UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

SEPTEMBER 30, 2006

-OR-

Commission File No. 1-32970

ALBERTO-CULVER COMPANY

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (708) 450-3000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x                Accelerated filer  ¨                Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes  ¨    No  x

The aggregate market value of Alberto-Culver’s (predecessor to New Alberto-Culver, see “Explanatory Note” on page 2) common stock held by non-affiliates (assuming for this purpose only that all directors and executive officers are affiliates) on March 31, 2006, the last business day of Alberto-Culver’s most recently completed second fiscal quarter, was $3.45 billion.

At November 30, 2006, there were 93,687,521 shares of common stock outstanding.

EXPLANATORY NOTE

During the fiscal year ended September 30, 2006, Alberto-Culver Company (Alberto-Culver or the company) consisted of two businesses: Global Consumer Products and Beauty Supply Distribution. On June 19, 2006, Alberto-Culver announced a plan to split Sally Holdings, Inc. (Sally Holdings), a wholly-owned subsidiary of the company, from the consumer products business. Sally Holdings was comprised of the company’s Sally Beauty Supply and Beauty Systems Group segments, which together made up the Beauty Supply Distribution business. Pursuant to an Investment Agreement, on November 16, 2006:

To accomplish the results described above, the parties engaged in a number of transactions including:

Notwithstanding the legal form of the transaction, because of the substance of the transaction, New Alberto-Culver is considered the divesting entity and treated as the “accounting successor” to the company, and New Sally will be considered the “accounting spinnee” for financial reporting purposes in accordance with Emerging Issues Task Force (EITF) Issue No. 02-11, “Accounting for Reverse Spinoffs.”

As used in this Annual Report on Form 10-K, the term “Separation” means the separation of Alberto-Culver into New Alberto-Culver and New Sally involving Clayton, Dubilier & Rice, Inc. (CD&R), which occurred on November 16, 2006.

Unless otherwise noted, the information included in Parts I and III of this Annual Report on Form 10-K relates to New Alberto-Culver, while the financial and other information included in Part II of this Annual Report on Form 10-K generally relates to Alberto-Culver (the accounting predecessor to New Alberto-Culver).

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are based on management’s current expectations and assessments of risks and uncertainties and reflect various assumptions concerning anticipated results, which may or may not prove to be correct. Some of the factors that could cause actual results to differ materially from estimates or projections contained in such forward-looking statements

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include: risks inherent in acquisitions, divestitures and strategic alliances; the pattern of brand sales; competition within the relevant product markets; loss of one or more key employees; the effects of a prolonged United States or global economic downturn or recession; changes in costs; the costs and effects of unanticipated legal or administrative proceedings; health epidemics; adverse weather conditions; loss of distributorship rights; sales by unauthorized distributors in New Alberto-Culver’s exclusive markets; and variations in political, economic or other factors such as currency exchange rates, inflation rates, interest rates, tax changes, legal and regulatory changes or other external factors over which New Alberto-Culver has no control. In addition, the following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements with respect to the benefits of the Separation: the risk that the businesses will not be separated cost effectively; disruption from the Separation making it more difficult to maintain relationships with clients, employees or suppliers; and events that negatively affect the intended tax free nature of the portion of the transaction related to the distribution of New Alberto-Culver shares. New Alberto-Culver has no obligation to update any forward-looking statement in this Annual Report on Form 10-K or any incorporated document.

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PART I

Description of Business

New Alberto-Culver operates two consumer products divisions: (i) Alberto-Culver Consumer Products Worldwide, which develops, manufactures, distributes and markets branded beauty care products as well as branded food and household products in the United States and more than 100 other countries, and (ii) Cederroth International, which manufactures, markets and distributes beauty and health care products throughout Scandinavia and in Europe. New Alberto-Culver’s consolidated net sales were $1.43 billion, $1.31 billion and $1.19 billion for the years ended September 30, 2006, 2005 and 2004, respectively. Beauty and health care products accounted for approximately 89% of New Alberto-Culver’s consolidated net sales for the years ended September 30, 2006 and 2005 and 88% for the year ended September 30, 2004. Food and household products accounted for approximately 11% of New Alberto-Culver’s consolidated net sales for the years ended September 30, 2006 and 2005 and 12% for the year ended September 30, 2004.

New Alberto-Culver’s major beauty and health care products marketed in the United States include the Alberto VO5, TRESemmé, Nexxus and Consort lines of hair care products, the St. Ives line of skin care products, FDS feminine deodorant sprays and the Soft & Beautiful, Just For Me, Comb-Thru, Motions and TCB lines of ethnic hair care products. Food and household products sold in the United States include Mrs. Dash salt-free seasoning blends, Molly McButter butter flavored sprinkles, SugarTwin sugar substitute, Static Guard anti-static spray and Kleen Guard furniture polish.

In Canada, New Alberto-Culver sells most of the products marketed in the United States along with the Alberto European and Alberto Balsam lines of hair care products.

In the United Kingdom and Europe, New Alberto-Culver sells products such as the Alberto VO5, Advanced Alberto VO5, Alberto Balsam and TRESemmé lines of hair care products and the St. Ives line of skin care products.

In Latin America, the significant products sold by New Alberto-Culver include the Alberto VO5, Alberto Get Set, Antiall and Folicure lines of hair care products, the St. Ives line of skin care products, Veritas soap and deodorant body powder products and Farmaco soap products. New Alberto-Culver’s principal markets in Latin America are Mexico, Puerto Rico and the Caribbean, Argentina and Chile.

Cederroth International, a subsidiary of New Alberto-Culver headquartered in Sweden, manufactures, markets and distributes beauty and health care products throughout Scandinavia and in parts of Europe. Such products include Salve adhesive bandages, Samarin antacids, Seltin salt substitute, Topz cotton buds, Savette wet wipes, Bliw liquid soaps, Date anti-perspirants and cologne for women, Alberto Family Fresh shampoo and shower products, Suketter artificial sweetener, Alberto VO5 hair care products, the St. Ives line of skin care products, HTH and L300 skin care products, Grumme Tvattsapa detergents, Pharbio natural pharmaceuticals and LongoVital herbal multivitamin products. Cederroth also distributes Jordan toothbrushes in Scandinavia. Soraya skin care products are sold in Poland and Eastern Europe.

New Alberto-Culver’s products are also sold in Australia, Asia and Africa.

New Alberto-Culver also performs custom label manufacturing of other companies’ beauty and health care products in the United States and Scandinavia.

For the year ended September 30, 2006, approximately 45.7% of New Alberto-Culver’s net sales were from international operations. As of September 30, 2006, approximately 40.1% of New Alberto-Culver’s identifiable assets were located in international locations.

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Product Development and Marketing

Many of New Alberto-Culver’s consumer products are developed in its laboratories. New Alberto-Culver has established global structures for operations and research and development, which are designed to enable it to implement cost-savings initiatives more quickly on a broad scale and to shorten the time that it takes to develop an idea into a market-ready product. New products introduced by New Alberto-Culver are assigned product managers, who guide the products from development to the consumer. The product managers are responsible for the overall marketing plans for the products and coordinate advertising and marketing activities.

New Alberto-Culver allocates a large portion of its revenues to the advertising and marketing of consumer beauty products. Net earnings are materially affected by these expenditures, which are charged against income in the period incurred. New Alberto-Culver regards television as a primary medium for advertising and uses it to conduct extensive network, spot and cable television advertising campaigns. New Alberto-Culver also advertises through other media such as newspapers, magazines, radio and internet, as well as through direct mailings by retailers to their customers. Extensive advertising and marketing are required to build and protect a branded consumer product’s market position. New Alberto-Culver believes there is significant consumer awareness of its major brands and that such awareness is an important factor in its operating results.

Suppliers

New Alberto-Culver manufactures and packages almost all of its products. New Alberto-Culver purchases the raw materials for these products from various suppliers, none of which are individually significant to the business.

Competition

The domestic and international markets for New Alberto-Culver’s branded consumer products are highly competitive and sensitive to changes in consumer preferences and demands. New Alberto-Culver’s competitors range in size from large, highly diversified companies (many of which have substantially greater financial resources than New Alberto-Culver) to small, specialized producers. New Alberto-Culver competes primarily on the basis of providing specific benefits to consumers, marketing (including advertising, promotion, merchandising, packaging and trade customer relations), product quality and price and believes that brand loyalty and consumer acceptance are also important factors to its success.

New Alberto-Culver attempts to differentiate itself from competing brands with innovative product offerings, attractive packaging and focused advertising and promotional efforts. New Alberto-Culver utilizes research and consumer testing to optimize product performance and improve consumer satisfaction with its products. While New Alberto-Culver’s products are often subject to significant price competition, many of New Alberto-Culver’s products are designed to provide consumers with better value for the price compared to competitive brands. In addition, New Alberto-Culver at times uses promotions that effectively reduce the price for some of its products to attract consumers to its brands and products and also to respond to competitive pressures that could harm New Alberto-Culver’s sales and profits.

Distribution

New Alberto-Culver’s sales force and independent brokers sell its retail beauty and health care products and food and household products by calling on retail outlets such as mass merchandisers, supermarkets, drug stores, dollar stores, wholesalers and variety stores. New Alberto-Culver’s sales representatives and brokers sell its ethnic professional hair care products in the United States to mass merchandisers, drug stores and supermarkets and to beauty supply outlets and beauty distributors, who in turn sell to beauty salons, barber shops and beauty schools.

New Alberto-Culver’s consumer products are sold internationally in more than 100 countries, primarily through direct sales by its subsidiaries, independent distributors and licensees. New Alberto-Culver’s foreign operations are subject to risks inherent in transactions involving foreign currencies and political uncertainties.

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Employees

In its domestic and foreign operations, New Alberto-Culver had approximately 3,800 employees as of September 30, 2006, consisting of about 1,800 hourly personnel and 2,000 salaried employees. Certain subsidiaries of New Alberto-Culver have union contracts covering production, warehouse, shipping and maintenance personnel. New Alberto-Culver considers relations with its employees to be satisfactory.

Regulation

New Alberto-Culver is subject to the regulations of a number of governmental agencies in the United States and certain foreign countries, including the Food and Drug Administration and the Federal Trade Commission. These regulations have not historically had a material effect on the business of New Alberto-Culver.

Trademarks and Patents

New Alberto-Culver’s trademarks, certain of which are material to its business, are registered or legally protected in the United States, Canada and other countries throughout the world in which products of the company are sold. Although New Alberto-Culver owns patents and has other patent applications pending, its business is not materially dependent upon patents or patent protection.

Availability of Reports

New Alberto-Culver’s Annual Report on Form 10-K, Alberto-Culver’s quarterly reports on Form 10-Q, all current reports on Form 8-K and amendments to such reports, if any, are available without charge, at www.alberto.com, as soon as reasonably possible after they are filed electronically with the Securities and Exchange Commission (SEC). New Alberto-Culver will provide copies of such reports to any person, without charge, upon written request to the Corporate Secretary.

New Alberto-Culver faces intense competition in its markets, and the failure to compete effectively could have an adverse impact on its business, financial condition and results of operations.

New Alberto-Culver faces intense competition from consumer product companies both in the U.S. and in its international markets. Most of New Alberto-Culver’s products compete with other widely advertised brands within each product category. New Alberto-Culver also encounters competition from similar and alternative products, many of which are produced and marketed by major multinational or national concerns. New Alberto-Culver’s products generally compete on the basis of:

A newly introduced consumer product (whether improved or newly developed) usually encounters intense competition requiring substantial expenditures for advertising and sales promotion. If a product gains consumer acceptance, it normally requires continuing advertising and promotional support to maintain its relative market position. Many of New Alberto-Culver’s competitors are larger and have financial resources greater than those of New Alberto-Culver and may therefore be able to spend more aggressively on advertising and promotional activities and respond more effectively to changing business and economic conditions than New Alberto-Culver. In addition, New Alberto-Culver’s competitors may attempt to gain market share by offering products at prices at or below those typically offered by New Alberto-Culver. Competitive pricing may require New Alberto-Culver to reduce prices and could lead to a reduction in its sales or its profit margins. If New Alberto-Culver is unable to compete effectively, such failure could have an adverse impact on its business, financial condition and results of operations.

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New Alberto-Culver depends on a limited number of customers for a large portion of its net sales, and the loss of any of these customers or a material reduction in sales to any of these customers could have an adverse effect on New Alberto-Culver’s business, financial condition and results of operations.

A limited number of customers account for a large percentage of New Alberto-Culver’s net sales. New Alberto-Culver’s largest customer, Wal-Mart Stores, Inc. and its affiliated companies, accounted for approximately 19%, 18% and 17% of its net sales during fiscal years 2006, 2005 and 2004, respectively. During fiscal years 2006, 2005 and 2004, New Alberto-Culver’s five largest customers accounted for approximately 29%, 28% and 27% of its net sales, respectively. New Alberto-Culver expects that a significant portion of its net sales will continue to be derived from a small number of customers and that these percentages may increase if the growth of mass merchandisers continues. As a result, changes in the strategies of New Alberto-Culver’s largest customers, including a reduction in the number of brands they carry or a shift of shelf space to private label products, may harm New Alberto-Culver’s net sales.

In addition, New Alberto-Culver’s business is based primarily upon individual sales orders and New Alberto-Culver rarely enters into long-term contracts with its customers. Accordingly, these customers could reduce their purchasing levels or cease buying products from New Alberto-Culver at any time and for any reason. If New Alberto-Culver loses a significant customer or if sales of its products to a significant customer materially decrease, it could have an adverse effect on New Alberto-Culver’s business, financial condition and results of operations.

The failure of New Alberto-Culver to effectively anticipate and respond to market trends and changes in consumer preferences could adversely affect its business, financial condition and results of operations.

New Alberto-Culver’s continued success depends in large part on its ability to anticipate, gauge and react in a timely and effective manner to changes in consumer spending patterns and preferences for beauty and other consumer products. New Alberto-Culver must continually work to develop, produce and market new products, maintain and enhance the recognition of its brands, achieve a favorable mix of products, and refine its approach as to how and where it markets and sells its products. While New Alberto-Culver devotes considerable effort and resources to shape, analyze and respond to consumer preferences, consumer spending patterns and preferences cannot be predicted with certainty and can change rapidly. If New Alberto-Culver is unable to anticipate and respond to trends in the market for beauty and other consumer products and changing consumer demands, its business, financial condition and results of operations could suffer.

Furthermore, material shifts or decreases in market demand for New Alberto-Culver’s products, including changes in consumer spending patterns and preferences, could result in New Alberto-Culver carrying inventories that are too high or cannot be sold at anticipated prices or increased product returns by its customers. Failure to maintain proper inventory levels or increased product returns by its customers could have an adverse effect on New Alberto-Culver’s business, financial condition and results of operations.

New Alberto-Culver manufactures and packages almost all of its products. New Alberto-Culver purchases from various suppliers the raw materials for these products. The loss of one or more suppliers or a significant disruption or interruption in the supply chain could have an adverse effect on the manufacturing and packaging of New Alberto-Culver’s products.

Price increases in raw materials could harm New Alberto-Culver’s profit margins.

As noted above, New Alberto-Culver manufactures and packages almost all of its products. The principal raw materials used by New Alberto-Culver include essential oils, chemicals, containers and packaging components. Increases in the costs of these or other raw materials used in New Alberto-Culver’s business may adversely affect New Alberto-Culver’s profit margins if it is unable to pass along any higher costs in the form of price increases or otherwise achieve cost efficiencies in manufacturing and distribution.

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Large sophisticated customers may take actions that adversely affect New Alberto-Culver’s margins and results of operations.

In recent years, New Alberto-Culver has experienced a consumer trend away from traditional grocery and drug store channels and toward mass merchandisers, which include super centers and club stores. This trend has resulted in the increased size and influence of these mass merchandisers. As these mass merchandisers grow larger and become more sophisticated, they may demand lower pricing, special packaging, or impose other requirements on product suppliers. These business demands may relate to inventory practices, logistics, or other aspects of the customer-supplier relationship. If New Alberto-Culver does not effectively respond to the demands of these mass merchandisers, they could decrease their purchases from New Alberto-Culver, causing New Alberto-Culver’s sales and profitability to decline.

New Alberto-Culver is a holding company with no operations of its own and depends on its subsidiaries for cash.

New Alberto-Culver is a holding company and, following the Separation, does not have any assets or operations other than ownership of its subsidiaries. New Alberto-Culver’s operations are conducted through its subsidiaries and its ability to generate cash to meet its debt service obligations or to pay dividends is highly dependent on the earnings of, and receipt of funds from, its subsidiaries through dividends or intercompany loans. However, none of New Alberto-Culver’s subsidiaries are obligated to make funds available to New Alberto-Culver for payment of dividends or to service its debt.

If New Alberto-Culver is unable to protect its intellectual property rights, specifically its trademarks, its ability to compete could be negatively impacted.

The market for New Alberto-Culver’s products depends to a significant extent upon the value associated with its trademarks and brand names, including “Alberto VO5,” “St. Ives,” “TRESemmé” and “Nexxus.” New Alberto-Culver owns the trademarks and brand name rights used in connection with marketing and distribution of its major products both in the United States and in other countries. Although most of New Alberto-Culver’s material intellectual property is registered in the United States and in certain foreign countries in which it operates, it may not be successful in asserting trademark or brand name protection. In addition, the laws of certain foreign countries may not protect New Alberto-Culver’s intellectual property rights to the same extent as the laws of the United States. The costs required to protect New Alberto-Culver’s trademarks and brand names is expected to continue to be substantial.

New Alberto-Culver’s business is exposed to domestic and foreign currency fluctuations.

New Alberto-Culver’s international sales are generally denominated in foreign currencies, and this revenue could be materially affected by currency fluctuations. Approximately 45.7% of its net sales were from international operations in fiscal year 2006. Its primary exposures are to fluctuations in exchange rates for the United States dollar versus the Swedish krona, the British pound sterling, the Canadian dollar, the Euro, the Australian dollar, the Mexican peso, the Argentine peso, the New Zealand dollar, the Polish zloty and the Danish krone. Changes in currency exchange rates may also affect the relative prices at which New Alberto-Culver and its foreign competitors sell products in the same market. Although New Alberto-Culver occasionally hedges some exposures to changes in foreign currency exchange rates arising in the ordinary course of business, it cannot ensure that foreign currency fluctuations will not have an adverse effect on its business, results of operations and financial condition.

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New Alberto-Culver’s ability to conduct business in or import products from international markets may be affected by legal, regulatory, political and economic risks.

Approximately 45.7% of New Alberto-Culver’s net sales were from international operations in fiscal year 2006. New Alberto-Culver’s ability to capitalize on growth in new international markets and to grow or maintain the current level of operations in its existing international markets is subject to risks associated with international operations. These include:

New Alberto-Culver is also subject to political and economic risks in connection with its international operations, including:

New Alberto-Culver cannot predict whether quotas, duties, taxes or other similar restrictions will be imposed by the United States, the European Union or other countries upon the import or export of its products in the future, or what effect any of these actions would have on its business, results of operations and financial condition. Changes in regulatory or geopolitical policies and other factors may have an adverse effect on New Alberto-Culver’s business in the future or may require it to modify its current business practices.

Any future acquisitions may expose New Alberto-Culver to additional risks.

New Alberto-Culver frequently reviews acquisition prospects that would complement its current product offerings, increase the size and geographic scope of its operations or otherwise offer growth and operating efficiency opportunities. The financing for any of these acquisitions could dilute the interests of New Alberto-Culver stockholders, result in an increase in its indebtedness or both. Acquisitions may entail numerous risks, including:

New Alberto-Culver’s failure to successfully complete the integration of any acquired business could have an adverse effect on its business, financial condition and results of operations. In addition, there can be no assurance that New Alberto-Culver will be able to identify suitable acquisition candidates or consummate acquisitions on favorable terms.

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Product liability claims could adversely affect New Alberto-Culver’s business, financial condition and results of operations.

New Alberto-Culver may be required to pay for losses or injuries purportedly caused by its products. Claims could be based on allegations that, among other things, New Alberto-Culver’s products contain contaminants, provide inadequate instructions regarding their use, or provide inadequate warnings concerning interactions with other substances. Product liability claims could result in negative publicity that could harm New Alberto-Culver’s sales and operating results. In addition, if any of New Alberto-Culver’s products is found to be defective, New Alberto-Culver could be required to recall it, which could result in adverse publicity and significant expenses. Although New Alberto-Culver maintains product liability insurance coverage, potential product liability claims may exceed the amount of insurance coverage or potential product liability claims may be excluded under the terms of the policy.

Environmental matters create potential liability risks.

New Alberto-Culver must comply with various environmental laws and regulations in the jurisdictions in which it operates, including those relating to air emissions, water discharges, the handling and disposal of liquid and solid hazardous wastes and the remediation of contamination associated with the use and disposal of hazardous substances. New Alberto-Culver handles and transports hazardous substances at its plant sites. A release of such chemicals due to accident or an intentional act could result in substantial liability to governmental authorities and/or to third parties. New Alberto-Culver has incurred, and will continue to incur, capital and operating expenditures and other costs in complying with environmental laws and regulations and in providing physical security for its worldwide operations.

New Alberto-Culver may not realize the anticipated benefits from the Separation.

The success of the Separation will depend, in part, on the ability of New Alberto-Culver to realize the anticipated benefits of the Separation. These anticipated benefits include enhanced opportunities to increase brand and product recognition as a result of increased ability of New Alberto-Culver to engage in more aggressive marketing and advertising campaigns as a result of eliminating the difficulties arising from operating two businesses which compete with the customers and suppliers of the other business. In addition, the anticipated benefits include the potential for increased operating earnings of the consumer products business expected to result from allowing each company to focus its attention and resources on its business and customers. New Alberto-Culver can not ensure that these benefits will occur. During the past five fiscal years, New Alberto-Culver experienced significant net sales and earnings growth. There can be no assurance that it will be able to achieve comparable growth in the future.

The Separation may present significant challenges.

There is a significant degree of difficulty and management distraction inherent in the process of separating New Alberto-Culver from New Sally. These difficulties include:

New Alberto-Culver may not cost-effectively separate from New Sally. The failure to do so could have an adverse effect on New Alberto-Culver’s business, financial condition and results of operations.

The process of separating operations could cause an interruption of, or loss of momentum in, the activities of New Alberto-Culver. Members of New Alberto-Culver’s senior management may be required to devote considerable amounts of time to this separation process, which will decrease the time they will have to manage their business, service existing customers, attract new customers and develop new products or strategies. If New Alberto-Culver’s senior management is not able to manage effectively the separation process, or if any significant business activities are interrupted as a result of the separation process, New Alberto-Culver’s business could suffer.

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If the distribution of New Alberto-Culver shares as part of the Separation does not constitute a tax-free distribution under Section 355 of the Internal Revenue Code, then New Alberto-Culver or New Sally (pursuant to a tax allocation agreement entered into in connection with the Separation) and Alberto-Culver stockholders may be responsible for payment of significant U.S. federal income taxes.

The completion of the New Alberto-Culver share distribution was conditioned upon the receipt of (i) a private letter ruling from the Internal Revenue Service and (ii) an opinion of Sidley Austin LLP, counsel to Alberto-Culver, in each case, to the effect that the contribution of the company to New Alberto-Culver and the New Alberto-Culver share distribution will qualify as a reorganization under Section 368(a)(1)(D) of the Internal Revenue Code and a distribution eligible for nonrecognition under Sections 355(a) and 361(c) of the Internal Revenue Code. The private letter ruling and the opinion of counsel was based, in part, on assumptions and representations as to factual matters made by, among others, Alberto-Culver, New Sally and representatives of the Lavin family stockholders (Mrs. Carol L. Bernick, Chairman of the New Alberto-Culver Board of Directors, Mr. Leonard H. Lavin, a director of New Alberto-Culver, Mrs. Bernice E. Lavin, wife of Mr. Lavin and mother of Mrs. Bernick, and a partnership and trusts established for the benefit of specified members of the Lavin family), as requested by the Internal Revenue Service or counsel, which, if incorrect, could jeopardize the conclusions reached by the Internal Revenue Service and counsel. The private letter ruling also did not address certain material legal issues that could affect its conclusions, and reserved the right of the Internal Revenue Service to raise such issues upon a subsequent audit. Opinions of counsel neither bind the Internal Revenue Service or any court, nor preclude the Internal Revenue Service from adopting a contrary position.

If the New Alberto-Culver share distribution were not to qualify as a tax-free distribution under Section 355 of the Internal Revenue Code, New Sally, as the successor to Alberto-Culver under the Internal Revenue Code, would recognize a taxable gain equal to the excess of the fair market value of the New Alberto-Culver common stock distributed to the New Sally stockholders over New Sally’s tax basis in the New Alberto-Culver common stock. In addition, each New Sally stockholder who received New Alberto-Culver common stock in the New Alberto-Culver share distribution would generally be treated as receiving a taxable distribution to the extent of earnings and profits of New Sally in an amount equal to the fair market value of the New Alberto-Culver common stock received.

In the event that New Sally recognizes a taxable gain in connection with the New Alberto-Culver share distribution because the New Alberto-Culver share distribution does not qualify as a tax-free distribution under Section 355 of the Internal Revenue Code, the taxable gain recognized by New Sally would result in significant U.S. federal income tax liabilities to New Sally. Under the Internal Revenue Code, New Sally would be primarily liable for these taxes and New Alberto-Culver would be secondarily liable. Under the terms of a tax allocation agreement between New Sally, Sally Holdings, New Alberto-Culver and Alberto-Culver, New Alberto-Culver will generally be required to indemnify New Sally against any such tax liabilities unless such failure results solely from an act of New Sally or its affiliates (including Investor), subject to specified exceptions, after the New Alberto-Culver share distribution.

The distribution of New Alberto-Culver shares may be taxable to New Sally and New Alberto-Culver if there is an acquisition of 50% or more of New Alberto-Culver’s or New Sally’s outstanding common stock.

Even if the New Alberto-Culver share distribution otherwise qualifies as a tax-free distribution under Section 355 of the Internal Revenue Code, the distribution of New Alberto-Culver common stock to New Sally stockholders in connection with the New Alberto-Culver share distribution would result in significant U.S. federal income tax liabilities to New Sally, as the successor to Alberto-Culver under the Internal Revenue Code (but not Alberto-Culver stockholders), if there is an acquisition of stock of New Alberto-Culver or New Sally as part of a plan or series of related transactions that includes the New Alberto-Culver share distribution and that results in an acquisition of 50% or more of New Alberto-Culver or New Sally outstanding common stock.

For purposes of determining whether the distribution of New Alberto-Culver common stock to New Sally stockholders in connection with the New Alberto-Culver share distribution is disqualified as tax-free to New

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Sally under the rules described in the preceding paragraph, any acquisitions of the stock of New Alberto-Culver or New Sally within two years before or after the New Alberto-Culver share distribution are presumed to be part of a plan, although the parties may be able to rebut that presumption. For purposes of this test, the investment by Investor will be treated as part of such a plan or series of transactions. Under the terms of the investment agreement, Investor acquired approximately 47.55% of New Sally common stock on a fully diluted basis and 48.0% on a basic shares outstanding method (which is the percentage likely to be used for purposes of this test). Thus, a relatively minor additional change in the ownership of the New Sally common stock could trigger a significant tax liability for New Sally under Section 355 of the Internal Revenue Code (for which New Alberto-Culver may be required to indemnify New Sally under a tax allocation agreement entered into in connection with the Separation).

The process for determining whether a prohibited change in control has occurred under the rules is complex, inherently factual and subject to interpretation of the facts and circumstances of a particular case. If New Alberto-Culver or New Sally does not carefully monitor its compliance with these rules, it might inadvertently cause or permit a prohibited change in the ownership of New Sally or of New Alberto-Culver to occur, thereby triggering New Alberto-Culver’s or New Sally’s respective obligations to indemnify the other pursuant to a tax allocation agreement, which would have a material adverse effect on New Alberto-Culver. New Sally will be primarily liable for these taxes, and there can be no assurance that New Alberto-Culver would be able to fulfill its obligations under the tax allocation agreement if New Alberto-Culver was determined to be responsible for these taxes thereunder. In addition, these mutual indemnity obligations could discourage or prevent a third party from making a proposal to acquire either party.

In the event that New Sally recognizes a taxable gain in connection with the New Alberto-Culver share distribution because of an acquisition of 50% or more of New Alberto-Culver or New Sally outstanding common stock as part of a plan or series of related transactions that includes the New Alberto-Culver share distribution, the taxable gain recognized by New Sally would result in significant U.S. federal income tax liabilities to New Sally. Under the Internal Revenue Code, New Sally would be primarily liable for these taxes and New Alberto-Culver would be secondarily liable pursuant to a tax allocation agreement.

Actions taken by the Lavin family stockholders or by Investor could adversely affect the tax-free nature of the New Alberto-Culver share distribution.

Sales and/or acquisitions by the Lavin family stockholders of New Sally common stock or New Alberto-Culver common stock after completion of the Separation (or stock of Alberto-Culver before the Separation) may adversely affect the tax-free nature of the New Alberto-Culver share distribution. First, with certain exceptions, sales by the Lavin family stockholders of New Sally common stock or New Alberto-Culver common stock at any time after completion of the New Alberto-Culver share distribution might be considered evidence that the New Alberto-Culver share distribution was used principally as a device for the distribution of earnings and profits, particularly if the selling stockholder were found to have an intent to effect such sale at the time of the New Alberto-Culver share distribution. If the Internal Revenue Service successfully asserted that the New Alberto-Culver share distribution was used principally as such a device, the New Alberto-Culver share distribution would not qualify as a tax-free distribution, and thus would be taxable to both New Sally and the New Sally stockholders (as a result of which New Alberto-Culver would be required to indemnify New Sally to the extent required under the tax allocation agreement entered into in connection with the Separation). Second, with certain exceptions, if any of the Lavin family stockholders were to sell an amount of New Sally common stock that it received in the holding company merger (or to acquire additional shares of New Sally common stock) within the two year period following completion of the New Alberto-Culver share distribution, and that amount of stock, if added to the New Sally common stock acquired by Investor (which comprised approximately 48.0% of the New Sally common stock on a basic shares outstanding method), were to equal or exceed 50% of the outstanding common stock of New Sally, as determined under the Internal Revenue Code and applicable Treasury regulations, a deemed acquisition of control of New Sally in connection with the New Alberto-Culver share distribution would be presumed. If this presumption were not successfully rebutted, New Sally would be

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subject to significant U.S. federal income tax liabilities and New Alberto-Culver would be required to indemnify New Sally to the extent required under the tax allocation agreement entered into in connection with the Separation, which would have a material adverse effect on New Alberto-Culver. Similar principles would apply to sales or acquisitions of Alberto-Culver stock by the Lavin family before the Separation.

Similarly, acquisitions by the Investor or its affiliates of New Sally common stock after completion of the Separation may cause a deemed acquisition of control of New Sally in connection with the New Alberto-Culver share distribution.

As a result of the special cash dividend and New Alberto-Culver share distribution, stockholders of Alberto-Culver may have a tax basis in their shares of New Alberto-Culver common stock and New Sally common stock that is significantly higher than the fair market value of each such share.

Under the rules for taxing dividends under the Internal Revenue Code, the special cash dividend will be taxable to holders of New Sally common stock first as a dividend to the extent paid out of New Sally’s current and accumulated earnings and profits; thereafter as a tax-free return of capital that reduces a stockholder’s tax basis in its New Sally common stock to the extent of such basis; and thereafter as capital gain from the sale or exchange of the New Sally common stock. Any tax basis remaining after application of these rules will be allocated between the New Sally common stock and New Alberto-Culver common stock received in the New Alberto-Culver share distribution in proportion to the fair market value of each.

The special cash dividend will reduce the value of a stockholder’s shares of New Sally common stock. However, because New Sally is expected to have significant earnings and profits at the time of the special cash dividend, a substantial portion of the special cash dividend will be taxable as a dividend and to that extent have no effect on a stockholder’s tax basis in its New Sally common stock. Thus, a stockholder can expect that the value of its New Sally common stock (after giving effect to the distributions) will decline by a greater amount than the amount of reduction of its tax basis, because stock basis will only be reduced by a portion, but not the entire amount, of the dividend. As a result, stockholders of Alberto-Culver who participate in the transaction may have a tax basis in their shares of New Alberto-Culver common stock and New Sally common stock that is significantly higher than the fair market value of each such stock. In particular, persons who have a tax basis in their Alberto-Culver common stock approximately equal to its trading price immediately prior to the Separation can expect this result.

Stockholders who have a tax basis in their shares of New Alberto-Culver common stock and New Sally common stock that is higher than the fair market value of such stock may face adverse tax consequences. Generally, a sale of such stock will generate a capital loss. Under the Internal Revenue Code, capital losses are generally only allowable to the extent of capital gains (or, in the case of an individual, the lower of $3,000 ($1,500 in the case of a married individual filing a separate return) or the excess of such losses over such gains). In particular, a stockholder who acquired Alberto-Culver common stock at a price near its trading price immediately prior to the transaction would recognize taxable income (through the taxation of the dividend) without having recognized any economic income and might not be able to offset the taxable income because of the special rules governing losses.

In addition, a substantial amount of the special cash dividend is expected to constitute an “extraordinary dividend” under the Internal Revenue Code. Under special tax rules relating to extraordinary dividends, any loss on the sale or exchange of New Sally common stock (and possibly New Alberto-Culver common stock) held by individuals will, to the extent of the amount treated as an extraordinary dividend, be long-term capital loss (even if it would otherwise be considered short-term under the general rules), and corporate stockholders that have not held their Alberto-Culver common stock for two years prior to the announcement of the special cash dividend may be required to reduce their basis in the shares by the untaxed portion of the special cash dividend.

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The uncertain reporting of the special cash dividend may result in stockholders overpaying income taxes and having to file amended tax returns.

As noted above, the portion of the special cash dividend that will be taxable as a dividend for U.S. federal income tax purposes is dependent on the earnings and profits of New Sally through the close of its taxable year ending September 30, 2007, which is when the special cash dividend was paid. Thus, the amount of the special cash dividend constituting a dividend for such purposes will not be known until after the close of such tax year. Nonetheless, stockholders will be required to reflect the tax consequences of the special cash dividend in their tax returns for their own taxable year that includes the date they actually receive the special cash dividend. For example, since the special cash dividend was received by an individual in calendar year 2006, the individual will be required to report the dividend in the individual’s tax return for 2006, generally due on April 16, 2007 (assuming no extension).

New Sally will be required to send information returns to stockholders reporting the special cash dividend generally by January 31 of the year following payment. Copies of these information returns are also required to be filed with the Internal Revenue Service. At the time New Sally is required to file these information returns, New Sally’s earnings and profits for the relevant period will not be known and, consequently, the amount of the special cash dividend constituting a dividend for U.S. federal income tax purposes will not be known. Treasury Regulations require, in these circumstances, that the entire amount of the special cash dividend be reported by New Sally as a taxable dividend. Because it is expected that the special cash dividend will in fact exceed the earnings and profits of New Sally, the reporting required by the Treasury Regulations will result in an overstatement of the amount of the special cash dividend constituting a taxable dividend.

The Internal Revenue Service has not provided clear guidance on how stockholders should file their tax returns in these circumstances. Stockholders who file their returns based on the information returns supplied by New Sally will overstate the amount of the taxable dividend, which may result in them paying significantly higher taxes than if the final actual amount of the taxable dividend were reflected on their tax returns. Stockholders who file their returns based on an estimate of the amount of the special cash dividend constituting a taxable dividend may face increased audit risk due to the discrepancy between the amount reported to them by New Sally and the amount reflected on their tax returns, and may be liable for interest and penalties if their estimate of tax resulting from the dividend understates the amount of tax ultimately determined to be due.

The portion of the special cash dividend that does not constitute a dividend for tax purposes also affects a stockholder’s tax basis in its New Sally common stock (which basis will be allocated among its New Sally common stock and the New Alberto-Culver common stock received in the New Alberto-Culver share distribution). As a result, until the exact amount of the special cash dividend constituting a taxable dividend is determined, a stockholder will not know with certainty its tax basis in its New Sally common stock and New Alberto-Culver common stock. Thus, stockholders who sell their New Sally common stock or New Alberto-Culver common stock prior to this determination will face the same uncertainty with respect to the gain or loss on the sale as they do with respect to the amount constituting a taxable dividend.

New Alberto-Culver expects that New Sally will provide stockholders with a determination of the portion of the special cash dividend constituting a taxable dividend as soon as practicable after its earnings and profits for the taxable year ending September 30, 2007, which is when the special cash dividend was paid, are determined. However, it is currently expected that this determination may not be made until calendar year 2008, after New Sally’s federal income tax return for its fiscal year ended September 30, 2007 is completed. Thus, since the special cash dividend was paid during calendar year 2006, a calendar year stockholder may need to file an amended tax return for 2006 to reflect the corrected amount of the taxable dividend, and possibly for 2007 (if, for example, such stockholder sold New Sally common stock or New Alberto-Culver common stock in 2007), after New Sally has provided stockholders with an amended information return in calendar year 2008 for the 2006 special cash dividend. Stockholders who report the full amount of the special cash dividend as a dividend must reduce their tax basis by the amount ultimately determined not to constitute a dividend whether or not they amend their originally filed return.

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Under U.S. federal bankruptcy laws or comparable provisions of state fraudulent transfer laws, stockholders could be required to return all or a portion of the cash and shares received in the distributions.

If New Sally was insolvent or rendered insolvent as a result of the New Alberto-Culver share distribution or the special cash dividend, or if Sally Holdings was insolvent or rendered insolvent either as a result of the incurrence of the indebtedness or the ultimate dividend/transfer of the proceeds of such indebtedness to New Sally, there is a risk that a creditor (or a creditor representative) of New Sally could bring fraudulent transfer claims to recover all or a portion of the special cash dividend and the New Alberto-Culver common stock received in the New Alberto-Culver share distribution and that the persons receiving such distributions would be required to return all or a portion of such distributions if such claims were successful. New Sally received opinions of a valuation firm with respect to its and its subsidiaries’ solvency at the time it declared the distributions and at the time the distributions were made.

The loss of the assets, revenue, cash flows and results of operations of New Sally will adversely affect the financial position and operations of New Alberto-Culver.

The assets, revenue, cash flows and results of operations of New Sally were included in the consolidated financial statements of Alberto-Culver through November 16, 2006, the closing date for the Separation. After that date, the assets, revenue, cash flows and results of operations of New Sally will no longer be included in the consolidated financial statements of New Alberto-Culver and the financial position and results of operations of New Alberto-Culver will therefore be significantly different than they were prior to completion of the Separation and, following completion of the Separation, New Alberto-Culver will have materially less assets, revenue and cash flows than Alberto-Culver historically had on a consolidated basis. Alberto-Culver’s diversification resulting from operating the consumer products business of New Alberto-Culver alongside the Sally/BSG distribution business of New Sally tended to mitigate financial and operational volatility. The Separation eliminated that diversification and New Alberto-Culver may experience increased volatility in terms of cash flow, operating results, working capital and financing requirements. Following the closing of the Separation, the financial statements of New Alberto-Culver will be different from the financial statements of Alberto-Culver, which are presented in Item 8 of this Annual Report on Form 10-K.

As a separate entity, New Alberto-Culver does not enjoy all of the benefits of scale that Alberto-Culver achieved with the combined consumer products and Sally/BSG distribution businesses.

Historically, Alberto-Culver benefited from the scope and scale of the consumer products and Sally/BSG distribution businesses in certain areas, including, among other things, risk management, employee benefits, regulatory compliance, administrative services and human resources. The loss by New Alberto-Culver of these benefits as a consequence of the Separation could have an adverse effect on New Alberto-Culver’s business, results of operations and financial condition following completion of the Separation. In addition, it is possible that some costs will be greater for the separate company than they were for the combined company due to the loss of volume discounts and the position of being a large customer to service providers and vendors.

The trading price and trading volume of New Alberto-Culver common stock may be more volatile following completion of the Separation.

New Alberto-Culver cannot predict how investors in New Alberto-Culver common stock will behave after completion of the Separation. The trading price for shares of common stock of New Alberto-Culver following completion of the Separation may be more volatile than the trading price of shares of Alberto-Culver common stock before completion of the Separation. The trading price of shares of New Alberto-Culver’s common stock could fluctuate significantly for many reasons, including the risks identified in this Annual Report on Form 10-K, selling by existing holders of Alberto-Culver common stock who decide that they do not want to hold some or all of their New Alberto-Culver securities after the completion of the transaction, or reasons unrelated to New Alberto-Culver’s performance. In addition, New Alberto-Culver’s common stock was removed from the S&P 500 Index and placed into the S&P Midcap 400 Index, which could ultimately result in reduced trading volume

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relative to the historical trading volume of Alberto-Culver, which was included in the S&P 500 Index. These factors and other factors beyond New Alberto-Culver’s control may result in reduced trading volume and/or increased volatility in New Alberto-Culver’s common stock and/or short- or long-term reductions in the value of New Alberto-Culver securities.

Any financing New Alberto-Culver obtains in the future could involve higher costs than it would have prior to the Separation.

Following completion of the Separation, any financing that New Alberto-Culver obtains will be with the support of a reduced pool of diversified assets and therefore New Alberto-Culver may not be able to secure adequate debt or equity financing on desirable terms. The cost to New Alberto-Culver of financing without New Sally may be materially higher than the historical cost of financing of Alberto-Culver prior to the Separation. New Alberto-Culver has been put on negative credit watch by Standard & Poor’s and Moody’s in connection with the Separation. If New Alberto-Culver has a credit rating lower than Alberto-Culver’s historical rating, it will be more expensive for it to obtain debt financing than it had been for Alberto-Culver.

The acceleration of vesting of options to purchase shares of Alberto-Culver common stock and restricted shares in connection with the Separation may make it more difficult for New Alberto-Culver to retain key employees.

Alberto-Culver treated the separation transactions as though they constituted a change in control under Alberto-Culver’s equity compensation plans. Accordingly, all outstanding options to purchase shares of Alberto-Culver common stock and all shares of restricted stock vested upon completion of the Separation. The vesting of these options and restricted shares over a period of time was used by Alberto-Culver to provide incentives to employees to remain with Alberto-Culver. The loss of this incentive may make it more difficult for New Alberto-Culver to retain certain key employees.

None.

New Alberto-Culver’s properties, plants and equipment are maintained in good condition and are suitable and adequate to support the business. The principal properties and their general characteristics are described below:

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New Alberto-Culver is the subject of various pending or threatened legal actions in the ordinary course of its business. There are no legal proceedings pending as of September 30, 2006 that New Alberto-Culver believes could have a material adverse effect on its business.

On July 26, 2006, the sole stockholder of New Alberto-Culver, acting by unanimous written consent, elected the following individuals to the Board of Directors of New Alberto-Culver: Carol L. Bernick, Howard B. Bernick, A. G. Atwater, Jr., James G. Brocksmith, Jr., Jim Edgar, King Harris, Leonard H. Lavin, John A. Miller, Robert H. Rock, Sam J. Susser and William W. Wirtz.

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PART II

The high and low sales prices of Alberto-Culver’s common stock on the New York Stock Exchange (NYSE) and cash dividends per share in each quarter of fiscal years 2006 and 2005 are as follows:

Stockholders of record, which excludes a large number of stockholders with shares held in “street name,” totaled 1,348 as of November 30, 2006.

Cash dividends for common stock in fiscal years 2006, 2005 and 2004 were $45.4 million, $40.8 million and $33.5 million, respectively. Following the completion of the Separation, New Alberto-Culver expects to pay a regular quarterly dividend and plans, subject to approval by its board of directors, to announce the next quarterly dividend in late January, 2007.

During the three months ended September 30, 2006, the company acquired 1,255 shares of common stock that were surrendered by employees in connection with the payment of withholding taxes related to restricted stock. These shares are not subject to the company’s stock repurchase program.

The following table summarizes information with respect to purchases made by or on behalf of the company of shares of its common stock during the quarter ended September 30, 2006.

In April, 2005, the Alberto-Culver board of directors authorized the company to purchase up to 5,000,000 shares of common stock. No shares were purchased under that program as of September 30, 2006.

On November 12, 2006, the board of directors of New Alberto-Culver authorized the purchase of up to 5,000,000 shares of New Alberto-Culver common stock. This authorization replaced the previous authorization to purchase Alberto-Culver common stock.

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The following table sets forth selected historical consolidated financial information for Alberto-Culver (accounting predecessor to New Alberto-Culver). Notwithstanding the legal form of the transaction which separated the consumer products and beauty supply distribution businesses involving CD&R, which closed November 16, 2006, because of the substance of the transaction, New Alberto-Culver is considered the divesting entity and treated as the “accounting successor” to Alberto-Culver for financial reporting purposes in accordance with EITF Issue No. 02-11, “Accounting for Reverse Spinoffs.” Effective with the closing of the Separation, New Alberto-Culver will report the historical consolidated results of operations (subject to certain adjustments) of New Sally in discontinued operations in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Pursuant to SFAS No. 144, this presentation is not permitted until the accounting period in which the closing of the Separation occurs.

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The following Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses Alberto-Culver’s (accounting predecessor to New Alberto-Culver) historical financial condition and results of operations. Notwithstanding the legal form of the transaction which separated the consumer products and beauty supply distribution businesses involving CD&R, which closed November 16, 2006, because of the substance of the transaction, New Alberto-Culver is considered the divesting entity and treated as the “accounting successor” to Alberto-Culver for financial reporting purposes in accordance with EITF Issue No. 02-11, “Accounting for Reverse Spinoffs.” Effective with the closing of the Separation, New Alberto-Culver will report the historical consolidated results of operations (subject to certain adjustments) of New Sally in discontinued operations in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Pursuant to SFAS No. 144, this presentation is not permitted until the accounting period in which the closing of the Separation occurs.

Description of Business

During fiscal years 2006, 2005 and 2004, Alberto-Culver Company and its subsidiaries (the company) operated two businesses: Global Consumer Products and Beauty Supply Distribution. The Global Consumer Products business consists of two divisions: (1) Alberto-Culver Consumer Products Worldwide, which develops, manufactures, distributes and markets branded beauty care products as well as branded food and household products in the United States and more than 100 other countries, and (2) Cederroth International, which manufactures, markets and distributes beauty and health care products throughout Scandinavia and in Europe. For reporting purposes, these two divisions are included in the Global Consumer Products segment. The company’s Beauty Supply Distribution business includes two segments: (1) Sally Beauty Supply, a domestic and international chain of cash-and-carry stores offering professional beauty supplies to both salon professionals and retail consumers, and (2) Beauty Systems Group (BSG), a full-service beauty supply distributor offering professional brands directly to salons through its own sales force and professional-only stores in exclusive geographical territories in North America and Europe.

Overview

Non-GAAP Financial Measures

The company’s financial results in fiscal year 2006 were affected by three non-core items: stock option expense recorded in accordance with Statement of Financial Accounting Standards (SFAS) No. 123 (R), “Share-Based Payment;” fees and expenses related to the terminated spin/merge of Sally Holdings, Inc. (Sally Holdings) with Regis Corporation (Regis) and the separation of the consumer products and beauty supply distribution businesses involving Clayton, Dubilier & Rice, Inc. (CD&R); and a non-cash charge related to the company’s conversion to one class of common stock. The fees and expenses related to the terminated spin/merge of Sally Holdings with Regis and the non-cash charge from the conversion to one class of common stock also affected fiscal year 2005. The company’s fiscal year 2004 results were affected by the non-cash charge related to the conversion to one class of common stock, along with three additional non-core items: a gain from the sale of the Indola European professional hair care business; a tax benefit from the liquidation of certain Indola foreign legal entities and a charge related to the early redemption of $200 million of 8.25% senior notes.

In the first quarter of fiscal year 2006, the company began recording stock option expense in accordance with SFAS No. 123 (R). As allowed by the statement, the company elected not to restate its previously issued financial statements; therefore, the company’s fiscal year 2006 results are not directly comparable to the results of prior year periods. In addition, the stock option expense had no effect on the operating profits or cash flows of the company’s business segments or the consolidated cash flows of the company. The Sally Holdings transaction costs relate to transactions contemplated by the company rather than the normal ongoing operations of the company’s businesses and had no effect on the operating profits of the company’s business segments. The

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non-cash charges and the charge associated with the redemption of senior notes relate to changes in the capital structure of the company rather than the normal operations of the company’s core businesses and had no effect on the operating profits or cash flows of the company’s business segments or the consolidated cash flows of the company. The gain on the sale of Indola and the subsequent tax benefit from the liquidation of certain Indola foreign legal entities represent the effects of a specific divestiture transaction rather than the normal ongoing operations of the company’s businesses.

To supplement the company’s financial results presented in accordance with U.S. generally accepted accounting principles (GAAP), “net earnings excluding non-core items,” “basic net earnings per share excluding non-core items” and “diluted net earnings per share excluding non-core items” are disclosed in the “Results of Operations” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A). In addition, the company discloses “organic sales growth” which measures the growth in net sales excluding the effects of foreign exchange rates, acquisitions and a divestiture. These measures are “non-GAAP financial measures” as defined by Regulation G of the Securities and Exchange Commission (SEC). The non-GAAP financial measures are not intended to be, and should not be, considered separately from or as alternatives to the most directly comparable GAAP financial measures of “net earnings,” “basic net earnings per share,” “diluted net earnings per share” and “net sales growth.” These specific non-GAAP financial measures, including the per share measures, are presented in MD&A with the intent of providing greater transparency to supplemental financial information used by management and the company’s board of directors in their financial and operational decision-making. These non-GAAP financial measures are among the primary indicators that management and the board of directors use as a basis for budgeting, making operating and strategic decisions and evaluating performance of the company and management as they provide meaningful supplemental information regarding the normal ongoing operations of the company and its core businesses. In addition, these non-GAAP financial measures are used by management and the board of directors to facilitate internal comparisons to the company’s historical operating results. These amounts are disclosed so that the reader has the same financial data that management uses with the belief that it will assist investors and other readers in making comparisons to the company’s historical operating results and analyzing the underlying performance of the company’s normal ongoing operations for the periods presented. Management believes that the presentation of these non-GAAP financial measures, when considered along with the company’s GAAP financial measures and the reconciliations to the corresponding GAAP financial measures, provides the reader with a more complete understanding of the factors and trends affecting the company than could be obtained absent these disclosures. It is important for the reader to note that the non-GAAP financial measures used by the company may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. Reconciliations of these measures to their most directly comparable GAAP financial measures are provided in the “Reconciliation of Non-GAAP Financial Measures” section of MD&A and should be carefully evaluated by the reader.

Accounting for Stock-Based Compensation

Effective October 1, 2005, the company adopted SFAS No. 123 (R) using the modified prospective method. Under this method, compensation expense is recognized for new stock option grants beginning in fiscal year 2006 and for the unvested portion of outstanding stock options that were granted prior to the adoption of SFAS No. 123 (R). The company recognizes compensation expense on a straight-line basis over the vesting period or to the date a participant becomes eligible for retirement, if earlier. In accordance with the modified prospective method, the financial statements for prior periods have not been restated. In fiscal year 2006, the company recorded stock option expense that reduced earnings before provision for income taxes by $15.9 million, provision for income taxes by $5.6 million, net earnings by $10.3 million and basic and diluted net earnings per share by 11 cents. The expense recorded in the first quarter of fiscal year 2006 included the immediate expensing of the fair value of stock options granted during the quarter to participants who had already met the definition of retirement under the stock option plans. The net balance sheet effect of recognizing stock option expense increased total stockholders’ equity by $5.6 million in fiscal year 2006 and resulted in the recognition of deferred tax assets of the same amount. The company’s consolidated statement of cash flows for the fiscal year ended September 30, 2006 reflects $1.8 million of excess tax benefits from employee stock option exercises as a financing cash inflow in accordance with the provisions of SFAS No. 123 (R).

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As of September 30, 2006, the company had $13.7 million of unrecognized compensation cost related to stock options that was expected to be recorded over a weighted average period of 2.3 years and $3.3 million of unearned compensation related to restricted shares that was expected to be amortized to expense over a weighted average period of 3.4 years. In connection with the closing of the transaction separating the consumer products and beauty supply distribution businesses involving CD&R, the company will record a charge in the first quarter of fiscal year 2007 equal to the amount of future compensation expense that would have been recognized in subsequent periods as the stock options and restricted shares vested over the original vesting periods. The unamortized balance of restricted shares was included in unearned compensation, a separate component of stockholders’ equity, as of September 30, 2005 and was reclassified to additional paid-in capital upon the adoption of SFAS No. 123 (R).

Sally Holdings Transactions

On January 10, 2006, the company entered into an agreement with Regis to merge Sally Holdings, a wholly-owned subsidiary of the company, with Regis in a tax-free transaction. Sally Holdings is comprised of the company’s Sally Beauty Supply and BSG business segments. Pursuant to the terms and conditions of the merger agreement, Sally Holdings was to be spun off to the company’s stockholders by way of a tax-free distribution and, immediately thereafter, combined with Regis in a tax-free stock-for-stock merger.

On April 5, 2006, the company provided notice to Regis that its board of directors had withdrawn its recommendation for shareholders to approve the transaction. Following the company’s notice to Regis, also on April 5, 2006, Regis provided notice to the company that it was terminating the merger agreement effective immediately. In connection with the termination of the merger agreement, the company paid Regis a $50.0 million termination fee on April 10, 2006.

On June 19, 2006, the company announced a plan to split Sally Holdings from the consumer products business. Pursuant to an Investment Agreement, on November 16, 2006, CDRS Acquisition LLC (Investor), a limited liability company organized by Clayton, Dubilier & Rice Fund VII, L.P., paid $575 million to obtain an equity ownership of approximately 47.55% of Sally Beauty Holdings, Inc. (New Sally) and a subsidiary of New Sally incurred approximately $1.85 billion of new debt. As a result of the transaction, the company’s shareholders received, for each share of common stock then owned, (i) one share of common stock of New Alberto-Culver, which owns and operates the company’s consumer products business, (ii) one share of common stock of New Sally, which owns and operates Sally Holdings’ beauty supply distribution business and (iii) a $25.00 per share special cash dividend.

To accomplish the results described above, the parties engaged in a number of transactions including:

Notwithstanding the legal form of the transactions, because of the substance of the transactions, New Alberto-Culver will be considered the divesting entity and treated as the “accounting successor” to the company, and New Sally will be considered the “accounting spinnee” for financial reporting purposes in accordance with Emerging Issues Task Force Issue No. 02-11, “Accounting for Reverse Spinoffs.”

In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the company’s Sally Beauty Supply and BSG business segments will be reported as discontinued

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operations beginning in the first quarter of fiscal year 2007. Unless otherwise noted, all information included within MD&A reflects the consolidated Alberto-Culver Company, including Sally Holdings.

In connection with these transactions, the company incurred transaction expenses, primarily the termination fee paid to Regis and legal and investment banking fees, during the fourth quarter of fiscal year 2005 and throughout fiscal year 2006. The total amount of transaction expenses, including the termination fee, was $60.2 million ($39.2 million after taxes), of which approximately $58.8 million ($38.3 million after taxes) was expensed by the company during fiscal year 2006. All expenses incurred related to the Regis transaction, including the termination fee, are expected to be deductible for income tax purposes, while most expenses related to the transaction involving CD&R are not expected to be deductible for income tax purposes.

The company has treated the transaction involving CD&R as though it constitutes a change in control for purposes of the company’s stock option and restricted stock plans. As a result, in accordance with the terms of these plans, all outstanding stock options and restricted shares of the company became fully vested upon completion of the transaction on November 16, 2006. The company will record a charge in the first quarter of fiscal year 2007 of approximately $18.0 million which is equal to the amount of future compensation expense that would have been recognized in subsequent periods as the stock options and restricted shares vested over the original vesting periods. As a result of the transaction, primarily all outstanding stock options held by employees of Sally Holdings were converted into options to purchase shares of New Sally common stock. All other outstanding stock options were converted into options to purchase New Alberto-Culver common stock.

In accordance with the Investment Agreement, upon the closing of the transaction, New Sally paid (i) all of Investor’s transaction expenses and a transaction fee in the amount of $30 million to CD&R and (ii) $20 million covering certain of the combined transaction expenses of Sally Holdings and the company and certain other expenses of the company. The transaction expenses of the company including Sally Holdings’ portion, were expensed by the company as incurred through the date of completion of the transaction.

In addition, in connection with the completion of the transaction, Howard B. Bernick, Chief Executive Officer and President of Alberto-Culver Company, and Michael H. Renzulli, Chairman of Sally Holdings, will terminate their employment with the company and receive certain benefits primarily consisting of combined lump sum cash payments totaling $14.0 million. The company will expense the $14.0 million related to these cash payments and any other benefits in the first quarter of fiscal year 2007.

Non-Cash Charge

On October 22, 2003, the board of directors approved the conversion of all of the issued shares of Class A common stock into Class B common stock on a one share-for-one share basis in accordance with the terms of the company’s certificate of incorporation. The conversion became effective after the close of business on November 5, 2003. Following the conversion, all outstanding options to purchase shares of Class A common stock became options to purchase an equal number of shares of Class B common stock. On January 22, 2004, all shares of Class B common stock were redesignated as common stock. The single class of common stock trades on the New York Stock Exchange under the symbol “ACV.”

Prior to the adoption of SFAS No. 123 (R), the company accounted for stock compensation expense in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” which required the company to recognize a non-cash charge from the remeasurement of the intrinsic value of all Class A stock options outstanding on the conversion date. A portion of this non-cash charge was recognized on the conversion date for vested stock options and the remaining non-cash charges related to unvested stock options and restricted shares were being recognized over the remaining vesting periods. As a result, the company recorded non-cash charges against pre-tax earnings of $100.1 million, of which $85.6 million ($55.6 million after taxes) was recognized in fiscal year 2004 and $14.5 million ($9.4 million after taxes) was recognized in fiscal year 2005. The non-cash charges reduced earnings before provision for income taxes,

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provision for income taxes, net earnings and basic and diluted net earnings per share. The net balance sheet effect of the options remeasurement increased total stockholders’ equity by $30.0 million in fiscal year 2004 and $5.1 million in fiscal year 2005, and resulted in the recognition of deferred tax assets of the same amounts. Due to the adoption of SFAS No. 123 (R) effective October 1, 2005, the amount of the non-cash charge affecting fiscal year 2006 was approximately $4,000. The non-cash charge had no effect on the operating profits or cash flows of the company’s business segments or the consolidated cash flows of the company.

Sale of Indola

In June, 2004, the company sold its Indola European professional hair care business. As a result of the sale, the company recorded a $10.1 million gain ($5.7 million after taxes) or six cents per basic and diluted net earnings per share in fiscal year 2004. In September, 2004, the company completed the liquidation of two foreign legal entities related to the divested Indola business and, as a result, recognized a tax benefit of $4.4 million or five cents per basic and diluted net earnings per share in fiscal year 2004.

Redemption of Senior Notes

In September, 2004, the company redeemed $200 million of 8.25% senior notes due November 1, 2005 under the redemption provisions of the notes. In connection with the buyback, the company recorded a pre-tax charge in fiscal year 2004 of $12.6 million ($8.2 million after taxes) or nine cents per basic and diluted net earnings per share consisting primarily of a make-whole premium. As part of the redemption, the company also paid $6.1 million of interest accrued through the redemption date that was originally scheduled to be paid in fiscal year 2005.

Reclassification

During the second quarter of fiscal year 2006, the company determined that certain of the Beauty Supply Distribution business’ warehousing and distribution costs previously classified in the consolidated statements of earnings as components of advertising, marketing, selling and administrative expenses should be classified as cost of products sold to be consistent with the company’s policy of capitalizing these costs in inventory. As a result, the company reclassified expenses related to purchasing costs, freight from distribution centers to the stores and handling costs in the distribution centers for all periods presented. These costs amounted to $92.5 million, $86.6 million and $76.8 million for fiscal years 2006, 2005 and 2004, respectively. The reclassifications had no effect on earnings.

Stock Split

On January 21, 2004, the board of directors approved a 3-for-2 stock split in the form of a 50% stock dividend. The additional shares were distributed February 20, 2004 to shareholders of record at the close of business on February 2, 2004. The stock dividend was distributed on outstanding shares, but not on shares held in the treasury. All share and per share information in this report, except for treasury shares, has been restated to reflect the 50% stock dividend.

Lease Accounting Adjustment

In February, 2005, the SEC issued a letter expressing its interpretations of certain lease accounting issues relating to the amortization of leasehold improvements, the recognition of rent expense when leases have rent holidays and allowances received by tenants for leasehold improvements. As a result of a review of its historical lease accounting practices, the company found some deviations to these interpretations and recorded a pre-tax, non-cash charge in the second quarter of fiscal year 2005 of $2.5 million ($1.6 million after tax) which reduced basic and diluted net earnings per share by two cents. In addition, net fixed assets were increased by $2.0 million and other liabilities were increased by $4.5 million.

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Relationships with Suppliers

Most of the net sales of the company’s Sally Beauty Supply and BSG business segments (Sally/BSG) are generated through retail stores with respect to the Sally Beauty Supply business and both professional only stores and professional distribution sales consultants with respect to the BSG business. In addition, BSG has a number of franchisees located primarily in the south and southwestern portions of the United States and in Mexico, which buy products directly from BSG for resale in their assigned territories. A very small percentage of sales are generated through subdistributors (primarily in Europe), which also buy products directly from BSG for resale in their assigned territories. Sally/BSG and its suppliers are dependent on each other for the distribution of beauty products. As is typical in distribution businesses, these relationships are subject to change from time to time (including the expansion or loss of distribution rights in various geographies and the addition or loss of products lines). Changes in Sally/BSG’s relationships with suppliers occur often, and could positively or negatively impact the net sales and operating profits of Sally/BSG. For example, as previously disclosed, net sales and operating profits of Sally/BSG were negatively affected in fiscal year 2005 by the decision of certain suppliers of the BSG business to begin selling their products directly to salons in most markets. Subsequently, in fiscal year 2006 one of those suppliers agreed to have BSG, once again, sell its product lines in BSG stores. Currently, BSG is in discussions with a principal supplier of Sally/BSG regarding one BSG division within the United States, and these discussions could result in limitations for the product lines of that supplier. At this time, the company cannot predict what changes to the relationship between BSG and this supplier may eventually occur or what effect, if any, these discussions will have on the operating results of Sally/BSG after fiscal year 2006, though if such negotiations are not resolved favorably to Sally/BSG, there could be a negative effect on operating results for fiscal year 2007 and possibly beyond.

Sally/BSG believes that it can be successful in mitigating negative effects resulting from unfavorable changes in the relationships between Sally/BSG and its suppliers through the development of new or expanded supplier relationships. For example, BSG is currently in the process of opening stores in certain areas of Florida for the first time as the result of acquiring a company in June, 2006 which holds the rights to sell an important supplier’s products in portions of Florida. In addition, Sally/BSG is (i) negotiating with various suppliers to add new product lines or expand existing product lines, (ii) adding additional product lines to the new BSG stores being opened in Florida and (iii) beginning to sell certain product lines in Michigan for the first time for its BSG operations.

Results of Operations

Comparison of the Years Ended September 30, 2006 and 2005

Fiscal year 2006 marked the company’s fifteenth consecutive year of record sales and record net earnings excluding non-core items. Net sales for the year ended September 30, 2006 were $3.77 billion, an increase of 6.8% over the prior year. Foreign exchange rates decreased fiscal year 2006 sales by 0.2%. Organic sales, which exclude the effects of foreign exchange rates, acquisitions and a divestiture, grew 5.9% in fiscal year 2006. Organic sales growth for fiscal year 2006 includes the effect of net sales related to the launch of Nexxus into retail channels in the U.S.

Net earnings of $205.3 million in 2006 decreased 2.6% from the prior year’s net earnings of $210.9 million. Basic net earnings per share of $2.22 in fiscal year 2006 were 9 cents or 3.9% lower than 2005. Diluted net earnings per share decreased 3.1% to $2.20 in fiscal year 2006 from $2.27 in fiscal year 2005. Non-core items reduced net earnings by $48.6 million, basic net earnings per share by 53 cents and diluted net earnings per share by 52 cents in fiscal year 2006. Non-core items also reduced net earnings by $10.4 million and basic and diluted net earnings per share by 11 cents in fiscal year 2005.

Excluding non-core items, net earnings were $254.0 million in 2006 or 14.8% higher than the prior year’s net earnings of $221.3 million. Basic net earnings per share excluding non-core items were $2.75 in fiscal year 2006, which was 33 cents or 13.6% higher than fiscal year 2005. Diluted net earnings per share excluding non-core items increased 14.3% to $2.72 from $2.38 in fiscal year 2005.

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Sales of Global Consumer Products in fiscal year 2006 increased 9.4% to $1.43 billion from $1.31 billion in 2005. The 2006 sales increase was principally due to the launch of Nexxus into retail channels (7.5%) and higher sales of TRESemmé shampoos, conditioners and styling products (5.1%), primarily in the U.S. The sales increase in fiscal year 2006 was partially offset by lower sales of Alberto VO5 shampoos and conditioners (1.9%) and St. Ives products (0.9%) and the effect of foreign exchange rates, which decreased sales by 0.8%.

Sales of the Beauty Supply Distribution business, composed of Sally Beauty Supply and BSG, were $2.37 billion in 2006 and $2.25 billion in 2005, representing an increase of 5.3%.

Sales of Sally Beauty Supply increased to $1.42 billion in fiscal year 2006 compared to $1.36 billion in 2005. The sales increase of 4.4% in 2006 was attributable to the opening of new stores including 92 net new stores during the current year (2.3%) and same store sales growth of 2.4%. These increases were partially offset by the impact of foreign exchange rates, which decreased sales by 0.3%. The number of Sally Beauty stores totaled 2,511 at September 30, 2006 compared to 2,419 at the end of fiscal year 2005.

Sales of BSG increased to $953.8 million in fiscal year 2006 compared to $895.4 million in 2005. The sales increase of 6.5% in 2006 was attributable to acquisitions (3.8%), the impact of foreign exchange rates (0.7%), the opening of new stores including 6 net new stores during the current year (0.6%) and same store sales growth of 4.1%. The number of BSG stores totaled 828 at September 30, 2006 compared to 822 at the end of fiscal year 2005.

Gross profit increased $136.3 million or 8.1% to $1.82 billion for fiscal year 2006 compared to fiscal year 2005. Gross profit, as a percentage of net sales, was 48.3% in 2006 compared to 47.8% in 2005. The gross profit margin improvement is primarily attributable to the launch of Nexxus into retail channels, as Nexxus products have a higher gross profit margin, along with improved vendor pricing for the Beauty Supply Distribution business.

Advertising, marketing, selling and administrative expenses increased 8.5% in fiscal year 2006. The increase primarily resulted from higher expenditures for advertising and marketing (3.4%), the recording of stock option expense resulting from the adoption of SFAS No. 123 (R) (1.2%) and higher selling costs associated with the launch of Nexxus into retail channels and the growth of the Sally Beauty Supply and BSG business (2.4%).

Advertising and marketing expenditures were $306.0 million and $260.6 million in fiscal years 2006 and 2005, respectively. The 17.4% increase in fiscal year 2006 was mainly attributable to Alberto-Culver Consumer Products Worldwide’s increased advertising in the U.S. for Nexxus (19.9%) and TRESemmé (4.4%), as well as higher advertising for the Beauty Supply Distribution business (1.5%). These increases were partially offset by decreased advertising in the U.K. (3.8%), primarily related to advertising for TRESemmé hair care products, lower advertising in the U.S. for Alberto VO5 (3.6%) and St. Ives (2.0%) and the effect of foreign exchange rates (0.7%).

Interest expense, net of interest income, was $4.1 million and $7.7 million in fiscal years 2006 and 2005, respectively. Interest expense was $10.5 million in fiscal year 2006 and $10.6 million in fiscal year 2005. Interest income was $6.3 million in fiscal year 2006 and $2.9 million in fiscal year 2005. The increase in interest income in fiscal year 2006 was principally due to higher interest rates and higher cash and short-term investments.

The provision for income taxes as a percentage of earnings before income taxes was 33.4% in 2006 and 35.0% in 2005. The decrease in the 2006 effective tax rate was mainly due to the favorable resolutions of certain tax audits, a reduction in the income tax accrual for certain foreign entities following the expiration of the statute of limitations and the expected utilization of additional foreign tax credits, partially offset by higher state income taxes. Other factors which influenced the effective tax rates for those years are described in “note 12” to the consolidated financial statements.

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Comparison of the Years Ended September 30, 2005 and 2004

Net sales for fiscal year 2005 were $3.53 billion, an increase of 8.4% from $3.26 billion in 2004. Foreign exchange rates increased fiscal year 2005 sales by 1.2%. Organic sales, which exclude the effects of foreign exchange rates, acquisitions and a divestiture, grew 4.6% in fiscal year 2005.

Net earnings of $210.9 million in fiscal year 2005 increased 48.8% from fiscal year 2004 net earnings of $141.8 million. Basic net earnings per share of $2.31 in fiscal year 2005 were 74 cents or 47.1% higher than 2004. Diluted net earnings per share of $2.27 in fiscal year 2005 increased 47.4% from $1.54 in 2004. Non-core items reduced net earnings by $10.4 million and basic and diluted net earnings per share by 11 cents in fiscal year 2005 and reduced net earnings by $53.7 million, basic net earnings per share by 60 cents and diluted net earnings per share by 59 cents in fiscal year 2004.

Excluding non-core items, net earnings were $221.3 million in 2005 or 13.2% higher than fiscal year 2004 net earnings of $195.4 million. Basic net earnings per share excluding non-core items were $2.42 in fiscal year 2005, which was 25 cents or 11.5% higher than fiscal year 2004. Diluted net earnings per share excluding non-core items increased 11.7% to $2.38 from $2.13 in fiscal year 2004.

Sales of Global Consumer Products in fiscal year 2005 increased 10.2% to $1.31 billion from $1.19 billion in 2004. The effect of foreign exchange rates increased sales by 2.4% compared to the prior year. The remaining 2005 sales increase was primarily due to higher sales of: TRESemmé shampoos, conditioners and styling products (8.0%), principally due to its launch in the United Kingdom during the fourth quarter of fiscal year 2004 and continued growth in the U.S.; and Alberto VO5 shampoos and conditioners (1.1%), mainly resulting from the launch of the red styling line in the U.S. In addition, acquisitions, including Nexxus in May, 2005, added approximately 1.2% to sales for fiscal year 2005. These increases were partially offset by the loss of sales resulting from the divestiture of the Indola European professional hair care business in June, 2004 (3.2%).

Sales of the Beauty Supply Distribution business, composed of Sally Beauty Supply and BSG, were $2.25 billion in 2005 and $2.10 billion in 2004, representing an increase of 7.5%.

Sales of Sally Beauty Supply increased to $1.36 billion in 2005 from $1.30 billion in 2004. The sales increase of 4.8% was attributable to the opening of new stores including 62 net new stores during 2005 (2.2%), the impact of foreign exchange rates (0.3%) and same store sales growth of 2.4%. The number of Sally Beauty stores totaled 2,419 at September 30, 2005 compared to 2,355 at the end of fiscal year 2004.

Sales of BSG in fiscal year 2005 increased to $895.4 million from $801.6 million in 2004. The increase was attributable to acquisitions (13.6%), the opening of new stores including 37 net new stores during the current year (1.3%) and the impact of foreign exchange rates (0.9%). These increases were partially offset by a 0.6% decline in same store sales and lower sales by its professional distributor sales consultants, principally resulting from certain suppliers’ decisions to begin selling their products directly to salons. The number of BSG stores totaled 822 at September 30, 2005 compared to 692 at the end of fiscal year 2004.

Gross profit increased $116.2 million or 7.4% to $1.69 billion for fiscal year 2005 compared to $1.57 billion for fiscal year 2004. Gross profit, as a percentage of net sales, was 47.8% in 2005 compared to 48.2% in 2004. The decrease in the gross margin percentage was primarily attributable to higher material costs, increased use of special packs, increased trade spending (which reduced net sales) and product mix for Global Consumer Products, partially offset by improved vendor pricing and lower store inventory shrinkage for Sally Beauty Supply and BSG.

Advertising, marketing, selling and administrative expenses increased 7.2% in fiscal year 2005. The increase primarily resulted from the higher selling and administrative costs associated with the growth of the Sally Beauty Supply and BSG businesses, including the acquisition of CosmoProf in December, 2004, and higher expenditures for advertising and marketing as discussed below. In addition, a portion of the increase related to the $2.5 million lease accounting adjustment discussed in the “Overview” section of MD&A.

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Advertising and marketing expenditures were $260.6 million and $254.1 million in fiscal years 2005 and 2004, respectively. The 2.5% increase in fiscal year 2005 was mainly attributable to Alberto-Culver Consumer Products Worldwide’s increased advertising in the U.K. (3.5%), primarily related to television advertising for TRESemmé hair care products, increased advertising in North America for Mrs. Dash (0.8%) and the effect of foreign exchange rates (1.6%). These increases were partially offset by decreased advertising in North America for St. Ives (2.5%) and lower advertising due to the divestiture of the Indola European professional hair care business (1.3%).

Interest expense, net of interest income, was $7.7 million and $21.4 million in fiscal years 2005 and 2004, respectively. Interest expense was $10.6 million in fiscal year 2005 and $25.7 million in fiscal year 2004. The reduction in interest expense in fiscal year 2005 was primarily due to the redemption of $200 million of 8.25% senior notes in September, 2004. Interest income was $2.9 million in fiscal year 2005 and $4.3 million in fiscal year 2004. The reduction in interest income in 2005 was principally due to lower cash and investment balances in fiscal year 2005.

The provision for income taxes as a percentage of earnings before income taxes was 35.0% in 2005 and 33.3% in 2004. In fiscal year 2004, the liquidation of two foreign legal entities related to the divested Indola business reduced the effective income tax rate by 2.1%. Other factors which influenced the effective tax rates for those years are described in “note 12” to the consolidated financial statements.

Financial Condition

Working capital at September 30, 2006 was $838.0 million, an increase of $184.3 million from the prior year’s working capital of $653.7 million. The resulting current ratio was 2.42 to 1.00 at September 30, 2006 compared to 2.22 to 1.00 last year. The increase in working capital in fiscal year 2006 was primarily related to working capital generated from operations, partially offset by cash outlays for capital expenditures and cash dividends, as well as the purchase of Salon Success in June, 2006.

Cash, cash equivalents and short-term investments increased $137.5 million to $306.0 million during fiscal year 2006 primarily due to cash flows provided by operating activities ($257.1 million) and cash received from exercises of employee stock options ($31.0 million), partially offset by cash outlays for capital expenditures ($80.3 million), dividends ($45.4 million) and acquisitions ($27.0 million).

Receivables, less allowance for doubtful accounts, increased 8.9% to $311.3 million from $285.9 million last year primarily due to a $24.3 million increase in gross trade receivables resulting from the launch of Nexxus into retail channels, the acquisition of Salon Success, the effect of foreign exchange rates and the timing of customer payments.

Inventories increased by $65.0 million to $754.6 million at September 30, 2006. Sally Beauty Supply and BSG inventories increased $49.9 million primarily due to new stores, expanded product lines, strategic inventory purchases related to favorable pricing from vendors, the acquisition of Salon Success and the effect of foreign exchange rates. Inventories for Global Consumer Products were $16.3 million higher principally due to increased finished goods inventories associated with the launch of Nexxus into retail channels and the effect of foreign exchange rates.

Other current assets increased $11.4 million to $56.9 million at September 30, 2006 primarily due to higher deferred income taxes and prepaid asset balances.

Net property, plant and equipment increased $18.6 million to $354.0 million at September 30, 2006. The increase resulted primarily from expenditures for additional Sally Beauty Supply and BSG stores, along with outlays for office facilities and warehouse expansions, partially offset by depreciation during fiscal year 2006.

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Goodwill increased $17.5 million to $568.6 million during fiscal year 2006 mainly due to the acquisition of Salon Success in June, 2006, additional purchase price related to the Nexxus acquisition and the effect of foreign exchange rates.

Trade names increased $6.3 million to $142.7 million at September 30, 2006 primarily due to the acquisition of Salon Success and the effect of foreign exchange rates.

Accounts payable increased $40.8 million during fiscal year 2006 to $302.2 million mainly due to higher inventory levels as of September 30, 2006 compared to the prior year, higher advertising payables and the timing of vendor payments.

Accrued expenses increased 4.6% to $264.2 million at September 30, 2006 from $252.5 million last year. The increase was primarily attributable to higher accruals for self-insurance and promotional allowances, the effects of foreign exchange rates and the reclassification of certain obligations from other liabilities to accrued expenses in anticipation of settling the obligations following the closing of the transaction separating the consumer products and beauty supply distribution businesses involving CD&R.

Income taxes payable and deferred income taxes increased $12.6 million to $66.9 million at September 30, 2006 mainly due to the timing of tax payments and the continued amortization of certain intangible assets for tax purposes but not for book purposes.

Other liabilities were $67.0 million at September 30, 2006, a decrease of $10.4 million compared to last year. The decrease was primarily due to an escrow payment related to the West Coast Beauty Supply acquisition and the reclassification of certain obligations to accrued expenses in anticipation of settling the obligations following the closing of the transaction separating the consumer products and beauty supply distribution businesses involving CD&R.

Stock options subject to redemption of $29.1 million as of September 30, 2006 represent the intrinsic value as of November 5, 2003 of currently outstanding stock options which were modified on that date as a result of the company’s conversion to one class of common stock. This amount was reclassified from additional paid-in capital because the company’s stock option plans contain a contingent cash settlement provision upon the occurrence of certain change in control events which are not solely in control of the company. While the company believes the possibility of occurrence of any such change in control event is remote, the reclassification was required because the company does not have sole control over such events.

Additional paid-in capital decreased $6.2 million to $340.6 million at September 30, 2006 primarily due to the reclassification of $29.1 million from additional paid-in capital to stock options subject to redemption as discussed in the preceding paragraph, partially offset by paid-in capital recorded for stock option expense and the issuance of common stock related to the exercise of stock options and other employee incentive plans.

Unearned compensation, a separate component of stockholders’ equity, was zero at September 30, 2006 versus $3.4 million at September 30, 2005. The decrease was due to the reclassification of the unamortized balance of restricted shares to additional paid-in capital in accordance with the provisions of SFAS No. 123 (R) and the repurchase of Alberto-Culver common stock held in a rabbi trust established for the board of directors deferred compensation plan due to tax requirements associated with the transaction separating the consumer products and beauty supply distribution businesses involving CD&R.

Accumulated other comprehensive gain (loss)—foreign currency translation improved $18.1 million to a $3.0 million gain from a $15.1 million loss last year. The gain was primarily due to the strengthening of certain foreign currencies versus the U.S. dollar, particularly the Swedish krona, British pound and Canadian dollar.

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Liquidity and Capital Resources

The company’s primary source of cash over the past three years has been from funds provided by operating activities which provided cash of $257.1 million, $209.4 million and $249.5 million in fiscal years 2006, 2005 and 2004, respectively. The primary uses of cash during the three-year period ended September 30, 2006 were $342.6 million for acquisitions, $246.1 million for capital expenditures, $213.3 million for the redemption of the $200 million of 8.25% senior notes including the make-whole premium and $119.6 million for cash dividends.

Cash Provided by Operating Activities—Net cash provided by operating activities increased by $47.6 million to $257.1 million in fiscal year 2006 compared to fiscal year 2005 primarily due to the timing of payments to vendors and receipts from customers, partially offset by an increase in amounts paid for inventories to support the launch of Nexxus into retail channels and increased sales in the beauty supply distribution business. Net cash provided by operating activities decreased by $40.1 million to $209.4 million in fiscal year 2005 from $249.5 million in fiscal year 2004. This change was primarily due to the timing of customer receipts and payments to vendors as well as higher tax payments in fiscal year 2005, and was partially offset by higher cash flows related to net earnings and a reduction in amounts paid for inventories.

Cash Used by Investing Activities—Net cash used by investing activities was $136.0 million, $200.6 million and $54.2 million during fiscal years 2006, 2005 and 2004, respectively. The net cash used by investment activities included $27.0 million, $157.2 million and $158.5 million spent for acquisitions in fiscal years 2006, 2005 and 2004, respectively, principally related to the June, 2006 acquisition of Salon Success, the May, 2005 acquisition of Nexxus, the December, 2004 acquisition of CosmoProf and the December, 2003 purchase of West Coast Beauty Supply. In addition, capital expenditures were $80.3 million, $91.0 million and $74.7 million in fiscal years 2006, 2005 and 2004, respectively, primarily due to outlays for new Sally Beauty Supply and BSG stores, office facilities and warehouse expansions. Net cash used by investing activities was also affected by the purchases and sales of short-term investments in each fiscal year. Fiscal year 2004 also included an inflow of $33.0 million of proceeds related to the sale of Indola.

Cash Used by Financing Activities—Net cash used by financing activities was $22.5 million, $2.4 million and $225.2 million in fiscal years 2006, 2005 and 2004, respectively. Cash dividends paid were $45.4 million, $40.8 million and $33.5 million in fiscal years 2006, 2005 and 2004, respectively. These amounts were partially offset by proceeds from the exercise of stock options of $31.0 million, $26.3 million and $25.5 million in fiscal years 2006, 2005 and 2004, respectively. Net cash used by financing activities was also affected by changes in the book cash overdraft balance in each fiscal year. In addition, in fiscal year 2004 the company used $213.3 million of cash for the redemption of the senior notes.

Compared to 2003, cash dividends per share increased 81.5% over the three-year period ended September 30, 2006. Cash dividends paid on common stock were $.49 per share in 2006, $.445 per share in 2005 and $.37 per share in 2004.

The company anticipates that cash flows from operations and available credit will be sufficient to fund operating requirements in future years. During fiscal year 2007, the company expects that cash will continue to be used for acquisitions, capital expenditures, new product development, market expansion and dividend payments. The company may also purchase shares of its common stock depending on market conditions and subject to certain restrictions related to the New Alberto-Culver share distribution in connection with the transaction separating the consumer products and beauty supply distribution businesses involving CD&R.

On April 28, 2005, the board of directors authorized the company to purchase up to 5,000,000 shares of common stock. No shares have been purchased under this authorization as of September 30, 2006. Purchases of the company’s common stock may be made depending on various factors including market conditions, share price and other alternative uses of cash such as acquisitions. No shares of common stock were purchased in fiscal years 2006, 2005 and 2004. During fiscal years 2006, 2005 and 2004, the company acquired $2.2 million, $2.6

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million and $40.1 million, respectively, of common stock surrendered by employees in connection with the exercises of stock options and the payment of withholding taxes as provided under the terms of certain incentive plans. Shares acquired under these plans are not subject to the company’s stock repurchase program. On November 12, 2006, the board of directors of New Alberto-Culver authorized the purchase of up to 5,000,000 shares of New Alberto-Culver common stock. This authorization replaced the previous authorization to purchase Alberto-Culver common stock.

The company has obtained long-term financing as needed to fund acquisitions and other growth opportunities. Funds also may be obtained prior to their actual need in order to take advantage of opportunities in the debt markets. The company has a $300 million revolving credit facility which expires August 31, 2009. The facility, which had no borrowings outstanding at September 30, 2006 or 2005, may be drawn in U.S. dollars or certain foreign currencies. Under debt covenants, the company has sufficient flexibility to incur additional borrowings as needed. On November 13, 2006 the company amended the revolving credit facility to include a waiver for all covenants that may have been violated as a result of the transaction separating the consumer products and beauty supply distribution businesses involving CD&R and extended the facility to November 13, 2011. The amended facility includes a new covenant that limits the company’s ability to purchase its common stock or pay dividends if the cumulative stock repurchases plus cash dividends exceeds $250 million plus 50% of consolidated net earnings commencing January 1, 2007.

In anticipation of the closing of the transaction separating the consumer products and beauty supply distribution businesses involving CD&R, which occurred on November 16, 2006, the company successfully completed a solicitation of consents from the holders of the $120 million of 6.375% debentures and entered into a supplemental indenture, dated October 5, 2006. Under the terms of the supplemental indenture, the holders consented to the transaction, waived compliance with covenants that may have been violated as a result of the transaction and agreed that following the consummation of the transaction, neither New Sally nor any of its subsidiaries will have any obligation or liability with respect to the debentures and that none of them will be subject to any covenant or any other term of the indenture. On November 16, 2006, an additional supplemental indenture was executed which added New Alberto-Culver as a guarantor of the 6.375% debentures.

The company is in compliance with the covenants and other requirements of its revolving credit agreement and 6.375% debentures. Additionally, the revolving credit agreement and the 6.375% debentures do not include credit rating triggers or subjective clauses that would accelerate maturity dates.

In September, 2004, the company redeemed $200 million of 8.25% senior notes due November 1, 2005 under the redemption provisions of the notes. In connection with the redemption, the company recorded a charge in fiscal year 2004 of $12.6 million ($8.2 million after taxes).

The company’s primary contractual cash obligations are operating leases, long-term debt and purchase obligations. A major portion of the operating leases are for Sally Beauty Supply and BSG stores, which typically are located in strip shopping centers. The operating leases allow the company to expand its business to new locations without making significant up-front cash outlays for land and buildings.

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The following table is a summary of contractual cash obligations and commitments outstanding by future payment dates at September 30, 2006:

On November 27, 2006, New Alberto-Culver committed to a plan to terminate employees as part of a reorganization following the completion of the transaction separating the company’s consumer products and beauty supply distribution businesses involving CD&R. As part of the reorganization, New Alberto-Culver’s worldwide workforce of approximately 3,800 will be reduced by approximately 90. New Alberto-Culver expects to take restructuring charges of approximately $13.0 million and $3.0 million in the first and second quarters of fiscal year 2007, respectively, related to this reorganization, primarily for severance benefits for the affected employees. New Alberto-Culver expects this reorganization and the financial charges related to it will be substantially completed by the end of the second quarter of fiscal year 2007 and expects substantially all severance payments to be completed by the end of calendar year 2007. On December 1, 2006, New Alberto-Culver also announced that it plans to sell its corporate airplane in early 2007 and that it expects to close its manufacturing facility in Dallas, Texas by the end of 2007.

Off-Balance Sheet Financing Arrangements

At September 30, 2006 and 2005, the company had no off-balance sheet financing arrangements other than operating leases incurred in the ordinary course of business as disclosed in “note 11” to the consolidated financial statements and outstanding standby letters of credit primarily related to various insurance programs which totaled $34.7 million and $29.1 million, respectively, at September 30, 2006 and 2005. The company does not have other unconditional purchase obligations or significant other commercial commitments.

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Inflation

The company was not significantly affected by inflation during the past three years. Management attempts to counteract the effects of inflation through productivity improvements, cost reduction programs, price increases and the introduction of higher margin products within the constraints of the highly competitive markets in which the company operates.

Quantitative and Qualitative Disclosures About Market Risk

As a multinational corporation that manufactures and markets products in countries throughout the world, the company is subject to certain market risks including foreign currency fluctuations, interest rates and government actions. The company considers a variety of practices to manage these market risks, including, when deemed appropriate, the occasional use of derivative financial instruments. The company uses derivative financial instruments only for risk management and does not use them for trading or speculative purposes. At September 30, 2006, the company had no material derivative financial instruments outstanding.

The company is exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. The company’s primary exposures are to changes in exchange rates for the U.S. dollar versus the Swedish krona, British pound sterling, Canadian dollar, Euro, Australian dollar, Argentine peso and Mexican peso. The company’s various currency exposures at times offset each other providing a natural hedge against currency risk. Periodically, specific foreign currency transactions (e.g., inventory purchases, intercompany transactions, etc.) are hedged with forward contracts to reduce the foreign currency risk. Gains and losses on these foreign currency hedges are included in the basis of the underlying hedged transactions. At September 30, 2006, the company had no material outstanding foreign currency contracts.

The company considers combinations of fixed rate and variable rate debt, along with varying maturities, in its management of interest rate risk. At September 30, 2006, the company had no variable rate long-term debt outstanding.

The company has periodically used interest rate swaps to manage interest rate risk on debt securities. These instruments allow the company to exchange fixed rate debt into variable rate or variable rate debt into fixed rate. Interest rate differentials paid or received on these arrangements are recognized as adjustments to interest expense over the life of the agreement. At September 30, 2006, the company had no interest rate swaps outstanding.

The company’s expected maturities by fiscal year of existing long-term fixed rate debt at September 30, 2006 is as follows (in thousands):

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The company is exposed to credit risk on certain assets, primarily cash equivalents, short-term investments and accounts receivable. The credit risk associated with cash equivalents and short-term investments is mitigated by the company’s policy of investing in a diversified portfolio of securities with high credit ratings.

The company provides credit to customers in the ordinary course of business and performs ongoing credit evaluations. The company’s exposure to concentrations of credit risk with respect to trade receivables is mitigated by the company’s broad customer base. Although Wal-Mart is a significant customer of the company’s Global Consumer Products segment, sales to Wal-Mart were less than 10% of the company’s consolidated net sales in fiscal year 2006. The company believes its allowance for doubtful accounts is sufficient to cover customer credit risks.

New Accounting Pronouncements

In July, 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” FIN No. 48 clarifies the recognition threshold and measurement requirements for tax positions taken or expected to be taken in tax returns and provides guidance on the related classification and disclosure. The provisions of FIN No. 48 are effective for fiscal years beginning after December 15, 2006. Accordingly, the company will adopt FIN No. 48 no later than the beginning of fiscal year 2008. The company is currently evaluating the effects that the adoption of FIN No. 48 will have on its consolidated financial statements.

In September, 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which provides interpretive guidance on the quantification of financial statement misstatements in order to eliminate the diversity in practice that currently exists among public companies. SAB No. 108 is required to be applied to annual financial statements for the first fiscal year ending after November 15, 2006. Accordingly, the company will comply with the provisions of SAB No. 108, as applicable, no later than the fourth quarter of fiscal year 2007. The company is currently evaluating the effects that the application of SAB No. 108 will have on its consolidated financial statements.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements. Actual results may differ from these estimates. Management believes these estimates and assumptions are reasonable.

Accounting policies are considered critical when they require management to make assumptions about matters that are highly uncertain at the time the accounting estimate is made and when different estimates that management reasonably could have used have a material impact on the presentation of the company’s financial condition, changes in financial condition or results of operations.

The company’s critical accounting policies relate to the calculation and treatment of sales incentives, allowance for doubtful accounts, valuation of inventories, income taxes and stock-based compensation.

Sales Incentives—Sales incentives primarily include consumer coupons and trade promotion activities such as advertising allowances, off-shelf displays, customer specific coupons, new item distribution allowances, listing fees and temporary price reductions. The company records accruals for sales incentives based on estimates of the ultimate cost of each program. The company tracks its commitments for sales incentive programs and, using historical experience, records an accrual at the end of each period for the estimated incurred, but unpaid costs of these programs. Actual costs differing from estimated costs could significantly affect these estimates and the related accruals.

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Allowance for Doubtful Accounts—The allowance for doubtful accounts requires management to estimate future collections of trade accounts receivable. Management records allowances for doubtful accounts based on historical collection statistics and current customer credit information. These estimates could be significantly affected as a result of actual collections differing from historical statistics or changes in a customer’s credit status.

Valuation of Inventories—When necessary, the company provides allowances to adjust the carrying value of inventories to the lower of cost or market, including costs to sell or dispose, and for estimated inventory shrinkage. Estimates of the future demand for the company’s products, anticipated product re-launches, changes in formulas and packaging and reductions in stock-keeping units are among the factors used by management in assessing the net realizable value of inventories. The company estimates inventory shrinkage based on historical experience. Actual results differing from these estimates could significantly affect the company’s inventories and cost of products sold.

Income Taxes—The company records tax provisions in its consolidated financial statements based on an estimation of current income tax liabilities. The development of these provisions requires judgments about tax issues, potential outcomes and timing. If the company prevails in tax matters for which provisions have been established or is required to settle matters in excess of established provisions, the company’s effective tax rate for a particular period could be significantly affected.

Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are estimated to be recovered or settled. Management believes that it is more likely than not that results of future operations will generate sufficient taxable income to realize the company’s deferred tax assets, net of the valuation allowance currently recorded. In the future, if the company determines that certain deferred tax assets will not be realizable, the related adjustments could significantly affect the company’s effective tax rate at that time.

Stock-Based Compensation—Effective October 1, 2005, the company adopted SFAS No. 123 (R) using the modified prospective method. Under this method, compensation expense is recognized for new stock option grants beginning in fiscal year 2006 and for the unvested portion of outstanding stock options that were granted prior to the adoption of SFAS No. 123 (R). The company recognizes compensation expense on a straight-line basis over the vesting period or to the date a participant becomes eligible for retirement, if earlier. The amount of stock option expense is determined based on the fair value of each stock option grant, which is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: expected life, volatility, risk-free interest rate and dividend yield. The expected life of stock options represents the period of time that the stock options granted are expected to be outstanding. The company estimates the expected life based on historical exercise trends. The company estimates expected volatility based on the historical volatility of the company’s common stock. The estimate of the risk-free interest rate is based on the U.S. Treasury bill rate for the expected life of the stock options. The dividend yield represents the company’s anticipated cash dividend over the expected life of the stock options. The amount of stock option expense recorded is significantly affected by these estimates. In addition, the company records stock option expense based on an estimate of the total number of stock options expected to vest, which requires the company to estimate future forfeitures. The company uses historical forfeiture experience as a basis for this estimate. Actual forfeitures differing from these estimates could significantly affect the timing of the recognition of stock option expense.

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Reconciliation of Non-GAAP Financial Measures

Reconciliations of “net earnings excluding non-core items,” “basic net earnings per share excluding non-core items” and “diluted net earnings per share excluding non-core items” to their most directly comparable financial measures under GAAP for the fiscal years ended September 30, 2006, 2005 and 2004 are as follows:

A reconciliation of “organic sales growth” to its most directly comparable financial measure under GAAP for the fiscal years ended September 30, 2006 and 2005 is as follows:

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Information required for this Item is included in the section entitled “Quantitative and Qualitative Disclosures About Market Risk,” included within Item 7 of this Annual Report on Form 10-K.

This Item includes the audited financial statements of Alberto-Culver (accounting predecessor to New Alberto-Culver). Notwithstanding the legal form of the transaction which separated the consumer products and beauty supply distribution businesses involving CD&R, which closed November 16, 2006, because of the substance of the transaction, New Alberto-Culver is considered the divesting entity and treated as the “accounting successor” to Alberto-Culver for financial reporting purposes in accordance with EITF Issue No. 02-11, “Accounting for Reverse Spinoffs.” Effective with the closing of the Separation, New Alberto-Culver will report the historical consolidated results of operations (subject to certain adjustments) of New Sally in discontinued operations in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Pursuant to SFAS No. 144, this presentation is not permitted until the accounting period in which the closing of the Separation occurs.

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Consolidated Statements of Earnings

Alberto-Culver Company & Subsidiaries

See accompanying notes to the consolidated financial statements.

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Consolidated Balance Sheets

Alberto-Culver Company & Subsidiaries

See accompanying notes to the consolidated financial statements.

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Consolidated Statements of Cash Flows

Alberto-Culver Company & Subsidiaries

See accompanying notes to the consolidated financial statements.

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Consolidated Statements of Stockholders’ Equity

Alberto-Culver Company & Subsidiaries