apart from being focused on responding to the rushed
expansion associated with the Town and Country Planning
Act, Izumi—the region’s number one retailer—is redoubling its efforts at its existing stores. The Company isoffering increased sales floor space and highly competitive specialty stores at its shopping centers to add value
and we are endeavoring to increase the Company’s dominance by collaborating with regional supermarkets. In
April 2008, we formed a business alliance with Marumiya,which having expanded to 34 outlets, is rapidly opening
small retail outlets in Kyushu that appeal to customers
seeking greater value. We believe that such an alliancewill be beneficial in terms of commodity supply, and thecommon use of credit and point cards. Furthermore, thesharing of specific product selection and know-how canbe used to expand “You Me Mart,” Izumi’s own supermarkets.

Yasuaki Yamanishi
President

Planned Opening

Site Area (approx.)

Store Area (approx.)

No. of Parking Spaces(approx.)

You Me Town Beppu

Winter 2007

21,400 m2

21,000 m2

1,300

You Me Town Hiroshima

Spring 2008

50,000 m2

38,750 m2

2,600

You Me Town Izumo

Summer 2008

106,000 m2

33,500 m2

3,100

You Me Town Mitoyo

Fall 2008

67,900 m2

22,000 m2

2,000

You Me Town Marugame

Fall 2008

43,000 m2

32,000 m2

2,000Store Name

7

GROUP DEVELOPMENT

Positioned at the hub of the general merchandising industry, Izumi maintains a streamlined, efficient groupstructure and benefits from synergies with such business segments as credit and finance. You Me Town
Kumamoto Co., Ltd., Youme Card Co., Ltd., X-Sell Inc., Izumi Food Service Co., Ltd., and Izumi Techno Co.,
Ltd. are the Company’s key consolidated subsidiaries. Of these, the decision was taken to restructure You Me
Town Kumamoto Co., Ltd. and X-Sell Inc.

You Me Town Kumamoto Co., Ltd. was established through the acquisition of large-scale outlets from the
now defunct NIKONIKODO Co., Ltd., a company undergoing corporate rehabilitation. Being the region’s topperforming retailers, these four converted You Me Town outlets have enjoyed growth in business performance. By integrating purchases, sales, distribution and other business operations, we are accelerating the
growth of these outlets.

By contrast, X-Sell Inc. performed below par as a result ofefforts made by competitors, despite being engaged in sales ofoverseas brands, an indispensible part of any You Me Town’sarray of products. Efforts to continue business operations of thisconsolidated subsidiary depend on effective counter-measures
based on its amalgamation into Izumi.

Youme Card Co., Ltd. has expanded its operations by focusing on credit card-based shopping. As operators of restaurants
and other dining establishments, Izumi Food Service Co. Ltd.
established a platform of profitability by focusing on its niche,
reducing accumulated losses. In addition, Izumi Techno Co., Ltd.,
specialists in store security, achieved higher sales revenue but
suffered decreases in earnings as result of restructuring in thedivision of operations by Izumi.

8

C O N S O L I D AT E D S T AT E M E N T S O F I N C O M E

Izumi Co., Ltd. and its subsidiaries
For the years ended February 29, 2008 and February 28, 2007

Thousands of
U.S. dollars(Note 3)

Millions of yen

2008

2007

2008

¥449,214
21,485¥426,830
19,991$4,286,802
205,029

470,699446,821

4,491,831

COST OF SALES

348,775

330,456

3,328,323

Gross profit

121,924

116,365

1,163,508

97,126

92,221

926,863

24,79824,144

236,645472(1,611)
467
4
981
(470)
114
(1,134)(212)

305(1,424)
442
1
5
(326)
169
(4,011)
432

4,504(15,374)
4,457
38
9,362
(4,485)
1,088(10,822)(2,023)REVENUES:Net sales
Other operating revenues

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 12)
Operating income
OTHER INCOME (EXPENSES):Interest and dividend income
Interest expense
Purchase discounts
Gain on sale of investments in securities
Gain on sale of property and equipment
Loss on sale or disposal of property and equipment
Foreign exchange gains
Impairment loss (Note 5)
Other, net
Income before income taxes and minority interests
INCOME TAXES (Note 13):
Current
DeferredIncome before minority interests
MINORITY INTERESTS
Net income(1,389)(4,407)(13,255)

23,40919,737223,390

9,874
317

9,501
(3,043)

94,227
3,025

10,191

6,458

97,252

13,21813,279126,138

(447)

121

(4,266)¥113,665¥ 13,158$ 130,404

U.S. dollars(Note 3)Yen

PER SHARE:
Net income (Note 2 (22)):
Basic
DilutedCash dividends applicable to the year

¥135.10120.1416.00¥251.80223.88
32.00

$1.29
1.15
0.15

The accompanying notes are an integral part of these statements.

9

C O N S O L I D AT E D B A L A N C E S H E E T S
Thousands of
U.S. dollars(Note 3)

Millions of yen

Izumi Co., Ltd. and its subsidiaries
As of February 29, 2008 and February 28, 2007

2008

2007

2008

ASSETS
CURRENT ASSETS:
Cash and bank deposits (Note 15)
Short-term loans receivable
Notes and accounts receivable:
Trade
Other

9,430
12,560¥ 11,614
12,88912,245
3,239

10,814
2,705

116,853
30,90915,484(1,744)

13,519(1,685)

147,762(16,643)

13,74011,834

131,119

26,2192,124
3,141

24,872
2,757
3,190

250,205
20,26929,974

67,214

67,156

641,416

1,728
6,091
2,026

1,696
8,182
1,647

16,49058,126
19,334

9,845

11,525

93,950237,81439,058

223,842
37,0442,269,434
372,727

Less-accumulated depreciation

276,872(141,946)

260,886(132,738)

2,642,161(1,354,576)

Land
Construction in progress

134,926
106,766
4,072

128,148
99,7072,604

1,287,585
1,018,856
38,859245,764

230,459

2,345,300

19,0385,187
8,540

13,314
4,159
8,932

181,678
49,49981,496Less-allowance for doubtful accounts

Inventories
Deferred income taxes (Note 13)
Other current assets
Total current assets

INVESTMENTS AND ADVANCES:
Investments in non-consolidated subsidiaries and affiliates
Investments in securities (Notes 4 and 7)
Other investments and advances

PROPERTY AND EQUIPMENT (Notes 5, 6 and 7):
Buildings and structures
Machinery, equipment, vehicles and other

OTHER ASSETS:
Fixed leasehold deposits
Deferred income taxes (Note 13)
Other

The accompanying notes are an integral part of these statements.

10

¥

$

89,990119,859

32,76526,405

312,673¥ 355,588¥ 335,545$ 3,393,339

Thousands of
U.S. dollars(Note 3)

Millions of yen

2008

2007

2008

¥ 41,410
15,261¥ 43,585
24,060$ 395,171
145,634

19,85915,121

16,865
11,260189,512144,298

34,980
5,007
1,492
12
700
42
6,765

28,125
5,136
1,452
39
698
—
7,046

333,81047,781
14,238
115
6,680
401
64,558105,669

110,141

1,008,388

107,801
5,744
25,363
1,010
1,100
3,254

79,537
5,672
23,416
1,063
1,100
9,611

1,028,734
54,814
242,037
9,638
10,49731,053249,941

230,540

2,385,161

19,614—22,07888,841—
19,614
22,491
76,888187,174—
210,688847,800(33,410)
—
1,247
(51)
(83)
7,411

—
(21,761)
2,334
66
(25)
5,398

(318,828)—
11,900(487)(792)
70,723

LIABILITIES AND NET ASSETSCURRENT LIABILITIES:
Short-term borrowings (Note 7)
Current portion of long-term debt (Note 7)
Notes and accounts payable:
Trade
Other
Income taxes payable
Accrued bonuses to employees
Accrued bonuses to directors and corporate auditors
Allowance for point discounts
Allowance for loss on refund of interest received
Other current liabilities
Total current liabilities
LONG-TERM DEBT (Note 7)
ACCRUED SEVERANCE INDEMNITIES (Note 8)
LEASE DEPOSITS RECEIVED
DEFERRED INCOME TAXES (Note 13)
ALLOWANCE FOR LOSS ON GUARANTEESOTHER LIABILITIES
Total liabilities
COMMITMENTS AND CONTINGENT LIABILITIES (Note 9)
NET ASSETS (Note 11):
Common stock, no par value:
Authorized:
February 29, 2008—195,243,000 shares
February 28, 2007—195,243,000 shares
Issued:February 29, 2008—123,117,420 shares
February 28, 2007— 61,558,710 shares
Additional paid-in capital
Retained earnings
Less–treasury stock at cost:
February 29, 2008—28,443,812 shares
February 28, 2007—9,652,302 shares
Net unrealized gains on securities
Unrealized gains/losses on hedging derivatives, net of taxes
Less–foreign currency translation adjustments
Minority interests in consolidated subsidiaries
Total net assets

105,647

105,005

1,008,178¥355,588¥335,545$3,393,339

11

C O N S O L I D AT E D S T AT E M E N T S O F C H A N G E S I N N E T A S S E T S
Millions of yen
Stockholders’ equity

Izumi Co., Ltd. and its subsidiaries
For the years ended February 29, 2008
and February 28, 2007 and 2006

Number ofshares ofcommonstock(thousands)

Commonstock

Additional
paid-in
capitalBALANCE AT FEBRUARY 28, 2005
61,559Net income for the year
Cash dividends
Directors’ and corporate auditors’ bonuses
Gain on appropriation of treasury stock
Net unrealized gains on securities
Foreign currency translation adjustments
Increase in treasury stock, net
Other increase¥19,614¥22,315BALANCE AT FEBRUARY 28, 2006
61,559Net income for the year
Cash dividends
Directors’ and corporate auditors’ bonuses
Gain on appropriation of treasury stock
Increase in treasury stock, net
Net adjustment to retained earnings due
to change in scope of consolidation(Note 2 (1))
Items other than changes instockholders’ equity¥19,614BALANCE AT FEBRUARY 28, 2007
Net income for the year
Cash dividends
Gain on appropriation of treasury stock
Increase in treasury stock, net
Net adjustment to retained earnings
due to change in scope of
consolidation (Note 2(1))
Decrease due to purchase of treasury
stock from consolidated subsidiaries
Stock split
Items other than changes instockholders’ equity

61,559¥19,614BALANCE AT FEBRUARY 29, 2008

123,117

5

Revaluation and translation adjustments

Retainedearnings

Treasurystock
at costUnrealized
gains/lossesNet
on hedging Foreign
Minority
unrealized derivatives, currencyinterests ingains
net oftranslation consolidated
on securities
taxes adjustments subsidiaries¥54,018 ¥(11,404) ¥11,583(1,361)
(12)
17

980

¥ —

¥ (4)

¥

—

1,047
0
(8,266)
10¥22,320171¥64,238 ¥(19,653) ¥ 2,027
13,158(1,622)(71)
617(2,725)

¥ —

¥ (4)

¥5,472

1,185¥22,491

22

307

66

(21)

(74)

¥76,888 ¥(21,761) ¥ 2,334
13,665(1,717)91(11,740)

¥ 66

¥(25)

¥5,398(1,087)

(117)

(58)

2,013

¥88,841 ¥(33,410) ¥ 1,247¥ (51)¥(83)¥7,411

5(435)
61,558¥19,614¥22,078

Thousands of U.S. dollars (Note 3)

BALANCE AT FEBRUARY 28, 2007
Net income for the year
Cash dividends
Gain on appropriation of treasury stock
Increase in treasury stock, net
Net adjustment to retained earnings
due to change in scope of
consolidation (Note 2(1))
Decrease due to purchase of treasury
stock from consolidated subsidiaries
Items other than changes instockholders’ equity$187,174 $214,629 $733,734 $(207,663) $ 22,273 $
130,404(16,385)210
868(112,033)

BALANCE AT FEBRUARY 29, 2008

$187,174 $210,688 $847,800 $(318,828) $ 11,900 $ (487) $(792) $70,723

47(4,151)(10,373) (1,117)

Consolidated statement of changes in net assets for the year ended February 28, 2006 is appended as a reference.
The accompanying notes are an integral part of these statements.

12

630 $(239) $51,513(553)

19,210C O N S O L I D AT E D S T AT E M E N T S O F C A S H F L O W S

Izumi Co., Ltd. and its subsidiaries
For the years ended February 29, 2008 and February 28, 2007

Thousands of
U.S. dollars(Note 3)

Millions of yen

2008

2007

2008

¥ 23,409¥ 19,737$223,390

11,846
(130)
352
(472)
1,611
(981)
470
(4)
1,134
(1,934)
(710)
2,536
(334)

11,200
26
(860)
(305)
1,424
(5)
326
(1)
4,011
(1,999)(1,200)931(1,225)

113,045(1,241)
3,359(4,504)
15,374(9,362)
4,485(38)
10,822(18,456)(6,775)24,201(3,188)36,793468(1,603)(10,410)32,057306(1,452)(10,216)

351,112
4,466(15,297)(99,342)

Net cash provided by operating activities

25,24820,695240,939

CASH FLOWS FROM INVESTING ACTIVITIES:Payments for purchases of property and equipment
Payments for purchases of intangible assets
Payments for purchases of investments in securities
Proceeds from sale of property and equipment
Proceeds from sale of investments in securities
Acquisition, net of cash acquired
Other, net(21,320)
(894)
(392)
1,034
5
275
(6,125)(16,273)
(725)
(578)
369
86
—
1,909

(203,455)(8,531)(3,741)
9,867
48
2,624
(58,450)(27,417)(15,212)(261,638)(2,475)42,461(22,975)(8,790)(1,737)(6,441)

10,081
5,700(18,625)(2,725)(1,692)—(23,619)405,201(219,248)(83,882)(16,576)(61,465)43(7,261)411(58)(2,184)
11,614—(18)(1,796)
12,251
1,159(553)(20,841)
110,831—¥ 9,430¥ 11,614$ 89,990

CASH FLOWS FROM OPERATING ACTIVITIES:
Income before income taxes and minority interests
Adjustments to reconcile income before income taxes andminority interests to net cash provided by operating activities:
Depreciation and amortization
Amortization on goodwill or negative goodwill
Provision for allowance for doubtful accounts
Interest and dividend income
Interest expense
Gain on sale of property and equipment
Loss on sale or disposal of property and equipment
Gain on sale or revaluation of investments in securities
Impairment loss
Increase in notes and accounts receivable
Increase in inventories
Increase in trade notes and accounts payable
Other, net
Sub-totalInterest and divided income received
Interest expense paid
Income taxes paid

Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings
Increase in long-term debts
Repayment of long-term debts
Payment for purchases of treasury stock
Dividends paid
Other, net
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents of newly consolidated subsidiaries
Cash and cash equivalents at end of year
The accompanying notes are an integral part of these statements.

13

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S T AT E M E N T S
Izumi Co., Ltd. and its subsidiaries
For the years ended February 29, 2008 and February 28, 2007

1. BASIS OF PRESENTATION OF CONSOLIDATEDFINANCIAL STATEMENTS
The accompanying consolidated financial statements of Izumi Co., Ltd.
(the “Company”) and its subsidiaries (collectively, the “Companies”) areprepared on the basis of accounting principles generally accepted inJapan, which are different in certain respects as to the application anddisclosure requirements of International Financial Reporting Standards,
and are compiled from the consolidated financial statements prepared by
the Company as required by the Japanese Financial Instruments andExchange Law.
Certain items presented in the consolidated financial statements
submitted to the Director of the Kanto Finance Bureau in Japan havebeen reclassified in these accounts for the convenience of readers
outside Japan.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(1) Basis of consolidation and accounting for investments inaffiliates
As at February 29, 2008, the accompanying consolidated financial
statements included the accounts of the Company and 21 of its all
subsidiaries, of which four subsidiaries were newly consolidated due toacquisition, and four subsidiaries were excluded due to liquidation or
merger. As at February 28, 2007, 21subsidiaries were consolidated.
Investments in all affiliates (20%-to-50% owned companies) areaccounted for using the equity method. As at February 29, 2008, theCompany had seven affiliates, of which one affiliate was included as aconsolidated subsidiary due to acquisition. As at February 28, 2007, theCompany had eight affiliates.

(2) Elimination and consolidation
For the purposes of preparing the consolidated financial statements,
all significant inter-company transactions and account balances havebeen eliminated.
Unrealized profits on sale of assets among the Companies havebeen entirely eliminated, and the portions attributable to minority interests are credited to net income. The depreciation expense has beenadjusted in connection with the elimination of unrealized profits included
in depreciable assets.
Regarding the elimination of investments in shares of consolidated
subsidiaries, together with the underlying equity in the net assets ofsuch subsidiaries, the Company follows the step-by-step acquisition
method to include equity in the net income of subsidiaries subsequent to
the date of acquisition in the consolidated financial statements. Any
differences between the costs of investments in subsidiaries and theamount of underlying equity in the net assets of subsidiaries are charged
to income as incurred.

(3) Cash and cash equivalents
Cash and cash equivalents included in the consolidated statements ofcash flows are composed of cash in hand, bank deposits able to be withdrawn on demand and short-term investments with an original maturityof three months or less and which represent a minor risk of material
fluctuation in value.

(4) Translation of foreign currencies
All monetary assets and liabilities denominated in foreign currencies,
whether long-term or short-term, are translated into Japanese yen at theexchange rates prevailing at the balance sheet date. Resulting gains andlosses are included in net profit or loss for the period.
Assets and liabilities of foreign subsidiaries and affiliates are translated into Japanese yen at the exchange rates prevailing at the balance
sheet date. Profit and loss accounts for the year are translated into
Japanese yen using the average exchange rate during the year.
Differences in yen amounts arising from the use of different rates arepresented as “foreign currency translation adjustments” in net assets.

(5) Investments in securities
Available-for-sale securities with available fair market value are stated atfair value. Unrealized gains on these securities are reported as “Netunrealized gains on securities” in net assets at a net-of-tax amount, andunrealized losses on these securities are included in net profit or loss forthe period. Available-for-sale securities with no available fair market value
are stated at cost.
If a decline in fair value below cost of an individual security is
judged to be material and other than temporary, the carrying value of theindividual security is written down and charged to the income statement.

14(6) Derivatives
Derivative financial instruments are stated at fair value and changes in thefair value are recognized as gains or losses unless the derivative financial
instruments are used for hedging purposes. If the derivative financial
instruments are used as hedges and meet certain hedging criteria, theCompanies defer recognition of gains and losses resulting from changes
in the fair value of derivative financial instruments until the related losses
or gains on the hedged items are realized. In the event that foreignexchange forward contracts, currency swap contracts or currency option
contracts are used as hedges and meet certain hedging criteria, thehedged items are stated at the forward exchange contract rates. If interest rate swap agreements are used as hedges and meet certain hedging
criteria, the net amount to be paid or received under the interest rate
swap agreements is added to or deducted from the interest on the assets
or liabilities for which the swap agreements were executed.

(7) Inventories
Inventories are valued at cost. Cost is determined principally by the retailmethod.
Supplies are carried at cost. Cost is determined by the last purchaseprice method.

(8) Depreciation of property and equipment
Property and equipment are stated at cost. Significant renewals andadditions are capitalized; normal repairs and maintenance including minor
renewals and improvements are charged to income as incurred.
The cost and accumulated depreciation applicable to property andequipment retired or otherwise disposed of are eliminated from therelated accounts and the gain or loss on disposal is credited or charged
to the income statement.
Depreciation of property and equipment is computed using thedeclining-balance method over the estimated useful lives or lease contract term of assets prescribed by Japanese corporate tax law, except for
the following, which are depreciated using the straight-line method:• A large-scale, compound-type shopping center• Buildings built on leasehold land
• Property and equipment of two consolidated subsidiaries• Buildings (excluding building improvements) acquired on or after
April 1, 1998
In accordance with the amendment of Japanese corporate tax law((Partial Amendment of the Income Tax Law etc., March 30,2007,Law
No.6) and (Partial Amendment of the Corporation Tax Enforcement
Ordinance, March 30, 2007,Ordinance No.83)),effective from the year
ended February 29, 2008, the Company and its domestic consolidated
subsidiaries have changed the depreciation method for the property andequipment acquired on and after April 1, 2007 to the method based on
the amended Japanese corporate tax law. The impact of this change on
the consolidated statements of income is immaterial.
Minor assets with an acquisition cost of ¥100 thousand or more,
but less than ¥200 thousand, are depreciated over three years on astraight-line basis.

(9) Intangible assets
Capitalized software costs for internal use, included in other assets, areamortized using the straight-line method over the estimated useful life of
the software (five years). Other intangible assets, included in otherassets, are amortized using the straight-line method over the period
stipulated by Japanese corporate income tax laws.

(10) Impairment of fixed assets
On August 9, 2002, the Business Accounting Council in Japan issued“Accounting Standard for Impairment of Fixed Assets”. The standard
requires that fixed assets be reviewed for impairment whenever eventsor changes in circumstances indicate that the carrying amount of anasset may not be recoverable. An impairment loss shall be recognized in
the income statement by reducing the carrying amount of impaired
assets or a group of assets to the recoverable amount to be measured
as the higher of net selling price and value in use.
The Companies applied this standard with effect from the year
ended February 28, 2007. As a result of this application, income before
income taxes and minority interests decreased by ¥4,011 million for theyear ended February 28, 2007. Further details of the impairment loss isshown in Note 5.

(11) Allowance for doubtful accounts
An allowance for doubtful accounts is provided in preparation for the riskof uncollectible accounts. This consists of the estimated uncollectible
amount with respect to individually identified doubtful receivables and an
amount calculated based on the historical bad debt ratio with respect tothe remaining receivables.

(12) Accrued bonuses to employees
An allowance is made for bonuses to employees and is provided forbased on the amount estimated to be payable to employees at thebalance sheet date.

(21) Accounting standard for presentation of net assets inthe balance sheet

An allowance is made for bonuses to directors and corporate auditors
and is provided based on the amount estimated to be payable todirectors and corporate auditors at the balance sheet date.
Effective from the year ended February 28, 2007, the Company
applied “Accounting standard for directors’ bonus” (Accounting Standard
Board of Japan Statement No.4 issued on November 29, 2005 by the
Accounting Standards Board of Japan).
As a result of the application of this standard, operating income,income before income taxes and minority interests for the year ended
February 28, 2007 decreased by ¥39 million.

Effective from the year ended February 28, 2007, the Companies haveapplied “Accounting standards for presentation of net assets in thebalance sheet (Accounting Standards Board of Japan Statement No.5)”,and “Implementation guidance for Accounting standards for presentationof net assets in the balance sheet (Accounting Standards of Japan
Guidance No.8)” both issued by the Accounting Standard Board of Japanon December 9, 2005.
“Net assets” in the balance sheets for this year is presented
according to the revision of “Regulations concerning the Terminology,
Form and Presentation Methods of Consolidated Financial Statements”
dated on April 25, 2006.
Total stockholders’ equity as at February 28, 2007, as presented
previously incurred have accounted for ¥99,541 million.

(14) Allowance for point discounts(22) Net income and cash dividends per share(13) Accrued bonuses to directors and corporate auditors

An allowance for point discounts is provided for estimated future usageof points that entitle customers to receive reductions in the price of
future purchases, based on past experience.

(15) Allowance for loss on refund of interest received
The allowance for loss on refund of interest received (the amount ofinterest that exceeds the ceiling rate imposed by the Interest Rate
Restriction Law) is provided by the consolidated financial service
subsidiary, Yume Card Co., Ltd. and is stated in amounts considered
to be appropriate based on the subsidiary past refund experiences.
In October, 2006, “Application of auditing for provision of allowance
for loss for reclaimed refund of interest in the accounting of consumer
finance companies” of the industry audit practice committee report No.37
by the Japanese Institute of Certified Public Accounts was issued andwas applied at the beginning of the year ended February 29, 2008.
As a result of the application of this report, operating income andincome before income taxes and minority interests for the year ended
February 29, 2008 decreased by ¥42 million ($401 thousand).

(16) Accrued severance indemnities
Accrued retirement indemnities to employees represent the estimatedpresent value of projected benefit obligations in excess of the fair valueof the plan assets except that, as permitted under Japanese accounting
standards, unrecognized actuarial differences are amortized on a straightline basis over 6 to 11 years from the next year in which they arise andunrecognized past service costs are amortized on a straight-line basis
over 6 to 11 years from the year in which they arise.
Certain subsidiaries provide for accrued severance indemnities at
100 % of the liability which would be required to be paid if all eligible
employees voluntarily terminated their employment at the balance
sheet date.
The Company and certain subsidiaries provide for lump-sum severance benefits with respect to directors and corporate auditors. While theCompany and certain subsidiaries have no legal obligation to do so, it iscustomary practice in Japan to make lump-sum payments to directors or
corporate auditors upon retirement. Such liabilities are not funded.

(17) Allowance for loss on guarantees
The Company provides an allowance for potential loss on guarantees ofloans from financial institutions taken by affiliates and others.

Basic earnings per share of common stock are based on the weighted
average number of shares of common stock outstanding during eachperiod. On March 1, 2007, the Company made a stock split (2 for 1). The
net assets and net income per share for the years ended February 28,
2007, are as follows, on the assumption that this stock split took placeat the beginning of this year:
Yen

Per share:

2007

Net assets
Net income–basic
Net income–diluted¥959.49¥125.90¥111.94

Net income-diluted reflects the potential dilution that could occur if
securities were exercised. Net income-diluted per share of common
stock assumes full conversion of the outstanding convertible bonds atthe beginning of the year.
Cash dividends per share include those declared with respect to
net income for the respective periods for which the dividends were
proposed by the Board of Directors. Dividends are charged to retained
earnings in the year in which they are paid.

(23) Reclassification
Certain reclassifications of the accompanying consolidated financial
statements as of and for the year ended February 28, 2007 have been
made to conform to the 2008 presentation.

3. U.S. DOLLAR AMOUNTS
Amounts in U.S. dollars are included solely for the convenience ofreaders outside Japan. The rate of ¥104.79= U.S. $1, the rate ofexchange on February, 29, 2008 has been used in translation. The
inclusion of such amounts is not intended to imply that the Japanese
yen has been or could be readily converted, realized or settled in U.S.
dollars at this rate or any other rate.

4. INVESTMENTS IN SECURITIES(1) Available-for-sale securities at February 29, 2008 and February 28,
2007 which have readily determinable fair value are summarized
as follows:
Millions of yen(18) Leases
Leases that transfer substantially all risks and rewards of ownership of
the assets are accounted for as capital leases. Leases which do nottransfer ownership of the assets at the end of the lease term areaccounted for as operating leases, in accordance with accounting
principles and practices generally accepted in Japan.

(19) Consumption taxes
Consumption taxes are imposed at a flat rate of 5% on all domestic
consumption of goods and services (with certain exemptions). The consumption taxes withheld on revenues and the consumption taxes paid onpurchases are both excluded from the amounts of relevant items in theaccompanying consolidated statements of income.

(20) Income taxes
Income taxes of the Companies consist of corporate income tax, local
inhabitant tax and enterprise tax.
Deferred income taxes are determined using the asset and liability
method, whereby deferred tax assets and liabilities are recognized in
respect of temporary differences between the tax basis of assets andliabilities and those as reported in the financial statements. Deferred tax
assets and liabilities are measured by using currently applicable tax rates,
and the effect on these deferred tax assets and liabilities of a change intax rates is recognized in income in the period of the application date.

2008

Securities withunrealized gains:
Equity securities
Securities withunrealized losses:
Equity securities
Total

2007

Acquisition
cost

Carrying
value

Gross
unrealized
gains(losses)¥3,652¥5,638¥1,986¥3,757 ¥7,637 ¥3,880

550¥4,202308¥5,946(242)¥1,744

438
393
(45)
¥4,195 ¥8,030 ¥3,835

Acquisition Carrying
cost
value

Gross
unrealized
gains(losses)Thousands of U.S. dollars(Note 3)2008

Securities withunrealized gains:
Equity securities $34,851 $53,803 $18,952
Securities withunrealized losses:
Equity securities
5,248
2,939 (2,309)
Total$40,099 $56,742 $16,643

15

(2) Available-for-sale securities at February 29, 2008 and February 28,

Millions of yen

2007, which have no readily determinable fair value, are summarized
as follows:
Thousands of
U.S. dollars(Note 3)

Millions of yen

Available-for-sale securities
Non-listed equity securities

2008

2007

2008

¥145

¥152

$1,384(3) Total sales of available-for-sale securities for the years ended
February 29, 2008 and February 28, 2007 are summarized asfollows:

2008

2007

2008

¥ 5
4
—

¥86
1
14

$48
38
—

5. IMPAIRMENT LOSS
For the years ended February 29, 2008 and February 28, 2007, theCompanies recognized impairment loss for the following group of assets.
2008
Description

2007
Location(Prefecture)

Location(Prefecture)

Description

Operating stores(19 groups)

Hiroshima,
Okayama,
Fukuoka,
OthersOperating stores(42 groups)

Hiroshima,
Okayama,
Fukuoka,
OthersRental assets(1 groups)

Hiroshima

Rental assets(2 groups)

Hiroshima,
Yamaguchi

Assets forcommon use(1 group)

Hiroshima

Idle assets(1 group)

KagawaIdle assets(1 group)

KagawaMillions of yen
Classification

Land
Buildings and structures
OthersTotal

Amount to:
Acquisition cost
Accumulated
depreciation
Accumulated
impairment loss
Net book value

Other

Total

¥ 666

¥ 1,896¥ 2,562¥ 2,665 ¥ 3,623 ¥ 6,288(634)(1,535)(2,169)(2,470) (2,996) (5,466)

—
¥ 32

¥

2008

2007

2008

¥ 323
486
325
¥1,134¥2,0201,710
281¥4,011$ 3,0824,638
3,102$10,822

The Companies group their fixed assets by the minimum cashgenerating unit (“CGU”), such as stores, rental assets and idle assets byindividual. Impairment loss was recognized and recorded in “Other
income (expenses)” in accordance with new “Accounting Standard for
Impairment of Fixed Assets.” An impairment loss is recognized when the
carrying amount of assets in a CGU exceeds the recoverable value of theassets. This may be triggered by land that has significantly depreciated invalue, CGUs that will be closed in the near future or which have madeconsecutive operating losses.
Recoverable value of the group of assets is the higher amount of
net selling price or value in use. Net selling price was primarily calculated
based on independent appraisals, and value in use was calculated bydiscounting estimated future cash flows to which 4.07% to 4.36% and4.07% to 4.21% discount rate was applied at February 29, 2008 andFebruary 28, 2007.

(7)
354 ¥

(7)
386

Equipment
andvehicles

¥

Other

—
195 ¥

(15)
807

2008

The acquisition cost is calculated including the interest portion as
the outstanding future lease payments are immaterial to the yearend balance of property and equipment.
b) Amounts of outstanding future lease payments and allowance for
impairment loss at February 29, 2008 and February 28, 2007,
which include the interest portion, are summarized as follows:
Millions of yen

Thousands of
U.S. dollars(Note 3)

2008

2007

2008

¥241
145
386
¥ 7

¥548
259
¥807
¥ 15

$2,300
1,384
3,684
$ 67

c) Lease payments, reversal of allowance for impairment loss on
leased property, depreciation expense and impairment loss for theyears ended February 29, 2008 and February 28, 2007 are as
follows:
Millions of yen

Lease payments
Reversal of allowance
for impairment loss
on leased property
Depreciation expense
Impairment loss

Thousands of
U.S. dollars(Note 3)

2008

2007

2008

¥430

¥924

$4,103

10
430
1

13
924
28

95
4,103
10

d) Method of asset depreciation
The depreciation expense is determined based on the straight-line
method over the lease term of the leased assets assuming noresidual value.

(2) As lessor:a) The acquisition cost, accumulated depreciation and net book valueof leased assets at February 29, 2008 and February 28, 2007 aresummarized as follows:

6. LEASES(1) As lessee:

16

(15)
612 ¥

Amount to:
Acquisition cost $ 6,356 $ 18,093 $ 24,449
Accumulated
depreciation(6,050) (14,648) (20,698)
Accumulated
impairment loss
—
(67)
(67)
Net book value$ 306 $ 3,378 $ 3,684

Millions of yena) The acquisition cost, accumulated depreciation, accumulated
impairment loss and net book value of leased assets at February
29, 2008 and February 28, 2007, if capitalized, are summarized
as follows:

Total

Thousands of U.S. dollars(Note 3)

Due within one year
Due after one year
Total
Allowance for impairment loss

Thousands of
U.S. dollars(Note 3)2007

Equipment
andvehiclesThousands of
U.S. dollars(Note 3)

Millions of yen

Sales
Gross realized gains
Gross realized losses

2008

Amount to:
Acquisition cost
Accumulated
depreciation
Net book value

Thousands of
U.S. dollars(Note 3)

2008

2007

2008

Equipment
and vehicles

Equipment
and vehicles

Equipment
and vehicles

¥ 89

¥210

$ 849

(40)
¥ 49

(39)
¥171

(381)
$ 468

b) Amounts of outstanding future income at February 29, 2008 andFebruary 28, 2007, which include the interest portion, aresummarized as follows:
Millions of yen

Due within one year
Due after one year
Total

Thousands of
U.S. dollars(Note 3)

2008

2007

2008

¥ 16
38
¥ 54

¥ 39
147
¥186

$153
362
$515

c) Lease income and depreciation expense for the years ended
February 29, 2008 and February 28, 2007 are as follows.
Millions of yen

Lease income
Depreciation expense amountThousands of
U.S. dollars(Note 3)

2008

2007

2008

¥16
15

¥22
21

$153
143

8. RETIREMENT BENEFIT PLANS
Employees of the Companies with more than one year’s service areentitled to receive lump-sum indemnities upon retirement. The amountof the benefits is determined by reference to current basic rate of pay,
length of service and conditions under which retirement occurs.
The funded status of the Companies at February 29, 2008 andFebruary 28, 2007 is summarized as follows:

Projected benefit obligation
Unrecognized net actuarial differences
Unrecognized past service costs
Accrued severance indemnities

Millions of yen

2008

Thousands of
U.S. dollars(Note 3)2007

Loans from banks and insurancecompanies, due from March 2008
to February 2018 with weighted
average interest rates of 1.53%
and 1.42% at February 29, 2008 andFebruary 28, 2007, respectively.
Secured¥ 53,508 ¥ 51,630
Unsecured
50,477
32,777
103,985
84,407
0.00% Japanese yen unsecured
convertible bonds due July 2009
19,077
19,190123,062
103,597
Less, portion due within one year
(15,261)(24,060)¥107,801 ¥ 79,537

2008$ 510,621
481,697
992,318
182,050
1,174,368(145,634)$1,028,734

The aggregate annual maturities of long-term debt outstanding at
February 29, 2008 are as follows:
Years ending the last day of February:

Millions of yen

Thousands of
U.S. dollars(Note 3)

2010
2011
2012
2013
2014 and thereafter
Total¥ 28,324
11,587
11,548
12,20644,136¥107,801$ 270,293
110,574
110,201
116,481421,185$1,028,734

Assets pledged as collateral and related secured debt at February
29, 2008 and February 28, 2007 are summarized as follows:
Millions of yen

Assets pledged as collateral:
Land
Buildings
Investments in securities
Total
Debt secured by the above:
Short-term borrowings
Other current liabilities
Long-term debt
Other liabilities
Total

Thousands of
U.S. dollars(Note 3)

2008

2007

2008

¥ 76,372
73,628911¥150,911¥ 65,567
71,175
1,328¥138,070$ 728,810
702,624
8,694$1,440,128¥¥ 10,050
1,002
51,63010,354¥ 73,036

$

5,255
1,919
53,5081,161¥ 61,843

50,14818,313
510,621
11,079$ 590,161

2008

2007

2008

¥4,65776
201¥4,934¥4,556(34)
262¥4,784$44,442725
1,918$47,085

Pension and severance costs of the Companies included thefollowing components for the years ended February 29, 2008 andFebruary 28, 2007:

7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings are primarily represented by bank overdrafts,
bearing interest at the weighted average interest rates of 1.05% and0.98% at February 29, 2008 and February 28, 2007, respectively.
Long-term debt at February 29, 2008 and February 28, 2007
consisted of the following:Thousands of
U.S. dollars(Note 3)

Millions of yen

Thousands of
U.S. dollars(Note 3)

Millions of yen

Service costs
Interest costs
Realized net actuarial losses/(gains)
Amortization of unrecognized past
service costs
Other
Net periodic pension costs

2008

2007

2008

¥382
82
(6)

¥399
80
17

$3,645
783
(57)

(61)
190
¥587

(61)
130
¥565

(582)
1,813
$5,602

Pension benefits are attributed to periods of employee service
based on year of service using the straight-line method.
Assumptions used in the accounting for the defined benefit plans
for the years ended February 29, 2008 and February 28, 2007 are as
follows:
Discount rate

2008

2007

1.5%–2.0%

1.5%–2.0%

9. COMMITMENTS AND CONTINGENT LIABILITIESThe Company was contingently liable for guarantees of loans from financial institutions taken out by affiliates and others, totaling ¥2,360 million($22,524 thousand) and ¥2,641 million at February 29, 2008 and February
28, 2007, respectively.

10. DERIVATIVE FINANCIAL INSTRUMENTS(1) Status of transactionsa) Nature of transactions
The Companies use derivative instruments, which comprise foreign
currency exchange forward contracts, currency swap contracts,
currency option contracts and interest rate swap agreements.
b) Purpose and policy of transactions
The Companies use foreign currency exchange forward contracts,
currency swap contracts and currency option contracts to minimize
exposure and to reduce risk from exchange rate fluctuation in
import transactions. The Companies also use interest rate swap
agreements to hedge against exposure to interest rate fluctuationand to adapt the long-term fixed interest rate to the current rate inline with changes in the market rate. The Companies do not use
derivative instruments for speculative trading purposes.
c) Risks in transactions
Derivative instruments used by the Companies are exposed to risk
from market rate fluctuations. Counter-parties are highly creditworthy domestic banks and, therefore, the Companies do not
expect losses due to non-performance by these counter-parties.
d) Risk management
Derivative transactions are managed and approved by responsible
decision-making bodies such as management meetings, andexecuted by the related departments.

17

(2) Market value of transactions
The Companies had the following derivative contracts outstanding at
February 28, 2007:
Millions of yen

2007

Currency option contracts

Contract
amountFair market
value

Unrealized
gains¥1,732¥91¥91

The fair value is quoted by financial institutions with which theCompanies conclude foreign currency exchange forward contracts andcurrency option contracts.
Derivative transactions with hedge accounting applied are excluded
from the above table.
The table for 2008 is not listed due to derivative transaction withhedge accounting applied.

11. NET ASSETS
Through May 1, 2006, the Company and its domestic subsidiaries are
subject to the Commercial Code of Japan (the “Code”). Under the Code,the entire amount of the issue price of new shares issued is required tobe capitalized as stated common stock, although the Company may, byresolution of its Board of Directors, capitalize an amount not exceeding
one half of the issue price of the new shares as additional paid-in capital.
The Code requires a domestic company to appropriate, as a legal
reserve, an amount equal to at least 10% of the amount paid out by it asappropriation of retained earnings (including any payment by way ofannual dividend and bonuses to directors and corporate auditors) for theperiod or equal to 10% of any interim dividend, until the sum of the legal
reserve and the additional paid-in capital equals 25% of its statedcommon stock. The legal reserve and additional paid-in capital may betransferred to stated common stock through suitable director action orused to reduce a deficit through suitable stockholder action.
Under the Code, the appropriation of retained earnings (including
year-end cash dividend payment) proposed by the Board of Directors
should be approved at a stockholders’ meeting, which must be held
within three months of the balance sheet date. The appropriation ofretained earnings reflected in the accompanying consolidated financial
statements represents the results of such appropriations which areapplicable to the immediately preceding fiscal year but which areapproved by the stockholders’ meeting and disposed of during thecurrent year.
As is customary practice in Japan, the payment of bonuses todirectors and corporate auditors is made out of retained earnings insteadof being charged to income for the year and constitutes a part of theappropriations cited above.
On May 1, 2006, a new corporate law (the “Law”) became
effective, which reformed and replaced the Code with various revisions
that would, for the most part, be applicable to events or transactions
which occur on or after May 1, 2006 and for the years ending on or after
May 1, 2006. The significant changes in the Law that affect financial andaccounting matters are summarized below.
a) Dividends: The Law allows Japanese companies to pay dividends
at any time during the year in addition to the year-end dividend
upon resolution at the stockholders’ meeting. For Japanese companies that meet certain criteria such as, having the Board of
Directors, having independent auditors, having the Board of
Corporate Auditors, and the term of service of the directors is prescribed as one year rather than two years of normal term by its
articles of incorporation, the Board of Directors may declare dividends (except for dividends in kind) if the company has prescribedso in its articles of incorporation. The Law permits Japanese companies
to distribute dividends-in-kind (non-cash assets) to stockholders
subject to certain limitations and additional requirements. The Law
continues to provide certain limitations on the amounts available fordividends or the purchase of treasury stock. The limitation isdefined as the amount available for distribution to the stockholders,
but the amount of net assets after dividends must be maintained
at no less than ¥3 million.
b) Increase/decrease and transfer of common stock, reserveand surplus: The Law requires that an amount equal to 10% of
dividends must be appropriated as a legal reserve (of retained
earnings) or as additional paid-in capital (of capital surplus) depending on the equity account charged upon the payment of such
dividends until the total aggregate amount of legal reserve andadditional paid-in capital equals 25% of the common stock. Under

18

the Law, the total amount of additional paid-in capital and legal
reserve may be reversed without limitation of threshold that theCode provided. The Law also provides that common stock, legal
reserve, additional paid-in capital, other capital surplus and retained
earnings can be transferred among the accounts under certain
conditions upon resolution of the stockholders.
c) Treasury stock: The Law continues to provide for Japanese companies to repurchase/dispose of treasury stock just as the Code did.
The amount of treasury stock purchased cannot exceed the amountavailable for distribution to the stockholders which is determined by
specific formula.

(1) Type and number of issued shares
Type of stock

Number of shares
as of February 28,
2007

Number ofsharesincreased

Number ofsharesdecreased

Number of shares
as of February 29,
2008

Common stock

61,558,710

61,558,710—

123,117,420

The increase of issued shares is due to stock split.

Type of stock

Number of shares
as of February 28,
2006

Number ofsharesincreased

Number ofsharesdecreased

Number of shares
as of February 28,
2007

Common stock

61,558,710——

61,558,710(2) Type and number of shares of treasury stock
Type of stock

Number of shares
as of February 28,
2007

Number ofsharesincreased

Number ofsharesdecreased

Number of shares
as of February 29,
2008

Common stock

9,652,302

18,866,068

74,55828,443,812

The increase in treasury stock of 9,652,302 shares is due to stock
split. The increase in treasury stock of 5,165,800 shares and4,403,089 shares is from purchases in the open market and fromconsolidated subsidiaries, respectively. The increase in treasury
stock of 4,877 shares is from purchases of non-full unit stocks. The
decrease in treasury stock is from distribution of treasury stock
when exercising stock warrants.

Type of stock

Number of shares
as of February 28,
2006

Number ofsharesincreased

Number ofsharesdecreased

Number of shares
as of February 28,
2007

Common stock

9,255,077

657,184

259,959

9,652,302

The increase in treasury stock is from purchases in the open
market and purchases of non-full unit stocks. The decrease in treasury stock is from distribution of treasury stock when exercisingstock warrants.

(3) Stock warrants
Number of shares subject to stock warrants
Type of stock
warrants

Type ofstock

Unsecured Common
convertible
stock
bonds

Number of shares
as of February 28,
2007

Number ofsharesincreased

Number ofsharesdecreased

Number of shares
as of February 29,
2008

6,331,243

6,331,243

74,562

12,587,924

The balance of stock warrants as of February 29, 2008 is ¥19,077
million ($182,050 thousand). The amount payable on the stock
warrant exercise date is ¥1,515.5 ($14.46). The increase in stock
warrants is due to stock split. The decrease in stock warrants isdue to exercise.
Number of shares subject to stock warrants
Type of stock
warrants

Type ofstock

Unsecured Common
convertible
stock
bonds

Number of shares
as of February 28,
2006

Number ofsharesincreased

Number ofsharesdecreased

Number of shares
as of February 28,
2007

6,591,224—

259,9816,331,243

The balance of stock warrants as of February 28, 2007 is ¥19,190
million. The amount payable on the stock warrant exercise date is¥3,301. However, on March 1, 2007, a stock split (2 for 1) was
made, resulting in an amount payable on the stock warrant
exercise date of ¥1,515.5.

(4) Matters related to dividendsa) Dividend payments
Millions ofyen

Thousands of
U.S dollars U.S dollars(Note 3)(Note 3)

Yen

Total amountof cashDividend
dividends per share

Resolution

Type

May 24, 2007
Stockholders’meeting

Commonstock¥858

October 11, 2007, Common
Board of directors’
stockmeeting¥858¥ 8.00Millions of
yen

Yen

Record date

Total amountof cashDividend
dividends per share

Effective
date¥16.00 February 28, May 25,
2007
2007

Total amountof cashDividend
dividends per share$8,188August 31, October 26, $8,188
2007
2007

Record date

$0.15

$0.08

Effectivedate

Resolution

Type

May 25, 2006
Stockholders’meeting

Commonstock¥757¥14.00 February 28, May 26,
2006
2006

October 11, 2006, Common
Board of directors’
stockmeeting¥865¥16.00

The reconciliation of the difference between the statutory income
tax rates and the effective income tax rates for the year ended February
29, 2008 and February 28, 2007 is as follows:

Statutory income tax rate
Increase (decrease) in tax resulting from:Entertainment expenses and other which arepermanently non-tax-deductible
Dividend income and other income which ispermanently non-taxable
Per capita inhabitant taxes and other
Valuation allowance
Amortization of goodwill
Equity in earnings of affiliates
Tax expense from acquiring parent company’s
shares from consolidated subsidiaries
Other
Effective income tax rate

2008

2007

40.4%

40.4%

0.1%

0.1%

(0.1%)
0.9%
0.1%(0.3%)(0.3%)(0.2%)
1.1%(8.8%)——

2.9%(0.2%)
43.5%—(0.1%)
32.7%

The significant components of deferred tax assets and liabilities atFebruary 29, 2008 and February 28, 2007 are as follows:

August 31, October 26,
2006
2006

Millions of yenb) Dividends whose record date is within the year ended February 29,
2008, but effective after the year-end
Millions ofyen

Resolution

Type

May 22, 2008
Stockholders’meeting

Commonstock

Resolution

Type

May 24, 2007
Stockholders’meeting

Commonstock

YenTotal amountof cashDividend
dividends per share

¥757

¥8.00

Millions of
yen

Yen

Total amountof cashDividend
dividends per share¥858

Thousands of
U.S dollars U.S dollars(Note 3)(Note 3)

Record date

Total amount
Effectiveof cashDividend
date
dividends per share

February 29, May 23,
2008
2008

Record date

$7,228$0.08

Effective
date¥16.00 February 28, May 25,
2007
2007

12. DETAILS OF SELLING, GENERAL AND ADMINISTRATIVE
EXPENSESThe following are the major elements of “operating expenses” for theyears ended February 29, 2008 and February 28, 2007.
Millions of yen

Advertising and promotion
Shipping expense
Allowance for doubtful accounts
Salaries and bonus expense
Accrued bonus
Welfare expense
Pension costs
Real estate rental fees
Utilities expense
Depreciation expense

Thousands of
U.S. dollars(Note 3)

2008

2007

2008

¥ 6,095
4,703
865
33,887
1,501
5,612
554
9,031
5,804
10,927¥ 5,896
4,095
776
32,595
1,544
5,673
541
9,268
5,269
10,326$ 58,164
44,8808,255
323,380
14,32453,555
5,287
86,182
55,387104,275

13. INCOME TAXESThe Companies are subject to a number of different taxes based on
income, which, in aggregate, result in statutory income tax rates ofapproximately 40.4% for the years ended February 29, 2008 andFebruary 28, 2007.

2008

Deferred tax assets:
Allowance for doubtful accounts
Property and equipment
Intangible assets
Investments in securities
Accrued enterprise tax
Accrued bonus
Accrued severance indemnities
Fair value adjustments ofconsolidated subsidiaries
Evaluation losses on investments
in consolidated subsidiaries
Tax loss carried forward
Excess depreciation andamortization
Allowance for point discounts
Impairment loss
Provision for loss on guarantees
Other

¥

338
67
291
255
417
815
2,320

Thousands of
U.S. dollars(Note 3)

2007

¥

222
237
276
88
378
1,091
2,299

2008

$

3,225
639
2,777
2,433
3,979
7,777
22,140

355

355

3,388

36
3,769

1,901
3,109

344
35,967

478
283
1,561
459
1,274

407
283
1,334
459
426

4,562
2,701
14,896
4,380
12,159Total

12,71812,865

121,367

Valuation allowance(4,103)(4,082)(39,155)

Total

8,615

8,783

82,212

(156)

(176)

(1,489)

(203)

(210)

(1,937)

(985)

(985)

(9,400)(799)(1,549)(7,625)

(10)
(161)

(10)
(0)

(95)
(1,536)

Deferred tax liabilities:
Reserve for special depreciation
Reserve for advanced
depreciation of fixed assets
Fair value adjustments ofconsolidated subsidiaries
Unrealized gains onavailable-for-sale securities
Unrealized gains on
property and equipment
Other
Total
Net deferred tax assets(2,314)(2,930)(22,082)¥ 6,301¥ 5,853$ 60,130

14. RELATED PARTY TRANSACTIONS
For the years ended February 29, 2008 and February 28, 2007, theCompany purchased ¥11,757 million ($112,197 thousand) and ¥12,030
million of merchandise from Japan Logistics Industry Co., Ltd. (“JLI”),
respectively. Representative Director and Vice President of JLI, Mr.
Yasuaki Yamanishi, is also a representative director and the President of
the Company and owns 2.13% of the Company’s voting stock. At
February 29, 2008 and February 28, 2007, the Company had accounts
payable of ¥1,360 million ($12,974 thousand) and ¥1,176 million, and19

deposit guarantee money of ¥50 million and ¥50 million ($477 thousand)to JLI, respectively.
For the year ended February 28, 2007, the Company purchased theCompany’s subsidiary stocks from Mr. Hiromasa Takanishi’s relatives for¥57 million. Mr. Hiromasa Takanishi is a Representative Director and theVice President of the Company and owns 0.03% of the Company’s
voting stock. The purchase price was based on the latest selling price.
For the years ended February 29, 2008 and February 28, 2007, theCompany leased the Higashi-Hiroshima shop building from Izumi Kosan
K.K. (“Izumi”) with lease payments of ¥341 million ($3,254 thousand).
Izumi is a majority-owned subsidiary of a company which is wholly
owned by Mr. Yasuaki Yamanishi and his relatives and owns 4.23% of
the Company’s voting stock. The lease terms are the same as those forthird parties. At February 29, 2008 and February 28, 2007, the Company
paid guarantee money of ¥1,269 million ($12,108 thousand) and ¥1,745
million respectively, to Izumi. These amounts were determined based onarea occupied by the Company relative to the total area of the building.

15. SUPPLEMENTARY CASH FLOW INFORMATIONCash and cash equivalents at February 29, 2008 and February 28, 2007
consisted of the following:
Millions of yen

Cash and bank deposits

Thousands of
U.S. dollars(Note 3)

2008

2007

2008

¥9,430¥11,614$89,990

16. Subsequent Event(Mergers with consolidated subsidiaries)
The Company at its Board of Directors meeting held on April 11, 2008,
reached a resolution to merge through absorption with X-sell Co., Ltd.
and Yume Town Kumamoto Co., Ltd.

1. Merger method
The Company remains as a surviving company and X-sell Co., Ltd. andYume Town Kumamoto Co., Ltd. are dissolved. In accordance with theprovisions on simplified organizational restructuring set out in the
Corporate Law, the Company and Yume Town Kumamoto Co., Ltd.
conduct the merger without formal approval of the merger agreement byresolution of the stockholders meeting. X-sell Co., Ltd. obtains approval
for the merger agreement by resolution of the stockholders meeting inAugust, 2008.
2. Merger schedule
Merger agreement
Board of directors
Stockholders meeting
Effective dateJuly, 2008
July, 2008
August, 2008
September, 2008

3. Merger ratio
Yume Town Kumamoto Co., Ltd is a wholly owned subsidiary of theCompany, no issuance of new stock are made under the merger. The
merger ratio of X-sell Co., Ltd. would be estimated by an accounting
office as a third party.

I N D E P E N D E N T A U D I T O R S ’ R E P O RT
To the Stockholders and Board of Directors of
Izumi Co., Ltd.:We have audited the accompanying consolidated balance sheets of Izumi Co., Ltd. and consolidated subsidiaries as ofFebruary 29, 2008, and the related consolidated statements of income, changes in net assets and cash flows for theyear then ended, expressed in Japanese yen. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to independently express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosuresin the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. 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 material respects, theconsolidated financial position of Izumi Co., Ltd. and consolidated subsidiaries as of February 29, 2008, and theconsolidated results of their operations and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in Japan.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended
February 29, 2008 are presented solely for convenience. Our audit also included the translation of yen amounts into
U.S. dollar amounts and, in our opinion, such translation has been made on the basis described in Note 3 to theconsolidated financial statements.

Hiroshima, JapanMay 22, 2008

20

DIRECTORS AND CORPORATE AUDITORSCHAIRMAN

FULL-TIME CORPORATE AUDITOR

Yoshimasa Yamanishi

Kuniaki Kawamoto

PRESIDENTCORPORATE AUDITORS

Yasuaki Yamanishi

Jiro Matsubara
Yasuyuki Tudo

MANAGING DIRECTOR

Tsunehiko Yoshida(as of May 22, 2008)

DIRECTOR

Yuichiro Kajiwara

CORPORATE DATAHEAD OFFICE

TRANSFER AGENT AND REGISTRAR

2-22, Kyobashi-cho,
Minami-ku, Hiroshima,
Hiroshima Prefecture 732-0828, Japan
Tel.: (082) 264-3211

The Sumitomo Trust & Banking Co., Ltd.
4-5-33, Kitahama, Chuo-ku,
Osaka 540-8639, JapanDATE OF ESTABLISHMENTANNUAL MEETING OF STOCKHOLDERS

October 27, 1961

The annual meeting of stockholders of the Company isnormally held in May each year in Hiroshima, Japan. In
addition, the Company may hold an extraordinary meetingof stockholders whenever necessary by giving at least
two weeks’ advance notice to stockholders.

PAID-IN CAPITAL¥19,614 million (as of February 28, 2008)
SECURITIES TRADED

Common Stock
Tokyo Stock Exchange, First Section
Osaka Securities Exchange, First Section

AUDITORSKPMG AZSA & Co.

21

IZUMI CO., LTD.
2-22, Kyobashi-cho, Minami-ku,
Hiroshima 732-0828, Japan
Tel: (082) 264-3211

Printed in Japan