8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 6, 2009

REGIS CORPORATION
(Exact name of registrant as specified in its charter)

Minnesota	1-12725	41-0749934
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No)

7201 Metro Boulevard
Minneapolis, MN 55439
(Address of principal executive offices and zip code)

(952) 947-7777
(Registrant’s telephone number, including area code)

(Not applicable)

(Former name or former address, if changed from last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Regis Corporation
Current Report on Form 8-K

ITEM 8.01   OTHER EVENTS.

As previously disclosed, Regis Corporation (the Company) sold its Trade Secret salon concept (Trade Secret) to Premier Salons Beauty, Inc. on February 16, 2009.  In the Form 10-Q for the quarterly period ended December 31, 2008, the Company classified the Trade Secret operations as discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented.

This Current Report on Form 8-K is filed in order to revise, in accordance with accounting principles generally accepted in the United States of America, certain information disclosed in Regis Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (Form 10-Q) and Annual Report on Form 10-K for the year ended June 30, 2008 (Form 10-K), namely:

·The Condensed Consolidated Financial Statements and Notes thereto, included in the Form 10-Q;

·The Consolidated Financial Statements and Notes thereto, included in the Form 10-K;

·Selected Financial Data included in the Form 10-K; and

·Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Form 10-K and Form 10-Q, in order to reflect Trade Secret as a discontinued operation.

The revisions to the Form 10-K and Form 10-Q reported in this Current Report on Form 8-K are limited to the specific items identified above.  The information provided herein should be read in conjunction with Regis Corporation’s Quarterly Reports on Form 10-Q for the periods ended December 31, 2008 and March 31, 2009, its Current Reports on Form 8-K filed with the Securities and Exchange Commision, as well as those portions of the Form 10-K and Form 10-Q not subject to the revisions noted above.

ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.

(d) Exhibits.

EXHIBIT NUMBER
15	Awareness Letter of Independent Registered Public Accounting Firm.
23	Consent of Independent Registered Public Accounting Firm
99.1	Selected Financial Data.
99.2	Condensed Consolidated Financial Statements as of September 30, 2008, and for the three months ended September 30, 2008 and 2007.
99.3	Consolidated Financial Statements as of June 30, 2008 and 2007, and for each of the three years in the period ended June 30, 2008.
99.4	Management’s Discussion and Analysis of Financial Condition and Results of Operations as of September 30, 2008, and for the three months ended September 30, 2008 and 2007.
99.5	Management’s Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2008 and 2007, and for each of the three years in the period ended June 30, 2008.

2

SIGNATURE

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	REGIS CORPORATION
Dated: July 6, 2009	By	/s/ Eric Bakken
		Name: Eric Bakken, Title: Secretary

3

EX-15

Exhibit No. 15

July 6, 2009

Securities and Exchange Commission

100 F Street, N.E.

Washington DC 20549

RE:Regis Corporation Registration Statements on Form S-3 (File No. 333-100327, No. 333-51094, No. 333-28511, No. 333-78793, No. 333-49165, No. 333-89279, No. 333-90809, No. 333-31874, No. 333-57092, No. 333-72200, No. 333-87482, No. 333-102858 and No. 333-116170), and Form S-8 (File No. 33-44867 and No. 33-89882)

Commissioners:

We are aware that our report dated November 10, 2008, except as it relates to the effects of discontinued operations discussed in Note 2 as to which the date is July 6, 2009, on our reviews of the interim financial statements of Regis Corporation for the three month periods ended September 30, 2008 and 2007 and included in the Company’s Current Report on Form 8-K for the three months ended September 30, 2008, is incorporated by reference in the above referenced registration statements.

Yours very truly,

/s/ PRICEWATERHOUSECOOPERS LLP

PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota

EX-23

Exhibit No. 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (File Nos. 333-125631, 333-100327, 333-102858, 333-116170, 333-87482, 333-51094, 333-28511, 333-78793, 333-49165, 333-89279, 333-90809, 333-31874, 333-57092 and 333-72200), and Form S-8 (Nos. 333-123737, 333-88938, 33-44867 and 33-89882) of Regis Corporation of our report dated August 29, 2008, except with respect to our opinion on the consolidated financial statements insofar as it relates to the effects of discontinued operations discussed in Note 2 as to which the date is July 6, 2009, relating to the consolidated financial statements and the effectiveness of internal control over financial reporting, which appears in this Current Report on Form 8-K.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP

Minneapolis, Minnesota

July 6, 2009

EX-99.1

Exhibit No. 99.1

Item 6.  Selected Financial Data

The following table sets forth, in thousands (except per share data), for the periods indicated, selected financial data derived from the Company’s Consolidated Financial Statements in Part II, Item 8.

	2008		2007		2006		2005		2004
Revenues(a)	$	2,481,391	$	2,373,338	$	2,168,002	$	1,941,360	$	1,680,539
Operating income(b)(c)	173,340		141,506		179,147		101,613		138,530
Income from continuing operations(b)(c)(d)	83,901		67,739		92,903		41,791		78,988
Income from continuing operations per diluted share(b)(c)(d)	1.92		1.48		2.00		0.90		1.71
Total assets	2,235,871		2,132,114		1,985,324		1,725,976		1,271,859
Long-term debt, including current portion	764,747		709,231		622,269		568,776		301,143
Dividends declared	$	0.16	$	0.16	$	0.16	$	0.16	$	0.14

(a)Revenues from salons, schools or hair restorations centers acquired each year were $110.0, $105.1, $158.3, $172.5, and $115.7 million during fiscal years 2008, 2007, 2006, 2005, and 2004, respectively. Revenues from the 51 accredited cosmetology schools contributed to Empire Education Group, Inc. on August 1, 2007 were $5.6, $68.5, $48.2, $18.2 and $1.0 million in fiscal years 2008, 2007, 2006, 2005 and 2004, respectively. Revenues from the deconsolidated European franchise salon operations were $36.2, $57.0, $52.7, $55.1 and $47.3 million in fiscal years 2008, 2007, 2006, 2005 and 2004, respectively.

(b)The following significant items affected operating income, net income from continuing operations, and income from continuing operations per diluted share:

·Operating (loss) income from the 51 accredited cosmetology schools contributed to Empire Education Group, Inc. on August 1, 2007 was ($0.3), ($18.6), $2.3, $2.5 and $0.1 million in fiscal years 2008, 2007, 2006, 2005 and 2004, respectively. Operating (loss) income from the deconsolidated European franchise salon operations was $5.1, $7.5, $4.8, ($31.0) and $6.7 million in fiscal years 2008, 2007, 2006, 2005 and 2004, respectively.

·An impairment charge of $23.0 million ($19.6 million net of tax) associated with the Company’s accredited cosmetology schools was recorded in fiscal year 2007. An impairment charge of $4.3 million ($2.8 million net of tax) related to a cost method investment was recorded in fiscal year 2006. An impairment charge of $38.3 million ($38.3 million net of tax) related to goodwill associated with the Company’s European business was recorded in fiscal year 2005.

·A net settlement gain of $33.7 million ($21.7 million net of tax) was recognized during fiscal year 2006 stemming from a termination fee collected from Alberto-Culver Company due to the terminated merger agreement for Sally Beauty Company. The termination fee gain is net of direct transaction-related expenses associated with the terminated merger agreement.

·Adjustments were recorded in fiscal years 2008, 2007, 2006 and 2005 related to a change in estimate of the Company’s self-insurance accruals, primarily prior years’ workers’ compensation claims reserves, due to the continued improvement of our safety and return-to-work programs over the recent years as well as changes in state laws. Site operating expenses decreased by $6.9 million ($4.2 million net of tax) and $10.0 million ($6.6 million net of tax) in fiscal years 2008 and 2007, respectively, and increased by $0.9 million ($0.6 million net of tax) and $2.3 million ($1.3 million net of tax) in fiscal year 2006 and 2005, respectively, as a result in the change in estimate.

·Expenses of $6.1 million ($3.7 million net of tax), $5.1 million ($3.4 million net of tax), $6.9 million ($4.4 million net of tax), $3.1 million ($1.7 million net of tax), and $2.7 million ($1.7 million net of tax) related to the impairment of property and equipment at underperforming locations were recorded during fiscal years 2008, 2007, 2006, 2005, and 2004, respectively. The $6.1 million impairment charge recognized during 2008 related to the Company’s decision to close 112 underperforming salons during fiscal year 2009.

·A $5.7 million ($3.7 million net of tax) charge associated with disposal charges and lease termination fees related to the closure of salons other than in the normal course of business was recorded in fiscal year 2006.

·Fiscal year 2006 includes a $2.8 million ($1.8 million net of tax) charge related to the settlement of a wage and hour lawsuit under the Fair Labor Standards Act (FLSA).

(c)Effective July 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), as amended, using the prospective transition method. Effective July 1, 2005, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), using the modified prospective method of application. Total compensation cost for stock-based payment arrangements totaled $6.8, $4.9, $4.9, $1.2 and $0.2 million ($4.2, $3.2, $3.2, $0.8 and $0.1 million after tax) during fiscal years 2008, 2007, 2006, 2005 and 2004, respectively. Prior to the adoption of these Statements, no compensation cost for stock-based payment arrangements was recognized in earnings. Refer to Note 1 to the Consolidated Financial Statements for further discussion.

(d)An income tax charge of approximately $3.0 million of which $1.3 million was recorded through income tax expense and $1.7 million was recorded through other comprehensive income, during fiscal year 2008 was associated with repatriating approximately $30.0 million of cash previously considered to be indefinitely reinvested outside of the United States. An income tax benefit increased reported net income by approximately $4.1 million during fiscal year 2007 due to the reinstatement of the Work Opportunity and Welfare-to-Work Tax Credits. Approximately $1.3 million of this benefit related to credits earned during fiscal year 2006, as the change in tax law during fiscal year 2007 was retroactive to January 1, 2006. Work Opportunity and Welfare-to-Work Tax Credits increased reported net income by $0.8 and $1.8 million during fiscal years 2006 and 2005, respectively.

EX-99.2

Exhibit No. 99.2

Item 1. Financial Statements

REGIS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

as of September 30, 2008 and June 30, 2008
(In thousands, except share data)

	September 30, 2008		June 30, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	125,266	$	127,627
Receivables, net	37,837		37,824
Inventories	241,742		212,468
Deferred income taxes	15,349		15,954
Other current assets	47,419		51,278
Total current assets	467,613		445,151
Property and equipment, net	482,498		481,851
Goodwill	888,700		870,993
Other intangibles, net	142,122		144,291
Investment in and loans to affiliates	245,323		247,102
Other assets	46,805		46,483
Total assets	$	2,273,061	$	2,235,871
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Long-term debt, current portion	$	272,442	$	230,224
Accounts payable	89,682		69,693
Accrued expenses	189,824		207,605
Total current liabilities	551,948		507,522
Long-term debt and capital lease obligations	534,754		534,523
Other noncurrent liabilities	212,488		217,640
Total liabilities	1,299,190		1,259,685
Commitments and contingencies (Note 8)
Shareholders’ equity:
Common stock, $0.05 par value; issued and outstanding 43,198,763 and 43,070,927 common shares at September 30, 2008 and June 30, 2008, respectively	2,160		2,153
Additional paid-in capital	148,142		143,265
Accumulated other comprehensive income	82,010		101,973
Retained earnings	741,559		728,795
Total shareholders’ equity	973,871		976,186
Total liabilities and shareholders’ equity	$	2,273,061	$	2,235,871

The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.

REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

for the three months ended September 30, 2008 and 2007
(In thousands, except per share data)

	2008			2007
Revenues:
Service	$	469,035		$	452,763
Product	134,183			133,660
Royalties and fees	10,311			20,907
	613,529			607,330
Operating expenses:
Cost of service	267,077			256,653
Cost of product	65,619			63,612
Site operating expenses	48,402			49,331
General and administrative	77,764			83,256
Rent	92,211			87,249
Lease termination costs	1,151			—
Depreciation and amortization	27,268			28,283
Total operating expenses	579,492			568,384
Operating income	34,037			38,946
Other income (expense):
Interest expense	(10,220		)	(10,513		)
Interest income and other, net	1,735			2,155
Income from continuing operations before income taxes and equity in income (loss) of affiliated companies	25,552			30,588
Income taxes	(9,958		)	(10,806		)
Equity in income (loss) of affiliated companies, net of income taxes	492			(334		)
Income from continuing operations	16,086			19,448
(Loss) income from discontinued operations, net of income taxes (Note 2)	(1,600		)	1,151
Net income	$	14,486		$	20,599
Net income (loss) per share:
Basic:
Income from continuing operations	0.38			0.44
(Loss) income from discontinued operations, net of income taxes	(0.04		)	0.03
Net income per share, basic	$	0.34		$	0.47
Diluted:
Income from continuing operations	0.37			0.44
(Loss) income from discontinued operations, net of income taxes	(0.04		)	0.03
Net income per share, diluted	$	0.34	(1)	$	0.46	(1)
Weighted average common and common equivalent shares outstanding:
Basic	42,787			43,906
Diluted	43,107			44,579
Cash dividends declared per common share	$	0.04		$	0.04

The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.

 (1) Total is a recalculation; line items calculated individually will not sum to total.

REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

for the three months ended September 30, 2008 and 2007
(In thousands)

	2008			2007
Cash flows from operating activities:
Net income	$	14,486		$	20,599
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	28,428			28,522
Amortization	2,532			3,060
Equity in (income) loss of affiliated companies	(492		)	334
Deferred income taxes	586			1,640
Excess tax benefits from stock-based compensation plans	(280		)	(1		)
Stock-based compensation	2,004			1,591
Other noncash items affecting earnings	(529		)	(35		)
Changes in operating assets and liabilities:
Receivables	(677		)	(1,981		)
Inventories	(29,319		)	(16,654		)
Other current assets	1,024			(12,607		)
Other assets	(126		)	(2,707		)
Accounts payable	24,096			(1,601		)
Accrued expenses	(14,388		)	1,125
Other noncurrent liabilities	458			3,289
Net cash provided by operating activities	27,803			24,574
Cash flows from investing activities:
Capital expenditures	(23,975		)	(22,389		)
Proceeds from sale of assets	10			10
Asset acquisitions, net of cash acquired and certain obligations assumed	(30,987		)	(35,475		)
Disbursements for loans and investments	(5,971		)	(14,500		)
Transfer of cash related to contribution of schools	—			(7,254		)
Net cash used in investing activities	(60,923		)	(79,608		)
Cash flows from financing activities:
Borrowings on revolving credit facilities	2,295,300			2,337,600
Payments on revolving credit facilities	(2,248,200		)	(2,368,000		)
Proceeds from issuance of long-term debt	—			50,000
Repayments of long-term debt and capital lease obligations	(9,367		)	(13,424		)
Excess tax benefits from stock-based compensation plans	280			1
Proceeds from issuance of common stock	2,291			698
Dividends paid	(1,725		)	(1,767		)
Other	(3,507		)	5,090
Net cash provided by financing activities	35,072			10,198
Effect of exchange rate changes on cash and cash equivalents	(4,313		)	5,280
Decrease in cash and cash equivalents	(2,361		)	(39,556		)
Cash and cash equivalents:
Beginning of period	127,627			184,785
End of period	$	125,266		$	145,229

The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.

REGIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

During the third quarter of fiscal year 2009, Regis Corporation (the Company), sold its Trade Secret salon concept (Trade Secret).  Trade Secret operations are presented as discontinued operations for all periods presented.  All amounts and disclosures in these financial statements have been adjusted to reflect the discontinued operations of Trade Secret.

The unaudited interim Condensed Consolidated Financial Statements of the Company as of September 30, 2008 and for the three months ended September 30 2008 and 2007, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of September 30, 2008 and the consolidated results of its operations and its cash flows for the interim periods. Adjustments consist only of normal recurring items, except for any discussed in the notes below. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year.

The Consolidated Balance Sheet data for June 30, 2008 was derived from audited Consolidated Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2008 and other documents filed or furnished with the Securities and Exchange Commission (SEC) during the current fiscal year.

The unaudited condensed financial statements of the Company as of September 30, 2008 and for the three month periods ended September 30, 2008 and 2007 included in this Form 10-Q, have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their separate report dated November 10, 2008, except as it relates to the effects of discontinued operations discussed in Note 2 as to which the date is July 6, 2009, appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a “report” or a “part” of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

Inventories:

Inventories consist principally of hair care products held either for use in services or for sale. Cost of product used in salon services is determined by applying estimated gross profit margins to service revenues, which are based on historical factors including product pricing trends and estimated shrinkage. In addition, the estimated gross profit margin is adjusted based on the results of physical inventory counts performed at least semi-annually and the monthly monitoring of factors that could impact the Company’s usage rate estimates. These factors include mix of service sales, discounting, and special promotions. Cost of product sold to salon customers is determined based on the weighted average cost of product to the Company, adjusted for an estimated shrinkage factor. Product and service inventories are adjusted based on the results of physical inventory counts performed at least semi-annually.

Stock-Based Employee Compensation:

Stock-based awards are granted under the terms of the 2004 Long Term Incentive Plan (2004 Plan) and the 2000 Stock Option Plan (2000 Plan). Additionally, the Company has outstanding stock options under its 1991 Stock Option Plan (1991 Plan), although the Plan terminated in 2001. Under these plans, four types of stock-based compensation awards are granted: stock options, equity-based stock appreciation rights (SARs), restricted stock awards (RSAs) and restricted stock units (RSUs). The stock-based awards, other than the RSUs, expire within ten years from the grant date. The RSUs cliff vest after five years, and payment of the RSUs is deferred until January 31 of the year following vesting.  Unvested awards are subject to forfeiture in the event of termination of employment.  The Company utilizes an option-pricing model to estimate the fair value of options and SARs at their grant date. Stock options and SARs are granted at not less than fair market value on the date of grant.  The Company’s primary employee stock-based compensation grant occurs during the fourth fiscal quarter.  The Company generally

recognizes compensation expense for its stock-based compensation awards on a straight-line basis over a five-year vesting period. Awards granted do not contain acceleration of vesting terms for retirement eligible recipients.

Total compensation cost for stock-based payment arrangements totaled $2.0 and $1.6 million ($1.2 and $1.0 million after tax) for the three months ended September 30, 2008 and 2007, respectively.

Stock options outstanding, weighted average exercise price and weighted average fair values as of September 30, 2008 were as follows:

Options	Shares		Weighted- Average Exercise Price
	(In thousands)
Outstanding at June 30, 2008	1,713		$	24.55
Granted	2		26.79
Exercised	(133	)	17.17
Forfeited or expired	(6	)	36.24
Outstanding at September 30, 2008	1,576		$	25.14
Exercisable at September 30, 2008	1,207		$	22.44

Outstanding options of 1,575,646 at September 30, 2008 had an intrinsic value of $8.6 million and a weighted average remaining contractual term of 4.3 years.  Exercisable options of 1,207,346 at September 30, 2008 had an intrinsic value of $8.6 million and a weighted average remaining contractual term of 3.0 years.  An additional 348,468 options are expected to vest with a $34.08 per share weighted average grant price and a weighted average remaining contractual life of 8.4 years.

All options granted relate to stock option plans that have been approved by the shareholders of the Company.

Stock options were granted under the 2004 Plan in fiscal year 2008. No stock options had been granted under the 2004 Plan prior to fiscal year 2008.

Grants of RSAs, RSUs and SARs outstanding under the 2004 Plan, as well as other relevant terms of the awards, were as follows:

	Nonvested				SARs Outstanding
	Restricted Stock Outstanding Shares/Units		Weighted Average Grant Date Fair Value		Shares		Weighted Average Exercise Price
	(in thousands)				(in thousands)
Balance, June 30, 2008	523		$	36.76	527		$	35.70
Granted	—		—		—		—
Vested/Exercised	(—	)	—		(—	)	—
Forfeited or expired	(8	)	34.31		(14	)	38.27
Balance, September 30, 2008	515		$	36.80	513		$	35.69

Outstanding and unvested RSAs of 299,743 at September 30, 2008 had an intrinsic value of $8.2 million and a weighted average remaining contractual term of 2.0 years.  An additional 286,679 awards are expected to vest with a total intrinsic value of $7.9 million.

Outstanding and unvested RSUs of 215,000 at September 30, 2008 had an intrinsic value of $5.9 million and a weighted average remaining contractual term of 3.5 years.  All unvested RSUs are expected to vest.

Outstanding SARs of 513,150 at September 30, 2008 had a total intrinsic value of zero and a weighted average remaining contractual term of 7.6 years.  Exercisable SARs of 176,980 at September 30, 2008 had a total intrinsic value of zero and a weighted average remaining contractual term of 6.7 years.  An additional 324,883 rights are expected to vest with a $34.04 per share weighted average grant price, a weighted average remaining contractual life of 8.1 years and a total intrinsic value of zero.

During the three months ended September 30, 2008 and 2007 total cash received from the exercise of share-based instruments was $2.3 and $0.7 million, respectively.

As of September 30, 2008, the total unrecognized compensation cost related to all unvested stock-based compensation arrangements was $21.5 million.  The related weighted average period over which such cost is expected to be recognized was approximately 3.2 years as of September 30, 2008.

The total intrinsic value of all stock-based compensation (the amount by which the stock exceeded the exercise or grant date price) that was exercised during the quarters ended September 30, 2008 and 2007 was $1.6 and $0.3 million, respectively.

Recent Accounting Pronouncements:

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 establishes a single definition of fair value and a framework for measuring fair value, sets out a fair value hierarchy to be used to classify the source of information used in fair value measurements, and requires new disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. This statement applies under other accounting pronouncements that require or permit fair value measurements, but does not change existing guidance as to whether or not an instrument is carried at fair value. In February 2008, the FASB issued FASB Staff Position (FSP) No. 157-1 and No. 157-2, which, respectively, removed leasing transactions from the scope of SFAS No. 157 and deferred for one year the effective date for SFAS No. 157 as it applies to certain nonfinancial assets and liabilities. On July 1, 2008, the Company adopted, on a prospective basis, SFAS No. 157 and became subject to the new disclosure requirements (excluding FSP 157-2) with respect to the Company’s fair value measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in our financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities.  The Company’s adoption did not impact its consolidated financial position or results of operations as all fair value measurements were in accordance with SFAS No. 157 upon adoption.  The additional disclosures required by SFAS No. 157 are included in Note 4.  The Company is evaluating the impact FSP No. 157-2 will have on its nonfinancial assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Companies are not allowed to adopt SFAS No. 159 on a retrospective basis unless they choose early adoption. The Company did not adopt the provisions of SFAS No. 159.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS No. 141(R)). SFAS No. 141(R) replaces SFAS No. 141, Business Combinations. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interests in the acquiree and the goodwill acquired. Some of the key changes under SFAS No. 141(R) will change the accounting treatment for certain specific acquisition related items including: (1) accounting for acquired in process research and development as an indefinite-lived intangible asset until approved or discontinued rather than as an immediate expense; (2) expensing acquisition costs rather than adding them to the cost of an acquisition; (3) expensing restructuring costs in connection with an acquisition rather than adding them to the cost of an acquisition; (4) including the fair value of contingent consideration at the date of an acquisition in the cost of an acquisition; and (5) recording at the date of an acquisition the fair value of contingent liabilities that are more than likely than not to occur. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) will be effective for the Company’s fiscal year 2010 and must be applied prospectively to all new acquisitions closing on or after July 1, 2009. Early adoption is prohibited. SFAS No. 141(R) is expected to have a material impact on how the Company will identify, negotiate and value future acquisitions and may materially impact the Company’s Consolidated Financial Statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS No. 161). SFAS No. 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedge items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008 (i.e. the Company’s third quarter of fiscal year 2009). The Company intends to comply with the disclosure requirements upon adoption.

2.DISCONTINUED OPERATIONS:

On February 16, 2009, the Company sold Trade Secret.  The Company concluded, after a comprehensive review of strategic and financial options, to divest Trade Secret.  The sale of Trade Secret included 659 company-owned salons and 62 franchise salons, all of which had historically been reported within the Company’s North America reportable segment.  The sale of Trade Secret included Cameron Capital I, Inc. (CCI). CCI owned and operated PureBeauty and BeautyFirst salons which were acquired by the Company on February 20, 2008.

The Company concluded that Trade Secret qualified as held for sale under Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS. No. 144), as of December 31, 2008 and is presented as discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented. The operations and cash flows of Trade Secret have been eliminated from ongoing operations of the Company and there will be no significant continuing involvement in the operations after disposal pursuant to Emerging Issues Task Force (EITF) Issue No. 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations.  The agreement includes a provision that the Company will supply product to the buyer of Trade Secret and provide certain administrative services for a transition period of six months following the date of sale with possible extension to not more than eleven months.

The (loss) income from discontinued operations are summarized below:

	For the Periods Ended September 30,
	Three Months
	2008			2007
	(Dollars in thousands)
Revenues	$	66,740		$	60,195
(Loss) income from discontinued operations, before income taxes	(2,775		)	1,995
Income tax benefit (provision) on discontinued operations	1,175			(844		)
(Loss) income from discontinued operations, net of income taxes	$	(1,600	)	$	1,151

Income taxes have been allocated to continuing and discontinued operations based on the methodology required by Financial Accounting Interpretation No. 18, Accounting for Income Taxes in Interim Periods an Interpretation of APB Opinion No. 28 (FIN 18).

3.SHAREHOLDERS’ EQUITY:

Net Income Per Share:

The Company’s basic earnings per share is calculated as net income divided by weighted average common shares outstanding, excluding unvested outstanding RSAs and RSUs. The Company’s dilutive earnings per share is calculated as net income divided by weighted average common shares and common share equivalents outstanding, which includes shares issuable under the Company’s stock option plan and long-term incentive plan and dilutive securities. Stock-based awards with exercise prices greater than the average market value of the Company’s common stock are excluded from the computation of diluted earnings per share.

The following table sets forth a reconciliation of shares used in the computation of basic and diluted earnings per share:

	For the Three Months Ended September 30,
	2008	2007
	(Shares in thousands)
Weighted average shares for basic earnings per share	42,787	43,906
Effect of dilutive securities:
Dilutive effect of stock-based compensation	320	591
Contingent shares issuable under contingent stock agreements	—	82
Weighted average shares for diluted earnings per share	43,107	44,579

The following table sets forth the awards which are excluded from the various earnings per share calculations:

	For the Three Months Ended September 30,
	2008	2007
	(Shares in thousands)
Basic earnings per share:
RSAs (1)	300	247
RSUs (1)	215	215
	515	462
Diluted earnings per share:
Stock options (2)	798	475
SARs (2)	518	394
RSAs (2)	148	140
RSUs (2)	—	215
	1,464	1,224

(1)            Shares were not vested

(2)            Shares were anti-dilutive

Additional Paid-In Capital:

The change in additional paid-in capital during the three months ended September 30, 2008 was due to the following:

	(Dollars in thousands)
Balance, June 30, 2008	$	143,265
Exercise of stock options	2,285
Tax benefit realized upon exercise of stock options	590
Stock-based compensation	2,004
Taxes related to restricted stock	(2		)
Balance, September 30, 2008	$	148,142

Comprehensive Income:

Components of comprehensive income for the Company include net income, changes in fair market value of financial instruments designated as hedges of interest rate or foreign currency exposure and foreign currency translation charged or credited to the cumulative translation account within shareholders’ equity. Comprehensive (loss) income for the three months ended September 30, 2008 and 2007 was as follows:

	For the Three Months Ended September 30,
	2008			2007
	(Dollars in thousands)
Net income	$	14,486		$	20,599
Other comprehensive income (loss):
Changes in fair market value of financial instruments designated as cash flow hedges of interest rate exposure, net of taxes	52			(1,741		)
Change in cumulative foreign currency translation	(20,015		)	12,195
Total comprehensive (loss) income	$	(5,477	)	$	31,053

4.FAIR VALUE MEASUREMENTS:

As discussed in Note 1 to the Consolidated Financial Statements, the Company adopted SFAS No. 157, subject to the deferral provisions of FSP No. 157-2, on July 1, 2008. This standard defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by SFAS No. 157 contains three levels as follows:

Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

·                  Quoted prices for similar assets or liabilities in active markets;

·                  Quoted prices for identical or similar assets in non-active markets;

·                  Inputs other than quoted prices that are observable for the asset or liability; and

·                  Inputs that are derived principally from or corroborated by other observable market data.

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment.  These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

The fair value hierarchy requires the use of observable market data when available.  In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. The following table sets forth by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis at September 30, 2008, according to the valuation techniques the Company used to determine their fair values.

	Fair Value at		Fair Value Measurements Using Inputs Considered as
	September 30, 2008		Level 1	Level 2		Level 3
			(Dollars in thousands)
LIABILITIES
Long-term liabilities
Derivative instruments	$	1,810		$	1,810
Equity put option	22,683					$	22,683

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Derivative instruments. The Company’s derivative instrument liabilities consist of cash flow hedges represented by interest rate swaps and forward foreign currency contracts.  The instruments are classified as Level 2 as the fair value is obtained using observable inputs available for similar assets and liabilities in active markets at the measurement date, as provided by sources independent from the Company

Equity put option. The Company’s merger of the European franchise salon operations with the operations of the Franck Provost Salon Group on January 31, 2008 contained an equity put option and an equity call option. See further discussion within Note 6 of the Condensed Consolidated Financial Statements.  At September 30, 2008, the equity put option was valued using a binomial lattice models that incorporated assumptions including the business enterprise value at that date, and future estimates of volatility and EBITDA multiples based on available market data.  At June 30, 2008 the fair value of the equity put option was $24.8 million. The $2.0 million decrease in the fair value of the equity put option since June 30, 2008 relates to foreign currency translation and has been recorded in accumulated other comprehensive income in the September 30, 2008 balance sheet. The Company determined the equity call option to have no value at September 30, 2008.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

As indicated in Note 1 to the Consolidated Financial Statements, the aspects of SFAS No. 157 for which the effective date was deferred for one year (i.e., the Company’s first quarter fiscal year 2010) under FSP No. 157-2 relate to nonfinancial assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. This deferral applies to such items as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) or nonfinancial long-lived asset groups measured at fair value for an impairment assessment.

5.GOODWILL AND OTHER INTANGIBLES:

The table below contains details related to the Company’s recorded goodwill as of September 30, 2008 and June 30, 2008:

	Salons						Hair Restoration
	North America			International			Centers		Consolidated
	(Dollars in thousands)
Balance at June 30, 2008	$	668,799		$	48,461		$	153,733	$	870,993
Goodwill acquired	24,064			(1,255		)	537		23,346
Translation rate adjustments	(1,510		)	(4,129		)	—		(5,639		)
Balance at September 30, 2008	$	691,353		$	43,077		$	154,270	$	888,700

Goodwill acquired includes adjustments to prior year acquisitions, primarily representing the finalization of purchase price allocations. For the three months ended September 30, 2008 the $1.3 million reduction to international goodwill related to the settlement of the escrow account on an acquisition that closed in September 2007.

Goodwill is tested for impairment annually or at the time of a triggering event in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Fair values are estimated based on the Company’s best estimate of the expected present value of future cash flows and compared with the corresponding carrying value of the reporting unit, including goodwill. Where available and as appropriate comparative market multiples are used to corroborate the results of the present value method. The Company considers its various concepts to be reporting units when it tests for goodwill impairment because that is where the Company believes goodwill resides. The

Company’s policy is to perform its annual goodwill impairment test during its third quarter of each fiscal year ending June 30.

We have experienced a decline in same-store sales which has negatively impacted our operating results during the three months ended September 30, 2008. The most significant decline in our same-store sales was within our Trade Secret concept, which is in the early stages of a strategy to improve the concept’s operating results by converting product assortment.  In addition, subsequent to September 30, 2008, the fair value of our stock has declined such that it began trading below book value per share.  Adverse changes in expected operating results, continuation of our stock trading below book value per share, and unfavorable changes in other economic factors will require us to reassess goodwill impairment prior to the third quarter of the fiscal year.

The table below presents other intangible assets as of September 30, 2008 and June 30, 2008:

	September 30, 2008							June 30, 2008
			Accumulated							Accumulated
	Cost		Amortization (1)			Net		Cost		Amortization (1)			Net
	(Dollars in thousands)
Amortized intangible assets:
Brand assets and trade names	$	81,242	$	(8,568	)	$	72,674	$	81,407	$	(8,072	)	$	73,335
Customer lists	52,045		(19,189		)	32,856		51,316		(17,444		)	33,872
Franchise agreements	27,165		(6,623		)	20,542		27,115		(6,363		)	20,752
Lease intangibles	14,951		(3,189		)	11,762		14,771		(2,887		)	11,884
Non-compete agreements	772		(637		)	135		785		(631		)	154
Other	7,394		(3,241		)	4,153		7,974		(3,680		)	4,294
	$	183,569	$	(41,447	)	$	142,122	$	183,368	$	(39,077	)	$	144,291

(1)Balance sheet accounts are converted at the applicable exchange rates effective as of the reported balance sheet  dates, while income statement accounts are converted at the average exchange rates for the year-to-date periods presented.

All intangible assets have been assigned an estimated finite useful life and are amortized over the number of years that approximate their respective useful lives (ranging from one to 40 years). The cost of intangible assets is amortized to earnings  in proportion to the amount of economic benefits obtained by the Company in that reporting period. The weighted average amortization periods, in total and by major intangible asset class, are as follows:

	Weighted Average
	Amortization Period
	(In years)
	September 30, 2008	June 30, 2008
Amortized intangible assets:
Brand assets and trade names	39	39
Customer lists	10	10
Franchise agreements	22	22
Lease intangibles	20	20
Non-compete agreements	4	4
Other	18	17
Total	26	26

Total amortization expense related to amortizable intangible assets was approximately $2.5 and $2.9 million during the three months ended September 30, 2008 and 2007, respectively. As of September 30, 2008, future estimated amortization expense related to amortizable intangible assets is estimated to be:

	(Dollars in thousands)
2009 (Remainder: nine-month period)	$	7,507
2010	9,798
2011	9,583
2012	9,345
2013	9,088

6.ACQUISITIONS, INVESTMENT IN AND LOANS TO AFFILIATES:

Acquisitions

During the three months ended September 30, 2008 and 2007, the Company made numerous salon and hair restoration center acquisitions and the purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. Operations of the acquired companies have been included in the operations of the Company since the date of the respective acquisition.

The components of the aggregate purchase prices of the acquisitions made during the three months ended September 30, 2008 and 2007 and the allocation of the purchase prices were as follows:

	For the Three Months Ended September 30,
Allocation of Purchase Prices	2008			2007
	(Dollars in thousands)
Components of aggregate purchase prices:
Cash	$	30,987		$	35,475
Deferred purchase price	75			281
	$	31,062		$	35,756
Allocation of the purchase price:
Current assets	$	1,490		$	1,589
Property and equipment	3,890			4,547
Goodwill	25,320			26,688
Identifiable intangible assets	770			4,324
Other long-term assets	—			1,621
Accounts payable and accrued expenses	(288		)	(2,970		)
Other noncurrent liabilities	(120		)	(43		)
	$	31,062		$	35,756

The majority of the purchase price in salon acquisitions is accounted for as residual goodwill rather than identifiable intangible assets. This stems from the value associated with the walk-in customer base of the acquired salons, which is not recorded as an identifiable intangible asset, as well as the limited value and customer preference associated with the acquired hair salon brand. Key factors considered by consumers of hair salon services include personal relationships with individual stylists, service quality and price point competitiveness. These attributes represent the “going concern” value of the salon.

Residual goodwill further represents the Company’s opportunity to strategically combine the acquired business with the Company’s existing structure to serve a greater number of customers through its expansion strategies. In the acquisitions of international salons and hair restoration centers, the residual goodwill primarily represents the growth prospects that are not captured as part of acquired tangible or identified intangible assets. Generally, the goodwill recognized in the North American salon transactions is expected to be fully deductible for tax purposes and the goodwill recognized in the international salon transactions is non-deductible for tax purposes. Goodwill generated in certain acquisitions is not deductible for tax purposes due to the acquisition structure of the transaction.

During the three months ended September 30, 2008 and 2007, certain of the Company’s salon acquisitions were from its franchisees. The Company evaluated the effective settlement of the preexisting franchise contracts and associated rights afforded by those contracts in accordance with Emerging Issues Task Force (EITF) No. 04-1,

Accounting for Preexisting Relationships Between the Parties to a Business Combination. The Company determined that the effective settlement of the preexisting franchise contracts at the date of the acquisition did not result in a gain or loss, as the agreements were neither favorable nor unfavorable when compared to similar current market transactions, and no settlement provisions exist in the preexisting contracts. Therefore, no settlement gain or loss was recognized with respect to the Company’s franchise buybacks.

Investment in and loans to affiliates

The table below presents the carrying amount of investments in and loans to affiliates as of September 30, 2008 and June 30, 2008:

	September 30, 2008		June 30, 2008
	(Dollars in thousands)
Provalliance	$	110,104	$	119,353
Empire Education Group, Inc.	109,181		109,307
Intelligent Nutrients, LLC	7,776		5,657
MY Style	13,233		7,756
Hair Club for Men, Ltd.	5,029		5,029
	$	245,323	$	247,102

Provalliance

On January 31, 2008, the Company merged its continental European franchise salon operations with the operations of the Franck Provost Salon Group in exchange for a 30.0 percent equity interest in the newly formed Provalliance entity (Provalliance). The merger with the operations of the Franck Provost Salon Group which are also located in continental Europe, created Europe’s largest salon operator with approximately 2,400 company-owned and franchise salons as of September 30, 2008.

The merger agreement contains a right (Equity Put) to require the Company to purchase additional ownership interest in or all of Provalliance between specified dates in 2010 to 2018.  The acquisition price is determined based on a multiple of the earnings before interest, taxes, depreciation and amortization of Provalliance for a trailing twelve month period which is intended to approximate fair value.  The estimated fair value of the Equity Put has been included as a component of the Company’s investment in Provalliance. A corresponding liability for the same amount as the Equity Put has been recorded in other noncurrent liabilities. Any changes in the fair value of the Equity Put in future periods, will be recorded in the Company’s consolidated statement of operations. If the Equity Put is exercised, and the Company fails to complete the purchase, the parties exercising the Equity Put will be entitled to exercise various remedies against the Company, including the right to purchase the Company’s interest in Provalliance for a purchase price determined based on a discounted multiple of the earnings before interest and taxes of Provalliance for a trailing twelve month period. The merger agreement also contains an option (Equity Call) whereby the Company can acquire additional ownership interest in Provalliance between specific dates in 2018 to 2020 at an acquisition price determined consistent with the Equity Put.

The Company’s investment in Provalliance is accounted for under the equity method of accounting. During the three month period ended September 30, 2008, the Company recorded $1.0 million of equity in income related to its investment in Provalliance. The exposure to loss related to the Company’s involvement with Provalliance is the carrying value of the investment and future changes in fair value of the Equity Put.

Empire Education Group, Inc.

On August 1, 2007, the Company contributed its 51 wholly-owned accredited cosmetology schools to Empire Education Group, Inc. (EEG) in exchange for a 49.0 percent equity interest in EEG. In January 2008, the Company’s effective ownership interest increased to 55.1 percent related to the buyout of EEG’s minority interest shareholder. This transaction leverages EEG’s management expertise, while enabling the Company to maintain a vested interest in the beauty school industry. Once the integration of the Regis schools is complete, the Company expects to share in significant synergies and operating improvements. EEG operates 87 accredited cosmetology schools.

As of September 30, 2008 the Company has loaned $36.4 million to EEG. During the three months ended September 30, 2008 and 2007 the Company recorded $0.4 and $0.1 million of interest income, respectively, related to the loan.

The Company accounts for the investment in EEG under the equity method of accounting as Empire Beauty School retains majority voting interest and has full responsibility for managing EEG. During the three months ended September 30, 2008 and 2007, the Company recorded ($0.1) and less than $0.1 million, respectively, of equity

(loss)/earnings related to its investment in EEG. The exposure to loss related to the Company’s involvement with EEG is the carrying value of the investment and the outstanding loans.

Intelligent Nutrients LLC

The Company holds a 49.0 percent interest in Intelligent Nutrients, LLC. The Company’s ownership percentage decreased from 50.0 percent to 49.0 percent during the Company’s 2008 fiscal year due to the issuance of additional shares by Intelligent Nutrients, LLC to the other investor.

Intelligent Nutrients, LLC currently carries a wide variety of organic, harmonically grown™ products, including dietary supplements, coffees, teas and aromatics. Additionally, a full line of professional hair care and personal care products is in development and is expected to be available by the end of calendar year 2008. These products will be offered at the Company’s corporate and franchise salons, and eventually in other independently owned salons. The Company’s investment in Intelligent Nutrients, LLC is accounted for under the equity method of accounting. During the three months ended September 30, 2008 and 2007 the Company recorded losses of $0.5 and $0.3 million, respectively. The Company completed $3.0 million of loans to Intelligent Nutrients, LLC in August 2008 of which $3.0 million was outstanding as of September 30, 2008. During the three months ended September 30, 2008, the Company recorded less than $0.1 million of interest income related to the loans. The exposure to loss related to the Company’s involvement with Intelligent Nutrients, LLC is the carrying value of the investment and the outstanding loans.

MY Style

In April 2007, the Company purchased exchangeable notes issued by Yamano Holding Corporation (Exchangeable Note) and a loan obligation of a Yamano Holdings subsidiary, MY Style, formally known as Beauty Plaza Co. Ltd., (My Style Note) for an aggregate amount of 1.3 billion JPY ($11.3 million USD). In September 2008, the Company advanced an additional 300 million JPY ($2.9 million USD) to Yamano Holding Corporation and extended the maturity date of the existing Exchangeable Note to September 2011.  In connection with the 300 million JPY advance the exchangeable portion of the Exchangeable Note increased from approximately 14.8 percent to 27.1 percent of the outstanding shares of MY Style. The exchangeable portion of the Exchangeable Note is recorded as an equity method investment as it is probable that the Company will exercise its right to exchange a portion of the note into equity of My Style.

As of September 30, 2008 the amount outstanding under the Exchangeable Note and My Style Note were $6.7 and $2.5 million, respectively.  As of September 30, 2008, $1.5 and $7.6 million are recorded in the condensed consolidated balance sheet as current assets and investment in affiliates and loans representing the outstanding principal of the notes. The notes are due in installments through May of  2012. The Company recorded less than $0.1 million in interest income related to the Exchangeable Note and My Style Note during the quarters ended September 30, 2008 and 2007, respectively. The exposure to loss related to the Company’s involvement with MY Style is the carrying value of the investment and the outstanding notes.

Yamano Holding Corporation and the Company have an agreement with respect to their joint pursuit of opportunities relating to retail hair salons in Asia.

Hair Club for Men, Ltd.

The Company acquired a 50.0 percent interest in Hair Club for Men, Ltd. through its acquisition of Hair Club in fiscal year 2005. The Company accounts for its investment in Hair Club for Men, Ltd. under the equity method of accounting. Hair Club for Men, Ltd. operates Hair Club centers in Illinois and Wisconsin. During the three months ended September 30, 2008 and 2007 the Company recorded income of $0.3 and $0.5 million, respectively. The exposure to loss related to the Company’s involvement with Hair Club for Men, Ltd. is the carrying value of the investment.

Cool Cuts 4 Kids, Inc.

The Company holds an interest of less than 20 percent in the preferred stock of a privately held entity, Cool Cuts 4 Kids, Inc. This investment is accounted for under the cost method. During fiscal year 2006, the Company determined that its investment was impaired and recognized an impairment loss for the full carrying value of the investment. The Company’s securities purchase agreement contains a call provision, giving the Company the right

of first refusal should the privately held entity receive a bona fide offer from another company, as well as the right to purchase all of the assets of the privately held entity during the period from April 1, 2008 to January 31, 2009 for a multiple of cash flow.

7.LEASE TERMINATION COSTS:

In July 2008, the Company approved a plan to close up to 160 underperforming company-owned salons in fiscal year 2009.  Approximately 100 locations are regional mall based concepts, another 40 locations are strip center concepts and 20 locations are in the United Kingdom.  The timing of the closures is dependent on successfully completing lease termination agreements and is therefore subject to change.  The Company expects to offer employment to associates affected by such closings at nearby Regis-owned salons.  The decision is a result of a comprehensive evaluation of the Company’s salon portfolio, further continuing the Company’s initiatives to enhance profitability.

The Company anticipated the pre-tax charge for the store closings would total approximately $20 to $25 million.  This included approximately $4.5 million, of incremental non-cash asset write-downs which were recognized in the fourth quarter of fiscal year 2008.  The incremental non-cash asset write-down in the fourth quarter of fiscal year 2008 was $3.4 million for the North America reportable segment and $1.1 million for the International reportable segment.  The balance of approximately $15 to $20 million was related to the original estimate of lease termination costs that were expected to be recognized primarily in fiscal year 2009.

As of September 30, 2008, 21 stores ceased using the right to use the leased property or negotiated a lease termination agreement with the lessor in which the Company will cease using the right to the leased property subsequent to September 30, 2008.  The 21 stores were within the North America reportable segment, one of which was a Trade Secret salon included within discontinued operations.  No stores within the International segment have ceased using the right to use the leased property. Lease termination costs are presented as a separate line item in the Consolidated Statement of Operations.  As lease settlements are negotiated the Company has found that the lessors are willing to negotiate rent reductions which has allowed the Company to keep operating certain stores.  As a result, the Company expects that the number of stores to be closed will be less than the 160 stores originally communicated and reducing the estimated lease termination costs of  $15 to $20 million to approximately $6 million.

Lease termination costs represent either the lease settlement or the net present value of remaining contractual lease payments related to closed stores, after reduction by estimated sublease rentals.  The transactions reflected in the accrual for lease termination costs are as follows:

	For the Three Months Ended September 30, 2008
	(Dollars in thousands)
Balance at July 1, 2008	$	—
Provision for lease termination costs:
Provisions associated with store closings	1,173
Change in assumptions about lease terminations and sublease income	—
Cash payments	(695		)
Balance at September 30, 2008	$	478

In the three months ended September 30, 2008, the Company incurred $1.2 million of lease termination expense, of which less than $0.1 million relates to one salon within the Trade Secret concept and is accounted for within the loss from discontinued operations within the Condensed Consolidated Statement of Operations as of September 30, 2008.  Cash payments of less than $0.1 million were made related to the one salon within the Trade Secret concept.

8.LITIGATION:

The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with allegations of purported class-wide wage and hour violations. Litigation is inherently unpredictable and the outcome of these matters cannot presently be determined. Although company counsel believes that the Company has valid defenses in these matters, it could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.

9.DERIVATIVE FINANCIAL INSTRUMENTS:

The primary market risk exposure of the Company relates to changes in interest rates in connection with its debt, some of which bears interest at variable rates based on LIBOR plus an applicable borrowing margin. Additionally, the Company is exposed to foreign currency translation risk related to its net investments in its foreign subsidiaries and, to a lesser extent, foreign currency denominated transactions. The Company has established policies and procedures that govern the management of these exposures through the use of derivative financial instrument contracts. By policy, the Company does not enter into such contracts for the purpose of speculation.

10.INCOME TAXES:

Income taxes have been allocated to continuing and discontinued operations based on the methodology required by Financial Accounting Interpretation No. 18, Accounting for Income Taxes in Interim Periods an Interpretation of APB Opinion No. 28 (FIN 18). Discontinued operations are excluded in determining the estimated effective income tax rate from continuing operations and the corresponding income tax expense (benefit).  The determination of the annual effective income tax rate is based upon a number of significant estimates and judgments, including the estimated annual pretax income of the Company in each tax jurisdiction in which it operates and the development of tax planning strategies during the year.  In addition, as a global enterprise, the Company’s interim tax expense (benefit) can be impacted by changes in tax rates or laws, the finalization of tax audits or reviews, as well as other factors that cannot be predicted with certainty.  As such, there can be significant volatility in interim tax provisions.During the three months ended September 30, 2008 and 2007, the Company’s continuing operations recognized tax expense of $10.0 million and $10.8 million, respectively, with corresponding effective tax rates of 39.0 and 35.3 percent.The effective income tax rate for the three months ended September 30, 2008 was negatively impacted by the shift in income from low to high tax jurisdictions as a result of the merger of European franchise salon operations with the Franck Provost Salon Group in January 2008. In addition, new state taxes in Texas, Michigan, and other states have increased the effective tax rate for the three months ended September 30, 2008. The increase in the effective tax rate for the three months ended September 30, 2008 was partially offset by Work Opportunity and Welfare-to-Work tax credits. The effective income tax rate during the three months ended September 30, 2007 was adversely affected by the adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109 (FIN 48).

The Company accrues for the effects of open uncertain tax positions and the related potential penalties and interest.  There were no material adjustments to our recorded liability for unrecognized tax benefits during the three months ended September 30, 2008.  It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of our unrecognized tax positions will increase or decrease during the next 12 months; however, we do not expect the change to have a significant effect on our consolidated results of operations or financial position.

The Company files tax returns and pays tax primarily in the United States, Canada, the United Kingdom, and the Netherlands as well as states, cities, and provinces within these jurisdictions. In the United States, fiscal years 2005 and after remain open for federal tax audit. For state tax audits, the statute of limitations generally spans three to four years, resulting in a number of states remaining open for tax audits dating back to fiscal year 2004. However, the company is under audit in a number of states in which the statute of limitations has been extended to fiscal years 2000 and forward. Internationally (including Canada), the statute of limitations for tax audits varies by jurisdiction, but generally ranges from three to five years.

11.SEGMENT INFORMATION:

As of September 30, 2008, the company owned, franchised, or held ownership interests in over 13,600 worldwide locations. The Company’s locations consisted of 10,299 North American salons (located in the United States, Canada and Puerto Rico), 468 international salons, 94 hair restoration centers and approximately 2,700 locations in which the Company maintains an ownership interest. The Company operates its North American salon operations through six primary concepts: Regis Salons, MasterCuts, Trade Secret, SmartStyle, Supercuts and Promenade salons. The concepts offer similar products and services, concentrate on the mass market consumer marketplace and have consistent distribution channels. All of the company-owned and franchise salons within the North American salon concepts are located in high traffic, retail shopping locations that attract mass market consumers, and the individual salons display similar economic characteristics. The salons share interdependencies and a common support base.

See Note 2 of the Condensed Consolidated Financial Statements on the classification of the Trade Secret concept as a discontinued operation.  The locations listed above included 670 company-owned salons and 62 franchised salons within the Trade Secret concept being accounted for as a discontinued operation.

The Company operates its international salon operations, primarily in the United Kingdom, through four primary concepts: Regis, Supercuts, Trade Secret, and Sassoon salons. Consistent with the North American concepts, the international concepts offer similar products and services, concentrate on the mass market consumer marketplace and have consistent distribution channels. All of the international salon concepts are company-owned and are located in malls, leading department stores, and high-street locations.  Individual salons display similar long-term economic characteristics. The salons share interdependencies and a common support base.  The Company’s company-owned and franchise hair restoration centers are located in the United States and Canada. The Company’s hair restoration centers offer three hair restoration solutions; hair systems, hair transplants and hair therapy, which are targeted at the mass market consumer. Hair restoration centers are located primarily in office and professional buildings within larger metropolitan areas.

Based on the way the Company manages its business, it has reported its North American salons, International salons and hair restoration centers as three separate reportable segments.

Financial information for the Company’s reporting segments is shown in the following tables:

Total Assets by Segment	September 30, 2008		June 30, 2008
	(Dollars in thousands)
North American salons	$	1,220,365	$	1,249,827
International salons	110,127		120,443
Hair restoration centers	285,892		284,898
Unallocated corporate	656,677		580,703
Consolidated	$	2,273,061	$	2,235,871

	For the Three Months Ended September 30, 2008 (1)
	Salons				Hair Restoration		Unallocated
	North America		International		Centers		Corporate			Consolidated
	(Dollars in thousands)
Revenues:
Service	$	417,549	$	35,399	$	16,087	$	—		$	469,035
Product	102,713		13,049		18,421		—			134,183
Royalties and fees	9,672		—		639		—			10,311
	529,934		48,448		35,147		—			613,529
Operating expenses:
Cost of service	239,655		18,750		8,672		—			267,077
Cost of product	52,915		7,025		5,679		—			65,619
Site operating expenses	44,339		2,645		1,418		—			48,402
General and administrative	31,570		4,167		8,704		33,323			77,764
Rent	77,305		12,347		2,052		507			92,211
Lease termination costs	1,151		—		—		—			1,151
Depreciation and amortization	18,191		1,816		2,704		4,557			27,268
Total operating expenses	465,126		46,750		29,229		38,387			579,492
Operating income (loss)	64,808		1,698		5,918		(38,387		)	34,037
Other income (expense):
Interest expense	—		—		—		(10,220		)	(10,220		)
Interest income and other, net	—		—		—		1,735			1,735
Income (loss) before income taxes and equity in income of affiliated companies	$	64,808	$	1,698	$	5,918	$	(46,872	)	$	25,552

(1) Beginning with the period ended December 31, 2008, the operations of the Trade Secret concept within the North American reportable segment were accounted for as a discontinued operation. All comparable periods have reflected Trade Secret as a discontinued operation. See further discussion at Note 2 in these Notes to the Condensed Consolidated Financial Statements.

	For the Three Months Ended September 30, 2007(1) (2)
	Salons				Hair Restoration		Unallocated
	North America		International		Centers		Corporate			Consolidated
	(Dollars in thousands)
Revenues:
Service	$	400,184	$	38,429	$	14,150	$	—		$	452,763
Product	101,711		15,293		16,656		—			133,660
Royalties and fees	10,031		9,559		1,317		—			20,907
	511,926		63,281		32,123		—			607,330
Operating expenses:
Cost of service	228,481		20,421		7,751		—			256,653
Cost of product	50,168		8,611		4,833		—			63,612
Site operating expenses	44,854		3,207		1,270		—			49,331
General and administrative	29,898		11,814		7,159		34,385			83,256
Rent	72,482		12,629		1,657		481			87,249
Depreciation and amortization	18,596		2,459		2,497		4,731			28,283
Total operating expenses	444,479		59,141		25,167		39,597			568,384
Operating income (loss)	67,447		4,140		6,956		(39,597		)	38,946
Other income (expense):
Interest expense	—		—		—		(10,513		)	(10,513		)
Interest income and other, net	—		—		—		2,155			2,155
Income (loss) before income taxes and equity in loss of affiliated companies	$	67,447	$	4,140	$	6,956	$	(47,955	)	$	30,588

(1)

On August 1, 2007, the Company contributed its accredited cosmetology schools to Empire Education Group, Inc. The results of operations for the month ended July 31, 2007 for the accredited cosmetology schools are reported in the North American salons segment. The Company retained ownership of its one North America and four United Kingdom Vidal Sassoon schools. Results of operations for the Vidal Sassoon schools are included in the respective North American and International salon segments.

(2)

Beginning with the period ended December 31, 2008, the operations of the Trade Secret concept within the North American reportable segment were accounted for as a discontinued operation. All comparable periods have reflected Trade Secret as a discontinued operation. See further discussion at Note 2 in these Notes to the Condensed Consolidated Financial Statements.

12.SUBSEQUENT EVENTS:

On October 3, 2008, the Company completed an $85 million term loan that matures in July 2012.  The monthly interest payments are based on a one-month LIBOR rate plus a 1.75 percent spread.  The term loan includes customary financial covenants including a leverage ratio, fixed charge coverage ratio and minimum net equity test.  The Company used the proceeds from the term loan to pay down the Company’s revolving credit facility.  In connection with the term loan, the Company completed two $20.0 million floating to fixed swaps that are effective November 3, 2008 and mature in July 2011.

REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Directors of Regis Corporation:

We have reviewed the accompanying condensed consolidated balance sheet of Regis Corporation as of September 30, 2008 and the related condensed consolidated statements of operations and of cash flows for each of the three month periods ended September 30, 2008 and 2007.  These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 3 to the Condensed Consolidated Financial Statements, Regis Corporation changed the manner it which it measures fair value for certain assets and liabilities effective July 1, 2008.  As discussed in Note 9 to the Condensed Consolidated Financial Statements, Regis Corporation changed the manner in which it accounts for unrecognized income tax benefits effective July 1, 2007.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of June 30, 2008, and the related consolidated statements of operations, of changes in shareholders’ equity and comprehensive income and of cash flows for the year then ended (not presented herein), and in our report dated August 29, 2008, we expressed an unqualified opinions on those financial statements. In our opinion, the accompanying consolidated balance sheet information as of June 30, 2008, is fairly stated, in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota
November 10, 2008, except as it relates to the effects of discontinued operations discussed in Note 2 as to which the date is July 6, 2009

EX-99.3

Exhibit No. 99.3

Item 8. Financial Statements and Supplementary Data

Management’s Statement of Responsibility for Financial Statements and

Report on Internal Control over Financial Reporting

Financial Statements

Management is responsible for preparation of the consolidated financial statements and other related financial information included in this annual report on Form 10-K. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, incorporating management’s reasonable estimates and judgments, where applicable.

Management’s Report on Internal Control over Financial Reporting

This report is provided by management pursuant to Section 404 of the Sarbanes- Oxley Act of 2002 and the SEC rules promulgated thereunder. Management, including the chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting and for assessing effectiveness of internal control over financial reporting.

The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed the Company’s internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment of the Company’s internal control over financial reporting, management has concluded that, as of June 30, 2008, the Company’s internal control over financial reporting was effective.

The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of June 30, 2008, as stated in their report which follows in Item 8 of this Current Report on Form 8-K.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Regis Corporation:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholders’ equity and comprehensive income and of cash flows present fairly, in all material respects, the financial position of Regis Corporation and its subsidiaries at June 30, 2008 and June 30, 2007, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2008 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Statement of Responsibility for Financial Statements and Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 9 to the consolidated financial statements, Regis Corporation changed the manner in which it accounts for unrecognized income tax benefits effective June 1, 2007. As discussed in Note 1 to the consolidated financial statements, Regis Corporation changed the manner in which it accounts for defined benefit arrangements effective June 30, 2007 and changed its method of accounting for share-based payments as of July 1, 2005.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP

Minneapolis, Minnesota

August 29, 2008, except with respect to our opinion on the consolidated financial statements insofar as it relates to the effects of discontinued operations discussed in Note 2 as to which the date is July 6, 2009

REGIS CORPORATION

CONSOLIDATED BALANCE SHEET

(Dollars in thousands, except per share data)

	June 30,
	2008		2007
ASSETS
Current assets:
Cash and cash equivalents	$	127,627	$	184,785
Receivables, net	37,824		67,773
Inventories	212,468		196,582
Deferred income taxes	15,954		18,775
Other current assets	51,278		57,149
Total current assets	445,151		525,064
Property and equipment, net	481,851		494,085
Goodwill	870,993		812,383
Other intangibles, net	144,291		213,452
Investment in affiliates	203,706		20,213
Other assets	89,879		66,917
Total assets	$	2,235,871	$	2,132,114
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Long-term debt, current portion	$	230,224	$	223,352
Accounts payable	69,693		74,532
Accrued expenses	207,605		240,748
Total current liabilities	507,522		538,632
Long-term debt and capital lease obligations	534,523		485,879
Other noncurrent liabilities	217,640		194,295
Total liabilities	1,259,685		1,218,806
Commitments and contingencies (Note 7)
Shareholders’ equity:
Common stock, $0.05 par value; issued and outstanding, 43,070,927 and 44,164,645 common shares at June 30, 2008 and 2007, respectively	2,153		2,209
Additional paid-in capital	143,265		178,029
Accumulated other comprehensive income	101,973		78,278
Retained earnings	728,795		654,792
Total shareholders’ equity	976,186		913,308
Total liabilities and shareholders’ equity	$	2,235,871	$	2,132,114

The accompanying notes are an integral part of the Consolidated Financial Statements.

REGIS CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share data)

	Years Ended June 30,
	2008			2007			2006
Revenues:
Service	$	1,862,490		$	1,764,480		$	1,604,511
Product	551,286			528,912			486,251
Royalties and fees	67,615			79,946			77,240
	2,481,391			2,373,338			2,168,002
Operating expenses:
Cost of service	1,062,559			988,946			902,627
Cost of product	264,391			258,263			240,119
Site operating expenses	184,769			190,614			180,950
General and administrative	321,563			317,723			284,994
Rent	361,476			341,822			310,774
Depreciation and amortization	113,293			111,464			103,074
Goodwill impairment	—			23,000			—
Terminated acquisition income, net	—			—			(33,683		)
Total operating expenses	2,308,051			2,231,832			1,988,855
Operating income	173,340			141,506			179,147
Other income (expense):
Interest expense	(44,279		)	(41,647		)	(34,913		)
Interest income and other, net	8,173			5,053			621
Income from continuing operations before income taxes and equity in income of affiliated companies	137,234			104,912			144,855
Income taxes	(54,182		)	(37,173		)	(51,952		)
Equity in income of affiliated companies, net of income taxes	849			—			—
Income from continuing operations	83,901			67,739			92,903
Income from discontinued operations, net of taxes (Note 2)	1,303			15,431			16,675
Net income	$	85,204		$	83,170		$	109,578
Net income per share:
Basic:
Income from continuing operations	1.94			1.51			2.06
Income from discontinued operations	0.03			0.35			0.37
Net income per share, basic	$	1.97		$	1.86		$	2.43
Diluted:
Income from continuing operations	1.92			1.48			2.00
Income from discontinued operations	0.03			0.34			0.36
Net income per share, diluted	$	1.95		$	1.82		$	2.36
Weighted average common and common equivalent shares outstanding:
Basic	43,157			44,723			45,168
Diluted	43,587			45,623			46,400
Cash dividends declared per common share	$	0.16		$	0.16		$	0.16

The accompanying notes are an integral part of the Consolidated Financial Statements.

REGIS CORPORATION

CONSOLIDATED STATEMENT OF CHANGES

IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Dollars in thousands)

	Common Stock						Additional Paid-In			Accumulated Other Comprehensive			Retained						Comprehensive
	Shares			Amount			Capital			Income			Earnings			Total			Income
Balance, June 30, 2005	44,952,002			2,248			229,871			46,124			476,469			754,712			70,140
Net income													109,578			109,578			109,578
Foreign currency translation adjustments										10,476						10,476			10,476
Changes in fair market value of financial instruments designated as cash flow hedges, net of taxes										1,466						1,466			1,466
Stock repurchase plan	(585,384		)	(29		)	(20,251		)							(20,280		)
Proceeds from exercise of stock options	843,370			43			14,367									14,410
Stock-based compensation							4,905									4,905
Shares issued through franchise stock incentive program	7,971			—			314									314
Payment for contingent consideration in salon acquisitions (Note 4)							(3,630		)							(3,630		)
Tax benefit realized upon exercise of stock options							6,712									6,712
Issuance of restricted stock	85,500			4			(4		)							—
Dividends													(7,256		)	(7,256		)
Balance, June 30, 2006	45,303,459			2,266			232,284			58,066			578,791			871,407			121,520
Net income													83,170			83,170			83,170
Foreign currency translation adjustments										20,873						20,873			20,873
Changes in fair market value of financial instruments designated as cash flow hedges, net of taxes										(1,220		)				(1,220		)	(1,220		)
Stock repurchase plan	(2,092,200		)	(104		)	(79,606		)							(79,710		)
Proceeds from exercise of stock options	829,524			41			14,269									14,310
Stock-based compensation							4,911									4,911
Shares issued through franchise stock incentive program	6,548			—			233									233
Tax benefit realized upon exercise of stock options							6,531									6,531
Cumulative effect adjustment for adoption of SFAS No. 158 (Note 10)										559						559
Taxes related to restricted stock							(587		)							(587		)
Issuance of restricted stock	117,314			6			(6		)							—
Dividends													(7,169		)	(7,169		)
Balance, June 30, 2007	44,164,645			2,209			178,029			78,278			654,792			913,308			102,823
Net income													85,204			85,204			85,204
Foreign currency translation adjustments										27,120						27,120			27,120
Changes in fair market value of financial instruments designated as cash flow hedges, net of taxes										(2,557		)				(2,557		)	(2,557		)
Stock repurchase plan	(1,701,089		)	(85		)	(49,872		)							(49,957		)
Proceeds from exercise of stock options	525,774			26			8,867									8,893
Stock-based compensation							6,841									6,841
Shares issued through franchise stock incentive program	11,311			—			416									416
Adoption of FIN No.48 (Note 9)							(237		)				(4,237		)	(4,474		)
Recognition of deferred compensation and other, net of taxes (Note 10)										(868		)				(868		)	(868		)
Tax benefit realized upon exercise of stock options							2,784									2,784
Taxes related to restricted stock	(54,914		)	(2		)	(663		)							(665		)
Issuance of restricted stock	125,200			5			(5		)							—
Dividends													(6,964		)	(6,964		)
Payment for contingent consideration in salon acquisitions (Note 4)							(2,895		)							(2,895		)
Balance, June 30, 2008	$	43,070,927		$	2,153		$	143,265		$	101,973		$	728,795		$	976,186		$	108,899

The accompanying notes are an integral part of the Consolidated Financial Statements.

REGIS CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

	Years Ended June 30,
	2008			2007			2006
Cash flows from operating activities:
Net income	$	85,204		$	83,170		$	109,578
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	108,673			104,915			95,660
Amortization	11,304			12,412			11,810
Equity in income of affiliated companies	(849		)	—			—
Deferred income taxes	(3,789		)	(6,243		)	7,409
Goodwill impairment	—			23,000			—
Asset impairment	10,471			6,813			12,740
Excess tax benefits from stock-based compensation plans	(1,420		)	(4,536		)	(4,556		)
Stock-based compensation	6,841			4,911			4,905
Other noncash items affecting earnings	(2,015		)	2,831			316
Changes in operating assets and liabilities*:
Receivables	(709		)	(4,092		)	(4,918		)
Inventories	(5,232		)	2,709			(6,068		)
Other current assets	2,554			(15,818		)	(7,551		)
Other assets	16,184			(9,715		)	(1,027		)
Accounts payable	(9,480		)	11,814			151
Accrued expenses	18,729			14,622			46,773
Other noncurrent liabilities	(14,083		)	15,067			16,463
Net cash provided by operating activities	222,383			241,860			281,685
Cash flows from investing activities:
Capital expenditures	(85,799		)	(90,079		)	(119,914		)
Proceeds from sale of assets	47			97			730
Purchases of salon, school and hair restoration center net assets, net of cash acquired	(132,971		)	(68,747		)	(155,481		)
Proceeds from loans and investments	10,000			5,250			—
Disbursements for loans and investments	(46,400		)	(30,673		)	(6,000		)
Transfer of cash related to contribution of schools and European franchise salon operations	(10,906		)	—			—
Net investment hedge settlement	—			(8,897		)	—
Net cash used in investing activities	(266,029		)	(193,049		)	(280,665		)
Cash flows from financing activities:
Borrowings on revolving credit facilities	9,079,917			7,028,556			3,054,730
Payments on revolving credit facilities	(9,088,530		)	(6,943,750		)	(2,998,480		)
Proceeds from issuance of long-term debt	125,000			25,000			1,766
Repayments of long-term debt and capital lease obligations	(78,161		)	(40,888		)	(22,553		)
Excess tax benefits from stock-based compensation plans	1,420			4,536			4,556
Repurchase of common stock	(49,957		)	(79,710		)	(20,280		)
Proceeds from issuance of common stock	8,893			14,310			14,410
Dividends paid	(6,964		)	(7,169		)	(7,256		)
Other	(2,622		)	(7,310		)	1,678
Net cash (used in) provided by financing activities	(11,004		)	(6,425		)	28,571
Effect of exchange rate changes on cash and cash equivalents	(2,508		)	7,002			3,088
(Decrease) increase in cash and cash equivalents	(57,158		)	49,388			32,679
Cash and cash equivalents:
Beginning of year	184,785			135,397			102,718
End of year	127,627			$	184,785		$	135,397

*Changes in operating assets and liabilities exclude assets and liabilities assumed through acquisitions

The accompanying notes are an integral part of the Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Description:

Regis Corporation (the Company) owns, operates and franchises hairstyling and hair care salons throughout the United States, the United Kingdom (U.K.), Canada, Puerto Rico and several other countries. In addition, the Company owns and operates hair restoration centers in the United States and Canada. Substantially all of the hairstyling and hair care salons owned and operated by the Company in the United States are located in leased space in enclosed mall shopping centers, strip shopping centers or Wal-Mart Supercenters. Franchise salons throughout the United States are primarily located in strip shopping centers. The company- owned salons in the U.K. are owned and operated in malls, leading department stores, mass merchants and high-street locations. The hair restoration centers, including both company-owned and franchise locations, are typically located in leased space within office buildings. The Company maintains ownership interest in salons and beauty schools through equity-method and cost-method investments

Consolidation:

During the third quarter of fiscal year 2009, the Company, sold its Trade Secret salon concept (Trade Secret).  Trade Secret operations are presented as discontinued operations for all periods presented.  All amounts and disclosures in these financial statements have been adjusted to reflect the discontinued operations of Trade Secret.

The Consolidated Financial Statements include the accounts of the Company and all of its wholly-owned subsidiaries. In consolidation, all material intercompany accounts and transactions are eliminated.

Use of Estimates:

The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Foreign Currency Translation:

Financial position, results of operations and cash flows of the Company’s international subsidiaries are measured using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates in effect at each fiscal year end. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive income within shareholders’ equity. Statement of Operations accounts are translated at the average rates of exchange prevailing during the year. The different exchange rates from period to period impact the amount of reported income from the Company’s international operations.

Cash and Cash Equivalents:

Cash equivalents consist of investments in short-term, highly liquid securities having original maturities of three months or less, which are made as a part of the Company’s cash management activity. The carrying values of these assets approximate their fair market values. The Company primarily utilizes a cash management system with a series of separate accounts consisting of lockbox accounts for receiving cash, concentration accounts that funds are moved to, and several “zero balance” disbursement accounts for funding of payroll and accounts payable. As a result of the Company’s cash management system, checks issued, but not presented to the banks for payment, may create negative book cash balances. Checks outstanding in excess of related book cash balances totaling approximately $3.9 and $6.5 million at June 30, 2008 and 2007, respectively, are included in accounts payable and accrued expenses within the Consolidated Balance Sheet.

Receivables and Allowance for Doubtful Accounts:

The receivable balance on the Company’s Consolidated Balance Sheet primarily includes accounts and notes receivable from franchisees. The balance is presented net of an allowance for expected losses (i.e., doubtful accounts), primarily related to receivables from the Company’s franchisees. The Company monitors the financial condition of its

franchisees and records provisions for estimated losses on receivables when it believes that its franchisees are unable to make their required payments based on factors such as delinquencies and aging trends. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses related to existing accounts and notes receivable. The Company also reserves certain receivables fully once they have reached a set age category.

The following table summarizes the activity in the allowance for doubtful accounts:

	For the Years Ended June 30,
	2008			2007			2006
	(Dollars in thousands)
Beginning balance	$	6,399		$	6,205		$	3,464
Bad debt expense	3,900			7,347			5,238
Write-offs	(8,784		)	(7,345		)	(2,589		)
Other (primarily the impact of foreign currency fluctuations)	—			192			92
Ending balance	$	1,515		$	6,399		$	6,205

Inventories:

Inventories consist principally of hair care products held either for use in services or for sale. Cost of product used in salon services is determined by applying estimated gross profit margins to service revenues, which are based on historical factors including product pricing trends and estimated shrinkage. In addition, the estimated gross profit margin is adjusted based on the results of physical inventory counts performed at least semi-annually and the monthly monitoring of factors that could impact the Company’s usage rates estimates. These factors include mix of service sales, discounting and special promotions. Cost of product sold to salon customers is determined based on the weighted average cost of product to the Company, adjusted for an estimated shrinkage factor. Product and service inventories are adjusted based on the results of physical inventory counts performed at least semi-annually.

Property and Equipment:

Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are computed on the straight-line method over estimated useful asset lives (30 to 39 years for buildings and improvements and three to ten years for equipment, furniture and software). Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term, generally ten years. For leases with renewal periods at the Company’s option, management may determine at the inception of the lease that renewal is reasonably assured if failure to exercise a renewal option imposes an economic penalty to the Company. In such cases, the Company will include the renewal option period along with the original lease term in the determination of appropriate estimated useful lives.

The Company capitalizes both internal and external costs of developing or obtaining computer software for internal use. Costs incurred to develop internal-use software during the application development stage are capitalized, while data conversion, training and maintenance costs associated with internal-use software are expensed as incurred. At June 30, 2008 and 2007, the net book value of capitalized software costs was $41.0 and $35.0 million, respectively. Amortization expense related to capitalized software was $8.3, $8.8, and $8.1 million in fiscal years 2008, 2007, and 2006, respectively, which has been determined based on an estimated useful life of five or seven years.

Expenditures for maintenance and repairs and minor renewals and betterments which do not improve or extend the life of the respective assets are expensed. All other expenditures for renewals and betterments are capitalized. The assets and related depreciation and amortization accounts are adjusted for property retirements and disposals with the resulting gain or loss included in operating income. Fully depreciated or amortized assets remain in the accounts until retired from service.

Investments:

The Company has equity investments in securities of other privately held entities. The Company accounts for these investments under the cost method or the equity method of accounting, as appropriate. The valuation of investments accounted for under the cost method considers all available financial information related to the investee. If an unrealized loss for any investment is considered to be other-than-temporary, the loss will be recognized in the Consolidated Statement of Operations in the period the determination is made. Investments accounted for under the equity method are recorded at the amount of the Company’s investment and adjusted each period for the Company’s share of the investee’s income or loss.

Investments are reviewed for changes in circumstance or the occurrence of events that suggest the Company’s investment may not be recoverable.

The Company recognized an impairment loss during fiscal year 2006 of $4.3 million related to its interest in a privately held entity, which was acquired during fiscal year 2005 through the acquisition of preferred stock. This investment was accounted for under the cost method. The impairment charge was included in Other, net (other non-operating expense) in the Consolidated Statement of Operations and reduced the Company’s investment balance to zero.

Goodwill:

Goodwill is tested for impairment annually or at the time of a triggering event in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Fair values are estimated based on the Company’s best estimate of the expected present value of future cash flows and compared with the corresponding carrying value of the reporting unit, including goodwill. Where available and as appropriate comparative market multiples are used to corroborate the results of the present value method. The Company considers its various concepts to be reporting units when it tests for goodwill impairment because that is where the Company believes goodwill resides. The Company’s policy is to perform its annual goodwill impairment test during its third quarter of each fiscal year ending June 30.

During the three months ended March 31 of fiscal years 2008, 2007, and 2006, the Company performed its annual goodwill impairment analysis on its reporting units. Based on its testing, a $23.0 million ($19.6 million net of tax) impairment charge was recorded during fiscal year 2007 related to its beauty school business. No impairment charges were recorded during fiscal years 2008 and 2006.

Long-Lived Asset Impairment Assessments, Excluding Goodwill:

The Company reviews long-lived assets for impairment at the salon level annually or if events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the assets compared to its carrying value. If an impairment is recognized, the carrying value of the impaired asset is reduced to its fair value, based on discounted estimated future cash flows.

During fiscal year 2008, the Company tested its long-lived assets for impairment and recognized impairment charges related primarily to the carrying value of certain salons’ property and equipment of $10.5 million, related to the Company approved plan in July of 2008 to close up to 160 underperforming Company owned salons in fiscal year 2009. Of the $10.5 million in total impairment charges recognized in fiscal year 2008, $5.0, $1.1, and $4.4 million related to North America, United Kingdom, and discontinued operations salons, respectively. During fiscal year 2007, the Company tested its long-lived assets for impairment and recognized impairment charges related primarily to the carrying value of certain salons’ property and equipment of $6.8 million, including $4.8, $0.3 and $1.7 million related to North America,United Kingdom, and discontinued operations salons, respectively. During fiscal year 2006, the Company recognized similar impairment charges for certain salons’ property and equipment of $8.4 million, including $5.9, $1.0, and $1.5 million related to North America, United Kingdom, and discontinued operations salons, respectively.  The Company also evaluated the appropriateness of the remaining useful lives of its affected property and equipment and whether a change to the depreciation charge was warranted. Impairment charges are included in depreciation related to company-owned salons in the Consolidated Statement of Operations.

Deferred Rent and Rent Expense:

The Company leases most salon and hair restoration center locations under operating leases. Accounting principles generally accepted in the United States of America require rent expense to be recognized on a straight-line basis over the lease term. Tenant improvement allowances funded by landlord incentives, rent holidays, and rent escalation clauses which provide for scheduled rent increases during the lease term or for rental payments commencing at a date other than the date of initial occupancy are recorded in the Consolidated Statements of Operations on a straight-line basis over the lease term (including one renewal option period if renewal is reasonably assured based on the imposition of an economic penalty for failure to exercise the renewal option). The difference between the rent due under the stated periods of the lease compared to that of the straight-line basis is recorded as deferred rent within other noncurrent liabilities in the Consolidated Balance Sheet.

For purposes of recognizing incentives and minimum rental expenses on a straight-line basis over the terms of the leases, the Company uses the date that it obtains the legal right to use and control the leased space to begin amortization,

which is generally when the Company enters the space and begins to make improvements in preparation of intended use of the leased space.

Certain leases provide for contingent rents, which are determined as a percentage of revenues in excess of specified levels. The Company records a contingent rent liability in accrued expenses on the Consolidated Balance Sheet, along with the corresponding rent expense in the Consolidated Statement of Operations, when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.

Revenue Recognition and Deferred Revenue:

Company-owned salon revenues and related cost of sales are recognized at the time of sale, as this is when the services have been provided or, in the case of product revenues, delivery has occurred, and the salon receives the customer’s payment. Revenues from purchases made with gift cards are also recorded when the customer takes possession of the merchandise or services are provided. Gift cards issued by the Company are recorded as a liability (deferred revenue) until they are redeemed. An accrual for estimated returns and credits has been recorded based on historical customer return data that management believes to be reasonable, and is less than one percent of sales.

Product sales by the Company to its franchisees are included within product revenues on the Consolidated Statement of Operations and recorded at the time product is shipped to franchise locations. The related cost of product sold to franchisees is included within cost of product in the Consolidated Statement of Operations.

Company-owned hair restoration center revenues stem primarily from servicing hair systems and surgical procedures, as well as through product and hair system sales. The Company records deferred revenue for contracts related to the servicing of hair systems and recognizes the revenue ratably over the term of the service contract. Revenues are recognized related to surgical procedures when the procedure is performed. Product revenues, including sales of hair systems, are recognized at the time of sale, as this is when delivery occurs and payment is probable.

Franchise revenues primarily include royalties, initial franchise fees and net rental income (see Note 7). Royalties are recognized as revenue in the month in which franchisee services are rendered or products are sold to franchisees. The Company recognizes revenue from initial franchise fees at the time franchise locations are opened, as this is generally when the Company has performed all initial services required under the franchise agreement.

Consideration Received from Vendors:

The Company receives consideration for a variety of vendor-sponsored programs. These programs primarily include volume rebates and promotion and advertising reimbursements. Promotion and advertising reimbursements are discussed under Advertising within this note.

With respect to volume rebates, the Company estimates the amount of rebate it will receive and accrues it as a reduction of the cost of inventory over the period in which the rebate is earned based upon historical purchasing patterns and the terms of the volume rebate program. A periodic analysis is performed, at least quarterly, in order to ensure that the estimated rebate accrued is reasonable, and any necessary adjustments are recorded.

Shipping and Handling Costs:

Shipping and handling costs are incurred to store, move and ship product from the Company’s distribution centers to company-owned and franchise locations, and include an allocation of internal overhead. Such shipping and handling costs related to product shipped to company-owned locations are included in site operating expenses in the Consolidated Statement of Operations. Shipping and handling costs related to shipping product to franchise locations totaled $3.4, $2.8, and $2.4 million included in continuing operations during fiscal years 2008, 2007, and 2006, respectively, and are included within general and administrative expenses. Any amounts billed to the franchisee for shipping and handling are included in product revenues within the Consolidated Statement of Operations.

Advertising:

Advertising costs, including salon collateral material, are expensed as incurred. Net advertising costs expensed were $71.4 million ($65.8 million included in continuing operations, and $5.6 million included in discontinued operations), $69.2 million ($65.2 million included in continuing operations, and $4.0 million included in discontinued operations), and

$61.5 million ($58.5 million included in income from continuing operations, and $3.0 million in discontinued operations) in fiscal years 2008, 2007, and 2006, respectively. The Company participates in cooperative advertising programs under which the vendor reimburses the Company for costs related to advertising for its products. The Company records such reimbursements as a reduction of advertising expense when the expense is incurred. During fiscal years 2008, 2007, and 2006, no amounts were received in excess of the Company’s related expense.

Advertising Funds:

Franchisees and certain company-owned salons are required to contribute a percentage of sales to various advertising funds. The Company administers the advertising funds at the directive of or subject to input from the franchise community. Accordingly, amounts collected and spent by the advertising funds are not reflected as revenues and expenditures of the Company. Assets of the advertising funds administered by the Company, along with an offsetting obligation to spend such assets, are recorded in the Consolidated Balance Sheet.

Preopening Expenses:

Non-capital expenditures such as payroll, training costs and promotion incurred prior to the opening of a new location are expensed as incurred.

Sales Taxes:

Sales taxes are recorded on a net basis (rather than as both revenue and an expense) within the Company’s Consolidated Statement of Operations.

Income Taxes:

Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. Realization of deferred tax assets is ultimately dependent upon future taxable income. Inherent in the measurement of deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to the Company’s operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities.

Net Income Per Share:

The Company’s basic earnings per share is calculated as net income divided by weighted average common shares outstanding, excluding unvested outstanding restricted stock awards and restricted stock units. The Company’s dilutive earnings per share is calculated as net income divided by weighted average common shares and common share equivalents outstanding, which includes shares issuable under the Company’s stock option plan and long-term incentive plan, shares issuable under contingent stock agreements, and dilutive securities. Stock-based awards with exercise prices greater than the average market value of the Company’s common stock are excluded from the computation of diluted earnings per share.

Comprehensive Income:

Components of comprehensive income for the Company include net income, changes in fair value of financial instruments designated as hedges of interest rate or foreign currency exposure and foreign currency translation charged or credited to the cumulative translation account within shareholders’ equity. These amounts are presented in the Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income.

Accumulated Other Comprehensive Income	2008			2007			2006
	(Dollars in thousands)
Balance at July 1	$	78,278		$	58,066		$	46,124
Cumulative translation adjustment:
Balance at July 1	83,968			63,095			52,619
Pre-tax amount	28,804			20,873			10,476
Tax effect	(1,684		)	—			—
Net of tax amount	27,120			20,873			10,476
Balance at June 30	111,088			83,968			63,095
Changes in fair market value of financial instruments designated as cash flow hedges:
Balance at July 1	(6,249		)	(5,029		)	(6,495		)
Pre-tax amount	(3,811		)	(1,554		)	2,336
Tax effect	1,254			334			(870		)
Net of tax amount	(2,557		)	(1,220		)	1,466
Balance at June 30	(8,806		)	(6,249		)	(5,029		)
Recognition of deferred compensation (SFAS No. 158):
Balance at July 1	559			—			—
Pre-tax amount	(1,330		)	891			—
Tax effect	462			(332		)	—
Net of tax amount	(868		)	559			—
Balance at June 30	(309		)	559			—
Balance at June 30	$	101,973		$	78,278		$	58,066

The Company adopted SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans (SFAS No. 158) during fiscal year 2007. SFAS No. 158 requires balance sheet recognition of the funded status for all pension and postretirement benefit plans. SFAS No. 158 requires the impact of the initial adjustment of the ending balance of accumulated other comprehensive income.

Derivative Instruments:

The Company may manage its exposure to interest rate and foreign currency risk within the Consolidated Financial Statements through the use of derivative financial instruments, according to its hedging policy. The Company does not use derivatives with a level of complexity or with a risk higher than the exposures to be hedged and does not hold or issue derivatives for trading or speculative purposes. The Company currently has or had interest rate swaps designated as both cash flow and fair value hedges, treasury locks designated as cash flow hedges, a hedge of its net investment in its European operations and forward foreign currency contracts designated as cash flow hedges of forecasted transactions denominated in a foreign currency. Refer to Note 6 to the Consolidated Financial Statements for further discussion.

The Company follows SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), as amended and interpreted, which requires that all derivatives be recorded on the balance sheet at fair value. SFAS No.133 also requires companies to designate all derivatives that qualify as hedging instruments as fair value hedges, cash flow hedges or hedges of net investments in foreign operations. This designation is based upon the exposure being hedged. Cash flow and fair value hedges are designated and documented at the inception of each hedge by matching the terms of the contract to the underlying transaction. At inception, as dictated by the facts and circumstances, all hedges are expected to be highly effective, as the critical terms of these instruments are generally the same as those of the underlying risks being hedged. All derivatives designated as hedging instruments are assessed for effectiveness on an on-going basis. The Company classifies the cash flows from hedging transactions in the same categories as the cash flows from the respective hedged items.

Stock-Based Employee Compensation Plans:

Stock-based compensation awards are granted under the terms of the 2004 Long Term Incentive Plan (2004 Plan) and the 2000 Stock Option Plan. Additionally, the Company has outstanding stock options under its 1991 Stock Option Plan, although the Plan terminated in 2001. Under these plans, four types of stock-based compensation awards are granted: stock options, equity-based stock appreciation rights (SARs), restricted stock awards (RSAs) and restricted stock units (RSUs). The stock-based awards, other than the RSUs, expire within ten years from the grant date. The Company utilizes an option-pricing model to estimate the fair value of options at their grant date. The Company generally recognizes compensation expense for its stock-based compensation awards on a straight-line basis over the five-year vesting period. Awards granted do not contain acceleration of vesting terms for retirement eligible recipients. The Company’s primary employee stock-based compensation grant occurs during the fourth quarter.

Effective July 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), as amended using the prospective transition method. Under the prospective method of adoption, compensation cost is recognized on all stock- based awards granted, modified or settled subsequent to July 1, 2003.

Effective July 1, 2005, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), using the modified prospective method of application. Under this method, compensation expense is recognized both for (i) awards granted, modified or settled subsequent to July 1, 2003 and (ii) the remaining vesting periods of awards issued prior to July 1, 2003. The impact of adopting SFAS No. 123R during fiscal years 2008, 2007, and 2006 was an increase in compensation expense of $0.4, $1.0 and $2.7 million ($0.2, $0.7 and $1.7 million after tax), respectively. This increase in compensation expense did not impact basic or diluted earnings per share in fiscal year 2008. In fiscal years 2007 and 2006, the increase in compensation expense reduced both basic and diluted earnings per share by $0.01 and $0.04, respectively. Compensation expense recorded during fiscal years 2008, 2007 and 2006 includes $6.5, $3.9 and $2.3 million, respectively, related to awards issued subsequent to July 1, 2003 and $0.4, $1.0 and $2.7 million, respectively, related to unvested awards previously being accounted for on the intrinsic value method of accounting.

Total compensation cost for stock-based payment arrangements totaled $6.8, $4.9 and $4.9 million ($4.2 and $3.2 and $3.2 million after tax) for the fiscal years ended June 30, 2008, 2007 and 2006, respectively. SFAS No. 123R requires that the cash retained as a result of the tax deductibility of increases in the value of stock-based arrangements be presented as a cash inflow from financing activity in the Consolidated Statement of Cash Flows. The amount presented as a financing activity for fiscal years 2008, 2007 and 2006 was $1.4, $4.5 and $4.6 million, respectively. Prior to fiscal year 2006, and the Company’s adoption of SFAS No. 123R, the tax benefit realized upon the exercise of stock options was presented as an operating activity (included within accrued expenses) and totaled $9.0 million for fiscal year 2005.

Recent Accounting Pronouncements:

In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value Measures (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 (i.e., the Company’s first quarter of fiscal year 2009). In February 2008, the FASB deferred SFAS No. 157’s effective date for all non-financial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until years beginning after November 15, 2008 (i.e. the Company’s first quarter of fiscal year 2010). The Company is currently evaluating the impact of SFAS No. 157 on its Consolidated Financial Statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Companies are not allowed to adopt SFAS No. 159 on a retrospective basis unless they choose early adoption. The Company does not expect it will elect to adopt the provisions of SFAS No. 159.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS No. 141(R)). SFAS No. 141(R) replaces SFAS No. 141, Business Combinations. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed,

any noncontrolling interests in the acquiree and the goodwill acquired. Some of the key changes under SFAS No. 141(R) will change the accounting treatment for certain specific acquisition related items including: (1) accounting for acquired in process research and development as an indefinite-lived intangible asset until approved or discontinued rather than as an immediate expense; (2) expensing acquisition costs rather than adding them to the cost of an acquisition; (3) expensing restructuring costs in connection with an acquisition rather than adding them to the cost of an acquisition; (4) including the fair value of contingent consideration at the date of an acquisition in the cost of an acquisition; and (5) recording at the date of an acquisition the fair value of contingent liabilities that are more than likely than not to occur. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) will be effective for the Company’s fiscal year 2010 and must be applied prospectively to all new acquisitions closing on or after July 1, 2009. Early adoption is prohibited. SFAS No. 141(R) is expected to have a material impact on how the Company will identify, negotiate and value future acquisitions and a material impact on how the acquisition will affect the Company’s Consolidated Financial Statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS No. 161). SFAS No. 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedge items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008 (i.e. the Company’s third quarter of fiscal year 2009). The Company intends to comply with the disclosure requirements upon adoption.

2. DISCONTINUED OPERATIONS

On February 16, 2009, the Company sold Trade Secret.  The Company concluded, after a comprehensive review of strategic and financial options, to divest Trade Secret.   The sale of Trade Secret included 659 company-owned salons and 62 franchise salons, all of which had historically been reported within the Company’s North America reportable segment. The sale of Trade Secret included Cameron Capital I, Inc. (CCI).  CCI owned and operated PureBeauty and BeautyFirst salons which were acquired by the Company on February 20, 2008.

The Company concluded that Trade Secret qualified as held for sale under Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS. No. 144), as of December 31, 2008 and is presented as discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented.  The operations and cash flows of Trade Secret have been eliminated from ongoing operations of the Company and there will be no significant continuing involvement in the operations after disposal pursuant to Emerging Issues Task Force (EITF) Issue No. 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations.  The agreement includes a provision that the Company will supply product to the buyer of Trade Secret and provide certain administrative services for a transition period of six months following the date of sale with possible extension to not more than eleven months.

The income from discontinued operations are summarized below:

	For the Years Ended June 30,
	2008		2007			2006
	(Dollars in thousands)
Revenues	$	257,474	$	253,250		$	262,862
Income from discontinued operations, before income taxes	865		23,044			25,298
Income tax benefit (provision) on discontinued operations	438		(7,613		)	(8,623		)
Income from discontinued operations, net of income taxes	$	1,303	$	15,431		$	16,675

Income taxes have been allocated to continuing and discontinued operations based on the methodology required by Financial Accounting Interpretation No. 18, Accounting for Income Taxes in Interim Periods an Interpretation of APB Opinion No. 28 (FIN 18).

3. OTHER FINANCIAL STATEMENT DATA

The following provides additional information concerning selected balance sheet accounts as of June 30, 2008 and 2007:

	2008			2007
	(Dollars in thousands)
Accounts receivable	$	39,339		$	74,172
Less allowance for doubtful accounts	(1,515		)	(6,399		)
	$	37,824		$	67,773
Other current assets:
Prepaids	$	47,181		$	56,240
Notes Receivable, primarily affiliates	4,097			909
	$	51,278		$	57,149
Property and equipment:
Land	$	3,864		$	4,864
Buildings and improvements	48,110			46,769
Equipment, furniture and leasehold improvements	862,661			807,988
Internal use software	79,913			75,327
Equipment, furniture and leasehold improvements under capital leases	73,929			61,004
	1,068,477			995,952
Less accumulated depreciation and amortization	(557,459		)	(481,663		)
Less amortization of equipment, furniture and leasehold improvements under capital leases	(29,167		)	(20,204		)
	$	481,851		$	494,085
Investment in affiliates:
Equity-method investments	$	197,917		$	12,133
Cost-method investments	5,789			8,080
	$	203,706		$	20,213
Other Assets:
Notes receivable, primarily affiliates	$	39,661		$	13,560
Other noncurrent assets	50,218			53,357
	$	89,879		$	66,917
Accounts payable:
Book overdrafts payable	$	2,927		$	4,907
Trade accounts payable	66,766			69,625
	$	69,693		$	74,532
Accrued expenses:
Payroll and payroll related costs	$	94,418		$	90,889
Insurance	52,345			54,572
Deferred revenues	10,062			34,776
Taxes payable, primarily income taxes	13,094			16,813
Other	37,686			43,698
	$	207,605		$	240,748
Other noncurrent liabilities:
Deferred income taxes	$	55,900		$	84,312
Deferred rent	57,751			54,701
Deferred benefits	48,732			50,740
Other	55,257			4,542
	$	217,640		$	194,295

	2008							2007
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
	(Dollars in thousands)
Amortized intangible assets:
Brand assets and trade names	$	81,407	$	(8,072	)	$	73,335	$	112,999	$	(10,193	)	$	102,806
Customer lists	51,316		(17,444		)	33,872		48,744		(9,970		)	38,774
Franchise agreements	27,115		(6,363		)	20,752		27,149		(7,538		)	19,611
Lease intangibles	14,771		(2,887		)	11,884		13,933		(4,818		)	9,115
School-related licenses	—		—			—		25,428		(1,247		)	24,181
Product license agreements	—		—			—		16,946		(2,944		)	14,002
Non-compete agreements	785		(631		)	154		691		(644		)	47
Other	7,974		(3,680		)	4,294		7,728		(2,812		)	4,916
	$	183,368	$	(39,077	)	$	144,291	$	253,618	$	(40,166	)	$	213,452

All intangible assets have been assigned an estimated finite useful life, and are amortized on a straight-line basis over the number of years that approximate their expected period of benefit (ranging from one to 40 years). The cost of intangible assets is amortized to earnings in proportion to the amount of economic benefits obtained by the Company in that reporting period. The weighted average amortization periods, in total and by major intangible asset class, are as follows:

	Weighted Average Amortization Period (in years)
Amortized intangible assets:
Brand assets and trade names	39
Customer list	10
Franchise agreements	22
Lease intangibles	20
Non-compete agreements	4
Other	17
Total	26

Total amortization expense related to amortizable intangible assets during the years ended June 30, 2008, 2007, and 2006 was approximately $11.1, $11.8, and $11.2 million, respectively. As of June 30, 2008, future estimated amortization expense related to amortizable intangible assets is estimated to be:

Fiscal Year	(Dollars in thousands)
2009	$	9,697
2010	9,436
2011	9,271
2012	9,121
2013	8,935

The following provides supplemental disclosures of cash flow activity:

	2008		2007		2006
	(Dollars in thousands)
Cash paid during the year for:
Interest	$	46,547	$	40,805	$	35,098
Income taxes, net of refunds	49,148		71,770		32,544

Significant non-cash investing and financing activities include the following:

In fiscal years 2008, 2007, and 2006, the Company financed capital expenditures totaling $10.4, $14.5, and $16.8 million, respectively, through capital leases.

In connection with various acquisitions, the Company entered into seller-financed payables and non-compete agreements in fiscal year 2006.

4. ACQUISITIONS, INVESTMENTS IN AFFILIATES AND LOANS

During fiscal years 2008, 2007, and 2006, the Company made numerous acquisitions and the purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. These acquisitions individually and in the aggregate are not material to the Company’s operations. Operations of the acquired companies have been included in the operations of the Company since the date of the respective acquisition.

Based upon purchase price allocations, the components of the aggregate purchase prices of the acquisitions made during fiscal years 2008, 2007, and 2006 and the allocation of the purchase prices were as follows:

Total Acquisitions

	2008			2007			2006
	(Dollars in thousands)
Components of aggregate purchase prices:
Cash	$	132,971		$	68,747		$	155,481
Note receivable applied to purchase price	10,000			—			—
Common stock	4			—			—
Liabilities assumed or payable	2,602			558			2,127
	$	145,577		$	69,305		$	157,608
Allocation of the purchase prices:
Current assets	$	16,631		$	3,876		$	12,516
Property and equipment	21,398			10,086			14,422
Deferred income tax asset	1,789			1,200			—
Other noncurrent assets	473			50			4,442
Goodwill	105,252			50,844			127,337
Identifiable intangible assets	16,114			4,464			17,251
Accounts payable and accrued expenses	(15,526		)	(412		)	(17,121		)
Deferred income tax liability	—			(436		)	(4,656		)
Other noncurrent liabilities	(3,449		)	(367		)	(213		)
Settlement of contingent purchase price(1)	2,895			—			3,630
	$	145,577		$	69,305		$	157,608

(1)During fiscal years 2005 and 2004, the Company guaranteed that the stock issued in conjunction with one of its acquisitions during their respective fiscal years would reach a certain market price by the fourth quarter of fiscal year 2008 and 2006. The guaranteed stock price was factored into the purchase price at the acquisition date by recording an increase to additional paid-in-capital for the differential between the stock price at the date of acquisition and the guaranteed stock price. However, the stock did not reach this price during the agreed upon time frame. Therefore, the Company was obligated to issue $2.9 and $3.6 million in additional consideration to the sellers during the fourth quarter of fiscal year 2008 and 2006, respectively. The $2.9 and $3.6 million in fiscal years 2008 and 2006, respectively, represents the difference between the guaranteed stock price and the actual stock price on the last day of the agreed upon time frame, and was recorded as a reduction to additional paid-in capital.

The value and related weighted average amortization periods for the intangibles acquired during fiscal years 2008 and 2007 business acquisitions, in total and by major intangible asset class, are as follows:

	Purchase Price Allocation Year Ended June 30,				Weighted Average Amortization Period (in years)
	2008		2007		2008	2007
	(Dollars in thousands)
Amortized intangible assets:
Brand assets and trade names	$	2,141	$	656	36	20
Customer lists	2,574		—		10	—
Franchise agreements	9,507		1,339		23	40
Lease intangibles	1,310		—		20	—
Non-compete agreements	193		—		3	—
School-related licenses	—		610		—	40
Other	389		1,859		19	15
Total	$	16,114	$	4,464	22	27

Based upon the actual and preliminary purchase price allocations, the change in the carrying amount of the goodwill for the years ended June 30, 2008 and 2007 is as follows:

	Salons					Beauty			Hair Restoration
	North America		International			Schools			Centers			Consolidated
	(Dollars in thousands)
Balance at June 30, 2006	$	520,314	$	41,224		$	81,886		$	134,804		$	778,228
Goodwill acquired	47,462		1,620			1,765			(3		)	50,844
Translation rate adjustments	2,385		3,643			283			—			6,311
Impairment	—		—			(23,000		)	—			(23,000		)
Balance at June 30, 2007	570,161		46,487			60,934			134,801			812,383
Goodwill acquired	82,528		7,652			—			15,073			105,253
Impact of contribution of certain beauty schools(1)	13,829		13,071			(60,960		)	—			(34,060		)
Impact of contribution of European franchise salon operations(2)	—		(22,366		)	—			—			(22,366		)
Translation rate adjustments	2,281		3,617			26			—			5,924
Adjustment related to FIN No. 48(3)	—		—			—			3,859			3,859
Balance at June 30, 2008	$	668,799	$	48,461		$	—		$	153,733		$	870,993

(1)On August 1, 2007 the Company contributed its accredited cosmetology schools to Empire Education Group, Inc. The Company retained ownership of its one North American and four United Kingdom Sassoon schools. Subsequent to August 1, 2007 results of operations and assets for the Sassoon schools are included in the respective North American and international salon segments.

(2)On January 31, 2008 the Company merged its continental European franchise salon operations with the Franck Provost Salon Group.(2)

(3)Related to FIN No. 48, the Company recorded a $3.9 million adjustment to goodwill to account for preacquisition tax positions at the Company’s hair restoration centers segment.

The majority of the purchase price in salon acquisitions is accounted for as residual goodwill rather than identifiable intangible assets. This stems from the value associated with the walk-in customer base of the acquired salons, which is not recorded as an identifiable intangible asset under current accounting guidance, as well as the limited value and customer preference associated with the acquired hair salon brand. Key factors considered by consumers of hair salon services include personal relationships with individual stylists, service quality and price point competitiveness. These attributes represent the “going concern” value of the salon.

Residual goodwill further represents the Company’s opportunity to strategically combine the acquired business with the Company’s existing structure to serve a greater number of customers through its expansion strategies. In the acquisitions of international salons and hair restoration centers, the residual goodwill primarily represents the growth prospects that are

not captured as part of acquired tangible or identified intangible assets. Generally, the goodwill recognized in the North American salon transactions is expected to be fully deductible for tax purposes and the goodwill recognized in the international salon transactions is non-deductible for tax purposes. Goodwill generated in certain acquisitions, such as the acquisition of hair restoration centers, is not deductible for tax purposes due to the acquisition structure of the transaction.

During fiscal years 2008 and 2007, the Company purchased salon operations from its franchisees. The Company evaluated the effective settlement of the preexisting franchise contracts and associated rights afforded by those contracts in accordance with Emerging Issues Task Force (EITF) No. 04-1, Accounting for Preexisting Relationships Between the Parties to a Business Combination. The Company determined that the effective settlement of the preexisting franchise contracts at the date of the acquisition did not result in a gain or loss, as the agreements were neither favorable nor unfavorable when compared to similar current market transactions, and no settlement provisions exist in the preexisting contracts. Therefore, no settlement gain or loss was recognized with respect to the Company’s franchise buybacks.

Investment in Affiliates and Loans

The table below presents the carrying amount of investments in affiliates as of June 30, 2008 and 2007:

	Provalliance			Empire Education Group, Inc.			Intelligent Nutrients, LLC			MY Style(1)			PureBeauty/ BeautyFirst(2)			Total
	(Dollars in thousands)
Balance at June 30, 2007	$	—		$	—		$	8,114		$	8,080		$	4,019		$	20,213
Investment acquired	109,915			72,337			—			—			—			182,252
Acquisition of remaining interest	—			—			—			—			(3,883		)	(3,883		)
Equity in income (loss) of affiliated companies, net of income taxes	1,767			802			(1,584		)	—			(136		)	849
Other, primarily translation rate adjustments	7,671			(232		)	(873		)	(2,291		)	—			4,275
Balance at June 30, 2008	$	119,353		$	72,907		$	5,657		$	5,789		$	—		$	203,706
Percentage ownership at June 30, 2008	30.0		%	55.1		%	49.0		%	14.8		%

(1)MyStyle is a cost method investment, therefore the Company does not record its portion of MY Style’s earnings or losses.

(2)In February 2008, the Company acquired 100% interest in this entity and no longer accounts PureBeauty as an equity method investment.  This entity was included in the sale of Trade Secret on February 16, 2009.

The table below presents the summarized financial information of the equity method investees as of June 30, 2008 and 2007.

	Equity Method Investee Greater Than 50% Owned				Equity Method Investees Less Than 50% Owned
	2008		2007(1)		2008		2007(1)
	(Dollars in thousands)
Summarized Balance Sheet Information:
Current assets	$	23,559	$	—	$	76,360	$	8,395
Noncurrent assets	89,964		—		222,235		2,711
Current liabilities	19,924		—		74,548		263
Noncurrent liabilities	38,457		—		47,832		—
Summarized Statement of Operations Information:
Gross revenue	$	119,076	$	—	$	153,426	$	2,269
Gross profit	105,946		—		52,538		1,279
Operating income (loss)	4,322		—		6,655		(2,818		)
Net income (loss)	1,725		—		1,962		(2,671		)

(1)The Company did not have ownership interest in Provalliance and Empire Education Group as of June 30, 2007.

As of June 30, 2006, the Company did not maintain an interest in any equity method investees.

Investment in Provalliance

On January 31, 2008, the Company merged its continental European franchise salon operations with the operations of the Franck Provost Salon Group in exchange for a 30.0 percent equity interest in the newly formed Provalliance entity (Provalliance). The merger with the operations of the Franck Provost Salon Group which are also located in continental Europe, created Europe’s largest salon operator with approximately 2,300 company-owned and franchise salons as of June 30, 2008.

The carrying value of the contributed European franchise salon operations approximated the estimated fair value of the Company’s interest in Provalliance. The Company’s net asset value in its European franchise salon operations as of January 31, 2008 was recorded as an investment in Provalliance and no gain or loss was recognized on the date of the merger.

The merger agreement contains a right (Equity Put) to require the Company to purchase additional ownership interest in or all of Provalliance between specified dates in 2010 to 2018. The acquisition price is determined based on a multiple of the earnings before interest, taxes, depreciation and amortization of Provalliance for a trailing twelve month period which is intended to approximate fair value. The estimated fair value of this Equity Put has been included as a component of the Company’s investment in Provalliance with a corresponding liability for the same amount. If the Equity Put is exercised, and the Company fails to complete the purchase, the parties exercising the Equity Put will be entitled to exercise various remedies against the Company, including the right to purchase the Company’s interest in Provalliance for a purchase price determined based on a discounted multiple of the earnings before interest and taxes of Provalliance for a trailing twelve month period. The merger agreement also contains an option (Equity Call) whereby the Company can acquire additional ownership interest in Provalliance between specific dates in 2018 to 2020 at an acquisition price determined consistent with the Equity Put. Any changes in the fair value of the Equity Put in future periods thereafter, will be recorded in the Company’s consolidated statement of operations.

The Company’s investment in Provalliance is accounted for under the equity method of accounting. During the period from the date of the merger on January 31, 2008 to June 30, 2008, the Company recorded $1.8 million of equity in income related to its investment in Provalliance. The exposure to loss related to the Company’s involvement with Provalliance is the carrying value of the investment and future changes in fair value of the Equity Put. As of June 30, 2008, the identifiable intangible assets of Provalliance resulting from the merger are based on preliminary estimates of fair value which are expected to be finalized by Provalliance during the Company’s 2009 fiscal year.

Investment in Empire Education Group, Inc.

On August 1, 2007, the Company contributed its 51 wholly-owned accredited cosmetology schools to Empire Education Group, Inc. (EEG) in exchange for a 49.0 percent equity interest in EEG. This transaction leverages EEG’s management expertise, while enabling the Company to maintain a vested interest in the beauty school industry. Once the integration of the Regis schools is complete, the Company expects to share in significant synergies and operating improvements. EEG operates 87 accredited cosmetology schools.

The carrying value of the contributed schools approximated the estimated fair value of the Company’s interest in EEG, resulting in no gain or loss on the date of contribution. The $40.5 million difference between the carrying amount and the Company’s underlying equity in net assets of EEG is related to the indefinite lived license and accreditation intangible assets and goodwill. The Company’s investment in EEG is accounted for under the equity method of accounting. Subsequent to August 1, 2007, the Company completed $25.0 million of loans and advances to EEG. In January 2008, the Company’s effective ownership interest increased to 55.1 percent related to the buyout of EEG’s equity interest shareholder. In connection with the buyout, the Company advanced EEG, an additional $21.4 million. Total outstanding debt was $36.4 million at June 30, 2008. The exposure to loss related to the Company’s involvement with EEG is the carrying value of the investment and the outstanding loans.

The Company will continue to account for the investment in EEG under the equity method of accounting as Empire Beauty School retains majority voting interest and has full responsibility for managing EEG. During the fiscal year ended June 30, 2008 the Company recorded $0.9 million of interest income related to the loans and advances. During the fiscal year ended June 30, 2008, the Company recorded $0.8 million of equity earnings related to its investment in EEG.

Investment in Intelligent Nutrients, LLC

The Company holds a 49.0 percent interest in Intelligent Nutrients, LLC. The Company’s ownership percentage decreased from 50.0 percent to 49.0 percent during the three months ended March 31, 2008 due to the issuance of additional shares by Intelligent Nutrients, LLC to the other investor. The Company is accounting for this investment under the equity method. Intelligent Nutrients, LLC currently carries a wide variety of organic, harmonically grown™ products, including dietary supplements, coffees, teas and aromatics. Additionally, a full line of professional hair care and personal care products is in development and is expected to be available in the fall of calendar year 2008. These products will be offered at the

Company’s corporate and franchise salons, and eventually in other independently owned salons. During the fiscal year ended June 30, 2008 the Company recorded $1.6 million of equity losses related to its investment in Intelligent Nutrients, LLC. The exposure to loss related to the Company’s involvement with Intelligent Nutrients, LLC is the carrying value of the investment. Subsequent to June 30, 2008, the Company completed $3.0 million of loans to Intelligent Nutrients, LLC.

Investment in MY Style

In April 2007, the Company purchased exchangeable notes issued by Yamano Holding Corporation and a loan obligation of a Yamano Holdings subsidiary, Beauty Plaza Co. Ltd., for an aggregate amount of 1.3 billion JPY ($11.3 million USD). A portion of the notes are exchangeable for approximately 14.8 percent of the outstanding shares of MY Style, a subsidiary of Yamano Holdings. The exchangeable portion of the notes is accounted for as a cost method investment. The notes, excluding the exchangeable portion are recorded in the condensed consolidated balance sheet as current assets and long-term assets of $3.9 and $2.0 million, respectively at June 30, 2008. The notes are due in May of fiscal years 2009 through 2013. The Company recorded $0.2 million in interest income related to the exchangeable notes and loan obligation during the fiscal year ended June 30, 2008. In connection with the purchase of the exchangeable notes and loan obligation, the parties also entered into an agreement with respect to their joint pursuit of opportunities relating to retail hair salons in Asia. The Company did not estimate the fair value of MY Style as of June 30, 2008 as there were no identified events or changes in circumstances that the Company was aware of that would have had a significant adverse affect on the fair value of MY Style.

Investment in Cameron Capital (PureBeauty and BeautyFirst)

On February 20, 2008, the Company acquired the capital stock of Cameron Capital I, Inc. (CCI), a wholly-owned subsidiary of Cameron Capital Investments, Inc. CCI owned and operated PureBeauty and BeautyFirst salons.  Prior to the acquisition, the Company held a 19.9 percent interest in the voting common stock of CCI which was accounted for under the equity method of accounting and had $10.0 million of long-term notes receivable under a credit agreement with the majority corporate investor in this privately held entity. The long-term notes receivable were incorporated as part of the purchase price of the acquisition.

The results of operations of CCI were included in the Trade Secret reporting unit within the Consolidated Statement of Operations since the date of acquisition.  On February 16, 2009, the Company sold Trade Secret, which included CCI.

Investment in Cool Cuts 4 Kids, Inc.

The Company holds an interest of less than 20 percent in the preferred stock of a privately held entity, Cool Cuts 4 Kids, Inc. This investment is accounted for under the cost method. During fiscal year 2006, the Company determined that its investment was impaired and recognized an impairment loss for the full carrying value of the investment. The Company’s securities purchase agreement contains a call provision, giving the Company the right of first refusal should the privately held entity receive a bona fide offer from another company, as well as the right to purchase all of the assets of the privately held entity during the period from April 1, 2008 to January 31, 2009 for a multiple of cash flow.

5. FINANCING ARRANGEMENTS

The Company’s long-term debt as of June 30, 2008 and 2007 consists of the following:

	Maturity Dates	Interest rate %		Amounts outstanding
	(fiscal year)	2008	2007	2008			2007
				(Dollars in thousands)
Senior term notes	2009 - 2018	4.65 - 8.39%	4.03 - 8.39%	$	580,514		$	515,578
Revolving credit facility	2010	3.02	6.50	139,100			147,800
Equipment and leasehold notes payable	2009 - 2011	8.07 - 8.97	7.55 - 8.67	36,093			35,885
Other notes payable	2009 - 2013	6.00 - 8.00	3.90 - 8.00	9,040			9,968
				764,747			709,231
Less current portion				(230,224		)	(223,352		)
Long-term portion				$	534,523		$	485,879

The debt agreements contain covenants, including limitations on incurrence of debt, granting of liens, investments, merger or consolidation, and transactions with affiliates. In addition, the Company must adhere to specified fixed charge

coverage and leverage ratios, as well as minimum net worth levels. Additional details are included below with the discussion of the specific categories of debt.

Aggregate maturities of long-term debt, including associated fair value hedge obligations of $0.3 million and capital lease obligations of $35.4 million at June 30, 2008, are as follows:

Fiscal year	(Dollars in thousands)
2009	$	230,224
2010	53,521
2011	91,790
2012	93,885
2013	123,898
Thereafter	171,429
	$	764,747

Senior Term Notes

Private Shelf Agreement

At June 30, 2008 and 2007, the Company had $255.2 and $189.7 million, respectively, in unsecured, fixed rate, senior term notes outstanding under a Private Shelf Agreement. The notes require quarterly payments, and final maturity dates range from July 2008 through December 2017. The interest rates on the notes range from 4.65 to 8.39 percent as of June 30, 2008 and 2007. In fiscal year 2008, we borrowed $125.0 million, and amended the fixed charge coverage ratio under our Private Shelf Agreement.

The Private Shelf Agreement includes financial covenants including debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratios, fixed charge coverage ratios and minimum net equity tests (as defined within the Private Shelf Agreement), as well as other customary terms and conditions. The maturity date for the debt may be accelerated upon the occurrence of various Events of Default, including breaches of the agreement, certain cross-default situations, certain bankruptcy related situations, and other customary events of default.

As a result of the fair value hedging activities discussed in Note 6 to the Consolidated Financial Statements, an adjustment of approximately $0.3 and $0.9 million was made to increase the carrying value of the Company’s long-term fixed rate debt at June 30, 2008 and 2007, respectively.

Private Placement Senior Term Notes

In fiscal year 2005, the Company issued $200.0 million of senior unsecured debt to approximately twenty purchasers via a private placement transaction pursuant to a Master Note Purchase Agreement. The placement was split into four tranches, with $100.0 million maturing March 31, 2013 and $100.0 million maturing March 31, 2015. Of the debt maturing in 2013, $30.0 million was issued as fixed rate debt with a rate of 4.97 percent. The remaining $70.0 million was issued as variable rate debt and is priced at 52 basis points over LIBOR. Of the $100.0 million of the debt maturing in 2015, $70.0 million was issued at a fixed rate of 5.20 percent, with the remaining $30.0 million issued as variable rate debt, priced at 55 basis points over LIBOR. All four tranches are non-amortizing and no principle payments are due until maturity. Interest payments are due semi-annually.

The Master Note Purchase Agreement includes financial covenants including debt to EBITDA ratios, fixed charge coverage ratios and minimum net equity tests (as defined within the Private Shelf Agreement), as well as other customary terms and conditions. The maturity date for the debt may be accelerated upon the occurrence of various Events of Default, including breaches of the agreement, certain cross- default situations, certain bankruptcy related situations, and other customary events of default.

During March of fiscal year 2002, the Company completed a $125.0 million private debt placement. Of this amount, $58.0 million was issued at a fixed coupon rate of 6.73 percent with a final maturity date of March 15, 2009 and $67.0 million was issued at a fixed coupon rate of 7.20 percent with a final maturity date of March 15, 2012. This private placement debt is unsecured and payments are due on a semi-annual basis. In anticipation of the new Master Note Purchase Agreement discussed above, the Company closed on the First Amendment to Note Purchase Agreement (related to this

private debt placement) in April 2005. The amendment modified certain financial covenants so that they would be more consistent with the financial covenants in the new Master Note Purchase Agreement.

Revolving Credit Facility

The Company has an unsecured $350.0 million revolving credit facility with rates tied to LIBOR plus 60.0 basis points. The revolving credit facility requires a quarterly facility fee on the average daily amount of the facility (whether used or unused) calculated at a rate of 15 basis points. Both the LIBOR credit spread and the facility fee are based on the Company’s debt-to-EBITDA ratio at the end of each fiscal quarter. The facility expires in July 2012.

On July 12, 2007, the Company amended its $350.0 revolving credit agreement. Among other changes, the ratio of earnings before interest, taxes, depreciation, amortization, and rent (EBITDAR), to fixed changes covenant was modified from a ratio of 1.65 on a rolling four quarter basis to a ratio of 1.50 on a rolling four quarter basis. The Company is in compliance with all covenants and other requirements of its credit agreements and senior notes. Additionally, the credit agreements do not include rating triggers or subjective clauses that would accelerate maturity dates.

The maturity date for the revolving credit facility may be accelerated upon the occurrence of various events of default, including breaches of the credit agreement, certain cross-default situations, certain bankruptcy related situations, and other customary events of default. The interest rates under the facility vary and are based on a bank’s reference rate, the federal funds rate and/or LIBOR, as applicable, and a leverage ratio for the Company determined by a formula tied to the Company’s debt and its adjusted income.

As of June 30, 2008 and 2007, the Company had outstanding borrowings under this facility of $139.1 and $147.8 million, respectively. Because the credit agreement provides for possible acceleration of the maturity date of the facility based on provisions that are not objectively determinable, the outstanding borrowings as of June 30, 2008 and 2007 are classified as part of the current portion of the Company’s long-term debt. Additionally, the Company had outstanding standby letters of credit under the facility of $31.7 million at June 30, 2008, primarily related to its self-insurance program. The Company had outstanding standby letters of credit under the facility of $54.6 million at June 30, 2007, primarily related to its self-insurance program and Department of Education requirements surrounding Title IV funding. Unused available credit under the facility at June 30, 2008 and 2007 was $179.2 and $147.6 million, respectively.

Equipment and Leasehold Notes Payable

The equipment and leasehold notes payable are primarily comprised of capital lease obligations which are payable in monthly installments through fiscal year 2011. The capital lease obligations are collateralized by the assets purchased under the agreement.

Other Notes Payable

Within other notes payable are mortgage notes for $4.9 and $7.2 million at June 30, 2008 and 2007, respectively, related to the Company’s distribution centers in Chattanooga, Tennessee and Salt Lake City, Utah. The note for the Salt Lake City distribution center is secured by that distribution center and the note for the Chattanooga distribution center is unsecured. Additionally, the Company had $4.1 and $2.8 million in unsecured outstanding notes at June 30, 2008 and 2007, respectively, related to debt assumed in acquisitions.

6. DERIVATIVE FINANCIAL INSTRUMENTS

The primary market risk exposure of the Company relates to changes in interest rates in connection with its debt, some of which bears interest at variable rates based on LIBOR plus an applicable borrowing margin. Additionally, the Company is exposed to foreign currency translation risk related to its net investments in its foreign subsidiaries and, to a lesser extent, foreign currency denominated transactions. The Company has established policies and procedures that govern the management of these exposures through the use of derivative financial instrument contracts. By policy, the Company does not enter into such contracts for the purpose of speculation.

The Company has established an interest rate management policy that attempts to minimize its overall cost of debt, while taking into consideration the earnings implications associated with the volatility of short-term interest rates. As part of this policy, the Company has elected to maintain a combination of variable and fixed rate debt. As of June 30, 2008 and 2007, the Company had the following outstanding debt balances:

	June 30,
	2008		2007
	(Dollars in thousands)
Fixed rate debt	$	525,647	$	461,431
Variable rate debt	239,100		247,800
	$	764,747	$	709,231

A one percent change in interest rates (including the impact of existing interest rate swap contracts) could impact the Company’s interest expense by approximately $1.9 million. To reduce the volatility associated with interest rate movements, the Company has entered into certain financial instruments discussed below:

Cash Flow Hedges:

Interest Rate Swaps

During the three months ended December 31, 2005, the Company entered into interest rate swap contracts that pay fixed rates of interest and receive variable rates of interest (based on the three-month LIBOR rate) on notional amounts of indebtedness of $35.0 and $15.0 million as of June 30, 2008, and mature in March 2013 and March 2015, respectively. These swaps were designated and are effective as cash flow hedges. These cash flow hedges were recorded at fair value within other noncurrent liabilities in the Consolidated Balance Sheet, with a corresponding offset in other comprehensive income within shareholders’ equity.

Forward Foreign Currency Contracts

On May 29, 2007, the Company entered into several forward foreign currency contracts to sell Canadian dollars and buy an aggregate of $16.9 million U.S. dollars, with maturation dates between June 2007 and May 2010. On February 1, 2006, the Company entered into several forward foreign currency contracts to sell Canadian dollars and buy an aggregate $15.8 million U.S. dollars, with maturation dates between July 2006 and May 2009. The purpose of the forward contracts is to protect against adverse movements in the Canadian dollar exchange rate. The contracts were designated and are effective as cash flow hedges of Canadian dollar denominated forecasted intercompany transactions related to monthly product shipments from the U.S. to Canadian salons. These cash flow hedges were recorded at fair value within other assets in the Consolidated Balance Sheet, with a corresponding offset in other comprehensive income within shareholders’ equity.

On January 3, 2007, the Company terminated its remaining Canadian forward foreign currency contracts entered into on February 1, 2006 having a $14.5 million notional amount. The termination resulted in a deferred gain of $0.4 million which is recorded in Accumulated Other Comprehensive Income (AOCI) in the Consolidated Balance Sheet, as the contracts hedged currency risk associated with a portion of the monthly forecasted intercompany foreign- currency-denominated transactions stemming from the forecasted monthly product shipments from the Company’s subsidiaries located in the Unites States to its Canadian subsidiaries. The deferred gain will be recorded into income through May 31, 2009 as the forecasted foreign currency transactions are recognized in earnings. Approximately $0.2 and $0.1 million of the deferred gain was amortized against cost of goods sold during fiscal years 2008 and 2007, respectively, resulting in a remaining deferred gain of $0.1 and $0.3 million in AOCI at June 30, 2008 and 2007.

When the inventory from the hedged forecasted transaction is sold to an external party by the salon and, therefore, impacts cost of goods sold in the Company’s Consolidated Statement of Operations, amounts are transferred out of AOCI to earnings. The Company uses an inventory turnover ratio (based on historical results) to estimate the timing of sales to an external third party. Therefore, amounts will be transferred from AOCI into earnings based on this inventory turnover ratio.

Financial Statement Impact of Cash Flow Hedges

The cumulative tax-effected net loss or gain is included within shareholders’ equity in the Consolidated Balance Sheet. At June 30, 2008, the cumulative tax-effected net loss recorded in AOCI related to the cash flow hedges was $2.2 million. At June 30, 2007 and 2006, the cumulative tax-effected net gain recorded in AOCI related to the cash flow hedges was, $1.7 and $1.9 million, respectively. The following table depicts the hedging activity in other comprehensive income related to the cash flow hedges for the years ended June 30, 2008, 2007 and 2006.

	2008			2007			2006
	(Dollars in thousands)
Tax-effected gain (loss) on cash flow hedges recorded in other comprehensive income:
Realized net (loss) gain transferred from other comprehensive income to earnings	$	(157	)	$	(190	)	$	50
Unrealized net (loss) gain from changes in fair value of cash flow hedges	(2,400		)	(1,030		)	1,416
	$	(2,557	)	$	(1,220	)	$	1,466

As of June 30, 2008, the Company estimates, based on current interest rates, that less than $0.6 million of tax-effected charges will be recorded in the Consolidated Statement of Operations during the next twelve months related to interest rate hedges. Additionally, based on current forward exchange rates, the Company estimates that approximately $0.1 million of tax-effected charges will be recorded in the Consolidated Statement of Operations in the next twelve months related to foreign currency hedges.

Fair Value Hedges:

The Company has interest rate swap contracts under which it pays variable rates of interest (based on the three-month LIBOR rate plus a credit spread) and receives fixed rates of interest on an aggregate $5.0 and $14.0 million notional amount at June 30, 2008 and 2007, respectively with a maturation date of July 2008. These swaps were designated as hedges of a portion of the Company’s senior term notes and are being accounted for as fair value hedges.

During fiscal year 2003, the Company terminated a portion of a $40.0 million notional interest rate swap contract. The remainder of this swap contract was terminated during the fourth quarter of fiscal year 2005. The terminations resulted in the Company realizing gains of $1.1 and $1.5 million during fiscal years 2005 and 2003, respectively, which are deferred in long-term debt in the Consolidated Balance Sheet and are being amortized against interest expense over the remaining life of the underlying debt that matures in July 2008. Approximately $0.5 million of the deferred gain was amortized against interest expense during fiscal years 2008, 2007 and 2006, respectively, resulting in a remaining deferred gain of $0.4 and $0.9 million in long-term debt at June 30, 2008 and 2007, respectively.

The Company’s outstanding fair value hedges are recorded at fair value within either other assets or other noncurrent liabilities (depending on whether the fair value adjustment is favorable or unfavorable) in the Consolidated Balance Sheet, with a corresponding cumulative adjustment to the underlying senior term note within long-term debt. This adjustment resulted in a decrease to the debt balance of less than $0.1 million for the years ended June 30, 2008, 2007, and 2006. No hedge ineffectiveness occurred during fiscal years 2008, 2007 or 2006. As a result, the fair value hedges did not have a net impact on earnings.

Hedge of Net Investments in Foreign Operations:

The Company has investments in foreign subsidiaries, and the net assets of these subsidiaries are exposed to exchange rate volatility. The Company frequently evaluates its foreign currency exchange risk by monitoring market data and external factors that may influence exchange rate fluctuations. As a result, the Company may engage in transactions involving various derivative instruments to hedge assets, liabilities and purchases denominated in foreign currencies.

During September 2006, the Company’s cross-currency swap (which had a notional amount of $21.3 million and hedged a portion of the Company’s net investment in its foreign operations) was settled, resulting in a cash outlay of $8.9 million. This cash outlay was recorded within investing activities within the Consolidated Statement of Cash Flows. The related cumulative tax-effected net loss of $7.9 million was recorded in accumulated other comprehensive income (AOCI) in fiscal year 2007. This amount will remain deferred within AOCI indefinitely, as the event which would trigger its release

from AOCI and recognition in earnings is the complete sale or liquidation of the Company’s international operations that the cross-currency swap hedged. The Company currently has no intent to sell or liquidate its interest in this portion of its business operations.

The Company’s cross-currency swap was recorded at fair value within other noncurrent liabilities in the Consolidated Balance Sheet at June 30, 2006 when the Company’s net investment in this derivative financial instrument was in a $9.4 million loss position based on its estimated fair value. The corresponding tax-effected offset was charged to the cumulative translation adjustment account, which is a component of AOCI set forth under the caption shareholders’ equity in the Consolidated Balance Sheet. The cumulative tax-effected net loss recorded in AOCI related to the cross-currency swap was $8.1 million at June 30, 2006. For the year ended June 30, 2006, $1.2 million of tax-effected loss related to this derivative was charged to the cumulative translation adjustment account.

7. COMMITMENTS AND CONTINGENCIES:

Operating Leases:

The Company is committed under long-term operating leases for the rental of most of its company-owned salon and hair restoration center locations. The original terms of the leases range from one to 20 years, with many leases renewable for an additional five to ten year term at the option of the Company, and certain leases include escalation provisions. For certain leases, the Company is required to pay additional rent based on a percent of sales in excess of a predetermined amount and, in most cases, real estate taxes and other expenses. Rent expense for the Company’s international department store salons is based primarily on a percent of sales.

The Company also leases the premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with the franchisees. These leases, generally with terms of approximately five years, are expected to be renewed on expiration. All additional lease costs are passed through to the franchisees.

During fiscal year 2005, the Company entered into a lease agreement for a 102,448 square foot building, located in Edina, Minnesota. The Company began to recognize rent expense related to this property during the three months ended September 30, 2005, which was the date that it obtained the legal right to use and control the property. The original lease term ends in 2016 and the aggregate amount of lease payments to be made over the remaining original lease term are approximately $8.7 million. The lease agreement includes an option to purchase the property or extend the original term for two successive periods of five years.

Rent expense in the Consolidated Statement of Operations excludes $29.9, $27.4 and $28.9 million in fiscal years 2008, 2007 and 2006, respectively, of rent expense on premises subleased to franchisees. These amounts are netted against the related rental income on the sublease arrangements with franchisees. In most cases, the amount of rental income related to sublease arrangements with franchisees approximates the amount of rent expense from the primary lease, thereby having no net impact on rent expense or net income. However, in limited cases, the Company charges a ten percent mark-up in its sublease arrangements. The net rental income resulting from such arrangements totaled $0.4, $0.5, and $0.5 million for fiscal years 2008, 2007 and 2006, respectively, and was classified in the royalties and fees caption of the Consolidated Statement of Operations.

Total rent expense, excluding rent expense on premises subleased to franchisees, includes the following:

	2008		2007		2006
	(Dollars in thousands)
Minimum rent	$	270,988	$	255,570	$	234,045
Percentage rent based on sales	15,715		16,060		14,718
Real estate taxes and other expenses	74,773		70,192		62,011
	$	361,476	$	341,822	$	310,774

As of June 30, 2008, future minimum lease payments (excluding percentage rents based on sales) due under existing noncancelable operating leases with remaining terms of greater than one year are as follows:

Fiscal year	Corporate leases		Franchisee leases
	(Dollars in thousands)
2009	$	280,767	$	46,208
2010	234,721		39,385
2011	182,244		30,615
2012	132,493		20,364
2013	90,529		10,997
Thereafter	157,726		9,203
Total minimum lease payments	$	1,078,480	$	156,772

Salon Development Program:

As a part of its salon development program, the Company continues to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations, and continues to enter into transactions to acquire established hair care salons.

Contingencies:

The Company is self-insured for most workers’ compensation, employment practice liability, and general liability. Worker’s compensation and general liability losses are subject to per occurrence and aggregate annual liability limitations. The Company is insured for losses in excess of these limitations. The Company is also self-insured for health care claims for eligible participating employees subject to certain deductibles and limitations. The Company determines its liability for claims incurred but not reported on an actuarial basis.

8. LITIGATION

The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with allegations of purported class-wide wage and hour violations. Litigation is inherently unpredictable and the outcome of these matters cannot presently be determined. Although company counsel believes that the Company has valid defenses in these matters, it could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.

9. INCOME TAXES

The components of income from continuing operations before income taxes and equity in income of affliated companies are as follows:

	2008		2007		2006
	(Dollars in thousands)
Income before income taxes:
United States	$	126,627	$	71,764	$	118,528
International	10,607		33,148		26,327
	$	137,234	$	104,912	$	144,855

The provision for income taxes consists of:

	2008			2007			2006
	(Dollars in thousands)
Current:
United States	$	53,694		$	37,192		$	41,542
International	4,262			5,153			2,795
Deferred:
United States	(4,674		)	(2,421		)	5,816
International	900			(2,751		)	1,799
	$	54,182		$	37,173		$	51,952

The provision for income taxes differs from the amount of income tax determined by applying the applicable United States (U.S.) statutory rate to earnings before income taxes, as a result of the following:

	2008		2007		2006
U.S. statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	5.7		1.7		2.4
Tax effect of goodwill impairment	—		5.1		—
Foreign income taxes at other than U.S. rates	(2.3	)	(3.6	)	(3.2	)
Work Opportunity and Welfare-to-Work Tax Credits	(2.0	)	(3.7	)	(0.4	)
Other, net	3.1		0.9		2.1
	39.5	%	35.4	%	35.9	%

The components of the net deferred tax assets and liabilities are as follows:

	2008			2007
	(Dollars in thousands)
Deferred tax assets:
Deferred rent	$	18,225		$	18,382
Payroll and payroll related costs	29,741			26,605
Net operating loss carryforwards	3,557			4,752
Reserve for impaired assets	8,951			5,328
Inventories	2,551			1,204
Deferred gift card revenue	1,789			1,788
Other	15,268			5,892
Total deferred tax assets	$	80,082		$	63,951
Deferred tax liabilities:
Insurance	$	—		$	(4,280	)
Depreciation and amortization	(114,912		)	(120,975		)
Accrued property taxes	(2,553		)	(2,617		)
Derivatives	(2,553		)	(583		)
Other	(10		)	(1,032		)
Total deferred tax liabilities	$	(120,028	)	$	(129,487	)
Net deferred tax liabilities	$	(39,946	)	$	(65,536	)

At June 30, 2008, the Company had U.S. and foreign operating loss carryforwards of approximately $10.0 million. During fiscal year 2008, approximately $5.6 million of the loss carryforwards related to French, Spanish and Polish tax losses were transferred in the merger with the Franck Provost Salon Group. The $10.0 million remainder of the loss carryforwards at June 30, 2008, relate to losses in the U.S. and Canada and expire in various amounts through 2028. The company expects to fully utilize all of these loss carryforwards.

As of June 30, 2008, undistributed earnings of international subsidiaries of approximately $49.1 million were considered to have been reinvested indefinitely and, accordingly, the Company has not provided United States income taxes on such earnings.

The Company files tax returns and pays tax primarily in the United States, Canada, the United Kingdom, and the Netherlands as well as states, cities, and provinces within these jurisdictions. In the United States, fiscal years 2005 and after remain open for federal tax audit. For state tax audits, the statute of limitations generally spans three to four years, resulting in a number of states remaining open for tax audits dating back to fiscal year 2004. However, the company is under audit in a number of states in which the statute of limitations has been extended to fiscal years 2000 and forward. Internationally (including Canada), the statute of limitations for tax audits varies by jurisdiction, but generally ranges from three to five years.

The Company adopted the provisions of FIN No. 48, Accounting for Uncertainity in Income Taxes, effective July 1, 2007. Immediately prior to the adoption of FIN No. 48, the Company’s tax reserves were $9.0 million. As a result of the adoption of FIN No. 48, the Company recognized a $20.7 million increase in the liability for unrecognized income tax benefits, including interest and penalties, which was accounted for through the following accounts:

	(Dollars in thousands)
Deferred income taxes	$	10,128
Goodwill	6,094
Additional paid-in capital	237
Retained earnings	4,237
Total increase	$	20,696

A rollforward of the unrecognized tax benefits is as follows:

	(Dollars in thousands)
Balance at July 1, 2007	$	22,500
Additions based on tax positions related to the current year	2,466
Additions based on tax positions of prior years	1,498
Reductions on tax positions related to the expiration of the statueof limitations	(5,446		)
Settlements	(618		)
Balance at June 30, 2008	$	20,400

If the Company were to prevail on all unrecognized tax benefits recorded, approximately $7.2 million of the $20.4 million reserve would benefit the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. During the year ended June 30, 2008, we recorded income expense of approximately $3.0 million for the accrual of interest and penalties. As of June 30, 2008, the Company had accrued interest and penalties related to unrecognized tax benefits of $7.2 million. This amount is not included in the gross unrecognized tax benefits noted above.

It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of our unrecognized tax positions will increase or decrease during the next twelve months; however, we do not expect the change to have a significant effect on our results of operations or our financial position.

10. BENEFIT PLANS

Profit Sharing Plan:

Prior to March 1, 2007, the Company maintained a Profit Sharing Plan (the Profit Sharing Plan) which covered substantially all non-highly compensated field supervisors, warehouse and corporate office employees. The Profit Sharing Plan was a defined contribution plan and contributions to it were at the discretion of the Company. Contributions were invested in a broad range of securities. Effective January 1, 2007, the vesting provisions of the Profit Sharing Plan were amended to comply with the accelerated vesting requirements required by the Pension Protection Act of 2006. Under the amended Profit Sharing Plan, participants’ interest in the Profit Sharing Plan become 20.0 percent vested after completing two years of service with vesting increasing 20.0 percent for each additional year of service, and with participants becoming fully vested after six full years of service.

On March 1, 2007, the Profit Sharing Plan was merged into the Company’s defined contribution 401(k) plan, the Regis Retirement Savings Plan (the RRSP). The RRSP is a 401(k) plan sponsored by the Company that resulted from the merger of four separate 401(k) plans previously maintained by the Company. In conjunction with the merger of the Profit Sharing Plan into the RRSP, the Profit Sharing Plan’s investments were liquidated and the proceeds were transferred and invested as directed by plan participants and are valued daily. The nature and terms of each 401(k) plan and of the Profit Sharing Plan did not change significantly in connection with the merger into the RRSP; the mergers did not affect participation in the RRSP, the account balances of plan participants in each respective plan, or the right to share in future profit sharing contributions to the plan.

Executive Profit Sharing Plan:

Prior to March 1, 2007, the Company maintained a nonqualified Profit Sharing Plan (the Executive Profit Sharing Plan) which covered company officers, field supervisors, warehouse and corporate office employees who were highly compensated. Contributions to the Executive Profit Sharing Plan were at the discretion of the Company. Prior to January 22, 2002, such contributions were invested in common stock of the Company. Subsequent to that date contributions were invested in a broad range of securities, including common stock of the Company. The investments other than Company common stock were in a pooled trust that was valued monthly. Investments in Company common stock were separately credited to participant accounts.

On March 1, 2007, the Executive Profit Sharing Plan was merged into the Company’s Nonqualified Deferred Salary Plan (as combined, the Executive Plan). Amounts received attributable to participant accounts in the Executive Profit Sharing Plan and all future profit sharing contributions under the Executive Plan are invested as directed by plan participants and are valued daily. Future profit sharing contributions to the Executive Plan will not be invested in common stock of the Company. The merger did not affect participation in the profit sharing portion of the Executive Plan, the profit sharing account balances of Executive Plan participants, or the right to share in future profit sharing contributions to participants’ Executive Plan accounts.

Stock Purchase Plan:

The Company has an employee stock purchase plan (ESPP) available to substantially all employees. Under the terms of the ESPP, eligible employees may purchase the Company’s common stock through payroll deductions. The Company contributes an amount equal to 15.0 percent of the purchase price of the stock to be purchased on the open market and pays all expenses of the ESPP and its administration, not to exceed an aggregate contribution of $10.0 million. As of June 30, 2008, the Company’s cumulative contributions to the ESPP totaled $6.8 million.

Franchise Stock Purchase Plan:

The Company has a franchise stock purchase plan (FSPP) available to substantially all franchisee employees. Under the terms of the plan, eligible franchisees and their employees may purchase the Company’s common stock. The Company contributes an amount equal to five percent of the purchase price of the stock to be purchased on the open market and pays all expenses of the plan and its administration, not to exceed an aggregate contribution of $0.7 million. As of June 30, 2008, the Company’s cumulative contributions to the FSPP totaled $0.1 million.

Deferred Compensation Contracts:

The Company has agreed to pay the Chief Executive Officer, commencing upon his retirement, an amount equal to 60 percent of his salary, adjusted for inflation, for the remainder of his life. Additionally, the Company has a survivor benefit plan payable upon his death at a rate of one half of his deferred compensation benefit, adjusted for inflation, for the remaining life of his spouse. In addition, the Company has other unfunded deferred compensation contracts covering key executives within the Company. The key executives’ benefits are based on years of service and the employee’s compensation prior to departure. The Company utilizes a June 30 measurement date for these deferred compensation contracts, a discount rate based on the Aa Bond index rate (6.50 and 6.25 percent at June 30, 2008 and 2007, respectively) and projected salary increases of 4.0 percent at June 30, 2008 and 2007 to estimate the obligations associated with these deferred compensation contracts. Compensation associated with these agreements is charged to expense as services are provided. Associated costs included in general and administrative expenses on the Consolidated Statement of Operations totaled $2.4, $4.0, and $2.4 million for fiscal years 2008, 2007, and 2006, respectively. Related obligations totaled $19.9 and $17.9 million at June 30, 2008 and 2007, respectively, and are included in other noncurrent liabilities in the Consolidated Balance Sheet. (The accumulated benefit obligation totaled $15.2 and $14.4 million at June 30, 2008 and 2007, respectively.) The tax-effected accumulated other comprehensive gain for the deferred compensation contracts, consisting of primarily unrecognized

actuarial gains, was $0.3 million at June 30, 2008. The Company intends to fund its future obligations under these arrangements through company-owned life insurance policies on the participants. Cash values of these policies totaled $16.4 and $14.1 million at June 30, 2008 and 2007, respectively, and are included in other assets in the Consolidated Balance Sheet.

The Company also has entered into an Amended and Restated Compensation Agreement (the Restated Agreement) with the Vice Chairman of the Board of Directors (the Vice Chairman) during fiscal year 2007, that replaces the prior compensation agreement between the Company and the Vice Chairman. Under the Restated Agreement, the Vice Chairman will continue to provide services to the Company and the Company has agreed to pay the Vice Chairman an annual amount of $0.6 million, adjusted for inflation to $0.8 million in fiscal year 2008, for the remainder of his life (this amount remains unchanged from the prior agreement in place with the Vice Chairman). The Vice Chairman has agreed that during the period in which payments are made, as provided in the agreement, he will not engage in any business competitive with the business conducted by the Company. Additionally, the Company has a survivor benefit plan for the Vice Chairman’s spouse, payable upon his death, at a rate of one half of his deferred compensation benefit, adjusted for inflation, for the remaining life of his spouse. Estimated associated costs included in general and administrative expenses on the Consolidated Statement of Operations totaled $0.7, $2.1 and $0.3 million for each of fiscal years 2008, 2007 and 2006, respectively. Related obligations totaled $6.5 and $6.6 million at June 30, 2008 and 2007, respectively, and are included in other noncurrent liabilities in the Consolidated Balance Sheet. The Company intends to fund all future obligations under this agreement through company-owned life insurance policies on the Vice Chairman. Cash values of these policies totaled $3.4 and $3.1 million at June 30, 2008 and 2007, respectively, and are included in other assets in the Consolidated Balance Sheet. The policy death benefits exceed the obligations under this agreement.

In September 2006, the FASB issued SFAS No. 158. SFAS No. 158 amends SFAS No. 87, Employers’ Accounting for Pensions (SFAS No. 87), SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination Benefits (SFAS No. 88), SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (SFAS No. 106) and SFAS No. 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits (SFAS No. 132(R)). SFAS No. 158 requires balance sheet recognition of the funded status for all pension and postretirement benefit plans as of the Company’s fiscal year ended June 30, 2007. SFAS No. 158 requires the impact of the initial adjustment be recorded as an adjustment of the ending balance of accumulated other comprehensive income. Subsequent changes in funded status will be recognized as a component of other comprehensive income to the extent they have not yet been recognized as a component of net periodic benefit cost pursuant to SFAS No. 87, SFAS No. 88 or SFAS No. 106. The Company has unfunded deferred compensation contracts covering key executives based on their accomplishments within the Company which are subject to the provisions of SFAS No. 158. The Company adopted the provisions of SFAS No. 158 as of June 30, 2007. The adoption of SFAS No. 158 increased long-term liabilities by $0.9 million, increased deferred tax assets by $0.3 million and decreased accumulated other comprehensive income by $0.6 million on the Consolidated Balance Sheet. For the year ended June 30, 2008, an adjustment to the impact of the adoption of SFAS No. 158 decreased long-term liabilities by $1.3 million, increased deferred tax liabilities by $0.5 million and increased accumulated other comprehensive income by $0.8 million.

Compensation expense included in income before income taxes related to the aforementioned plans, excluding amounts paid for expenses and administration of the plans, for the three years ended June 30, 2008, 2007 and 2006, included the following:

	2008		2007		2006
	(Dollars in thousands)
Profit sharing plan	$	3,373	$	3,305	$	2,650
Executive Profit Sharing Plan	497		491		389
ESPP	711		714		689
FSPP	18		11		16
Deferred compensation contracts	3,122		6,107		2,755

11. SHAREHOLDERS’ EQUITY

Net Income Per Share:

The Company’s basic earnings per share is calculated as net income divided by weighted average common shares outstanding, excluding unvested outstanding RSAs and RSUs. The Company’s dilutive earnings per share is calculated as net

income divided by weighted average common shares and common share equivalents outstanding, which includes shares issuable under the Company’s stock option plan and long-term incentive plan, shares issuable under contingent stock agreements, and dilutive securities. Stock-based awards with exercise prices greater than the average market value of the Company’s common stock are excluded from the computation of diluted earnings per share.

The following table sets forth a reconciliation of shares used in the computation of basic and diluted earnings per share:

	2008	2007	2006
	(Shares in thousands)
Weighted average shares for basic earnings per share	43,157	44,723	45,168
Effect of dilutive securities:
Dilutive effect of stock-based compensation	430	844	1,076
Contingent shares issuable under contingent stock agreements	—	56	156
Weighted average shares for diluted earnings per share	43,587	45,623	46,400

The following table sets forth the awards which are excluded from the various earnings per share calculations:

	2008	2007	2006
	(Shares in thousands)
Basic earnings per share:
RSAs(1)	308	259	193
RSUs(1)	215	215	—
	523	474	193
Diluted earnings per share:
Stock options(2)	517	492	436
SARs(2)	416	405	96
RSA(1)	183	—	—
RSU(1)	215	—	—
	1,331	897	532

(1)Awards were not vested

(2)Awards were anti-dilutive

Stock-based Compensation Award Plans:

In May of 2004, the Company’s Board of Directors approved the 2004 Long Term Incentive Plan (2004 Plan). The 2004 Plan received shareholder approval at the annual shareholders’ meeting held on October 28, 2004. The 2004 Plan provides for the granting of stock options, equity-based stock appreciation rights (SARs) and restricted stock, as well as cash-based performance grants, to employees and directors of the Company. On March 8, 2007, the Company’s Board of Directors approved an amendment to the 2004 Plan to permit the granting and issuance of restricted stock units (RSUs). The 2004 Plan expires on May 26, 2014. A maximum of 2,500,000 shares of the Company’s common stock are available for issuance pursuant to grants and awards made under the 2004 Plan. Stock options, SARs and restricted stock under the 2004 Plan generally vest pro rata over five years and have a maximum term of ten years. The cash-based performance grants will be tied to the achievement of certain performance goals during a specified performance period, not less than one fiscal year in length. The RSUs cliff vest after five years and payment of the RSUs is deferred until January 31 of the year following vesting. Unvested awards are subject to forfeiture in the event of termination of employment. See Note 1 to the Consolidated Financial Statements for discussion of the Company’s measure of compensation cost for its incentive stock plans, as well as an estimate of future compensation expense related to these awards.

On October 24, 2000, the shareholders of Regis Corporation adopted the Regis Corporation 2000 Stock Option Plan (2000 Plan), which allows the Company to grant both incentive and nonqualified stock options and replaced the Company’s 1991 Stock Option Plan (1991 Plan). Total options covering 3,500,000 shares of common stock may be granted under the 2000 Plan to employees of the Company for a term not to exceed ten years from the date of grant. The term may not exceed five years for incentive stock options granted to employees of the Company possessing more than ten percent of the total combined voting power of all classes of stock of the Company or any subsidiary of the Company. Options may also be

granted to the Company’s outside directors for a term not to exceed ten years from the grant date. The 2000 Plan contains restrictions on transferability, time of exercise, exercise price and on disposition of any shares acquired through exercise of the options. Stock options are granted at not less than fair market value on the date of grant. The Board of Directors determines the 2000 Plan participants and establishes the terms and conditions of each option.

The Company also has outstanding stock options under the 1991 Plan, although the Plan terminated in 2001. The terms and conditions of the 1991 Plan are similar to the 2000 Plan. Total options covering 5,200,000 shares of common stock were available for grant under the 1991 Plan and, as of June 30, 2001, all available shares were granted.

Common shares available for grant under the following plans as of June 30 were:

	2008	2007	2006
	(Shares in thousands)
2000 Plan	136	136	250
2004 Plan	1,459	1,748	1,971
	1,595	1,884	2,221

Stock options outstanding, weighted average exercise prices and weighted average fair values were as follows:

	Options Outstanding
	Shares		Weighted Average Exercise Price
	(in thousands)
Balance, June 30, 2005	3,673		$	19.43
Granted	135		35.33
Cancelled	(48	)	26.95
Exercised	(852	)	17.02
Balance, June 30, 2006	2,908		20.59
Granted	141		39.04
Cancelled	(27	)	27.06
Exercised	(829	)	17.22
Balance, June 30, 2007	2,193		22.97
Granted	143		28.57
Cancelled	(97	)	34.17
Exercised	(526	)	16.91
Balance, June 30, 2008	1,713		24.55
Exercisable at June 30, 2008	1,344		$	21.94

Outstanding options of 1,713,244 at June 30, 2008 had an intrinsic value of $8.9 million and a weighted average remaining contractual term of 4.3 years. Exercisable options of 1,343,744 at June 30, 2008 had an intrinsic value of $8.9 million and a weighted average remaining contractual term of 3.2 years. An additional 347,224 options are expected to vest with a $34.12 per share weighted average exercise price and a weighted average remaining contractual life of 8.6 years that have a total intrinsic value of zero.

All options granted relate to stock option plans that have been approved by the shareholders of the Company. Stock options granted in fiscal year 2008 were granted under the 2004 Plan. Stock options granted in fiscal year 2007 and 2006 were granted under the 2000 Plan.

Grants of RSAs, RSUs and SARs outstanding under the 2004 Plan, as well as other relevant terms of the awards, were as follows:

	Nonvested				SARs Outstanding
	Restricted Stock Outstanding Shares/Units		Weighted Average Grant Date Fair Value		Shares		Weighted Average Exercise Price
	(in thousands)				(in thousands)
Balance, June 30, 2005	142		$	38.40	197		$	39.16
Granted	86		35.33		97		35.33
Cancelled	(3	)	39.59		(3	)	39.98
Vested/Exercised	(32	)	38.67		(5	)	40.31
Balance, June 30, 2006	193		36.92		286		36.87
Granted	343		40.07		139		39.01
Cancelled	(21	)	37.84		(23	)	38.41
Vested/Exercised	(41	)	37.33		(2	)	37.92
Balance, June 30, 2007	474		38.36		400		37.53
Granted	125		28.57		138		28.57
Cancelled	(10	)	37.71		(11	)	38.53
Vested/Exercised	(66	)	38.05		—		—
Balance, June 30, 2008	523		36.76		527		35.70
Exercisable at June 30, 2008					182		$	38.73

Outstanding and unvested RSAs of 308,325 at June 30, 2008 had an intrinsic value of $8.1 million and a weighted average remaining contractual term of 2.3 years. An additional 293,802 awards are expected to vest with a total intrinsic value of $7.7 million.

Outstanding SARs of 527,300 at June 30, 2008 had a total intrinsic value of zero and a weighted average remaining contractual term of 6.8 years. Exercisable SARs of 181,820 at June 30, 2008 had a total intrinsic value of zero and a weighted average contractual term of 7.0 years. An additional 332,306 rights are expected to vest with a $34.00 per share weighted average grant price, a weighted average remaining contractual life of 6.7 years and a total intrinsic value of zero.

Total cash received from the exercise of share-based instruments in fiscal years 2008 and 2007 was $8.9 and $16.8 million, respectively.

As of June 30, 2008, the total unrecognized compensation cost related to all unvested stock-based compensation arrangements was $23.9 million. The related weighted average period over which such cost is expected to be recognized was approximately 3.7 years as of June 30, 2008.

The total intrinsic value of all stock-based compensation (the amount by which the stock exceeded the exercise or grant date price) that was exercised during fiscal years 2008, 2007 and 2006 was $7.3, $17.7 and $18.4 million, respectively.

Using the fair value of each grant on the date of grant, the weighted average fair values per stock-based compensation award granted during fiscal years 2008, 2007 and 2006 were as follows:

	2008		2007		2006
Stock options	$	8.60	$	12.38	$	11.43
SARs	8.60		12.37		11.43
Restricted stock awards	28.57		39.01		35.33
Restricted stock units	—		40.70		—

The expense associated with the RSA and RSU grants is based on the market price of the Company’s stock at the date of grant. The significant assumptions used in determining the underlying fair value on the date of grant of each stock option and SAR grant issued during the fiscal years 2008, 2007 and 2006 is presented below:

	2008		2007		2006
Risk-free interest rate	3.29	%	4.55	%	4.96	%
Expected term (in years)	5.50		5.50		5.50
Expected volatility	28.00	%	27.00	%	27.00	%
Expected dividend yield	0.56	%	0.41	%	0.45	%

The risk free rate of return is determined based on the U.S. Treasury rates approximating the expected life of the options and SARs granted. Expected volatility is established based on historical volatility of the Company’s stock price. Estimated expected life was based on an analysis of historical stock options granted data which included analyzing grant activity including grants exercised, expired, and canceled. The expected dividend yield is determined based on the Company’s annual dividend amount as a percentage of the strike price at the time of the grant. The Company uses historical data to estimate pre-vesting forfeiture rates.

Compensation expense included in income before income taxes related to stock- based compensation was $6.8, $4.9 and $4.9 million for the three years ended June 30, 2008, 2007, and 2006, respectively.

See Note 1 to the Consolidated Financial Statements for discussion of the Company’s measure of compensation cost for its stock-based compensation awards.

Authorized Shares and Designation of Preferred Class:

The Company has 100 million shares of capital stock authorized, par value $0.05, of which all outstanding shares, and shares available under the Stock Option Plans, have been designated as common.

In addition, 250,000 shares of authorized capital stock have been designated as Series A Junior Participating Preferred Stock (preferred stock). None of the preferred stock has been issued.

Shareholders’ Rights Plan:

The Company has a shareholders’ rights plan pursuant to which one preferred share purchase right is held by shareholders for each outstanding share of common stock. The rights become exercisable only following the acquisition by a person or group, without the prior consent of the Board of Directors, of 15.0 percent or more of the Company’s voting stock, or following the announcement of a tender offer or exchange offer to acquire an interest of 15.0 percent or more. If the rights become exercisable, they entitle all holders, except the takeover bidder, to purchase one one-thousandth of a share of preferred stock at an exercise price of $140, subject to adjustment, or in lieu of purchasing the preferred stock, to purchase for the same exercise price common stock of the Company (or in certain cases common stock of an acquiring company) having a market value of twice the exercise price of a right.

Share Repurchase Program:

In May 2000, the Company’s Board of Directors (BOD) approved a stock repurchase program. Originally, the program authorized up to $50.0 million to be expended for the repurchase of the Company’s stock. The BOD elected to increase this maximum to $100.0 million in August 2003, to $200.0 million on May 3, 2005, and to $300.0 million on April 26, 2007. The timing and amounts of any repurchases will depend on many factors, including the market price of the common stock and overall market conditions. Historically, the repurchases to date have been made primarily to eliminate the dilutive effect of shares issued in conjunction with acquisitions, restricted stock grants and stock option exercises. All repurchased shares become authorized but unissued shares of the Company. This repurchase program has no stated expiration date. As of June 30, 2008, 2007, and 2006, a total accumulated 6.8, 5.1, and 3.0 million shares have been repurchased for $226.5, $176.5, and $96.8 million, respectively. As of June 30, 2008, $73.5 million remains to be spent on share repurchases under this program.

12. SEGMENT INFORMATION

As of June 30, 2008, the Company owned, franchised or held ownership interests in over 13,550 worldwide locations. The Company’s locations consisted of 10,273 North American salons (located in the United States, Canada and Puerto Rico), 472 international salons, 92 hair restoration centers, and 2,714 locations in which the Company maintains an ownership interest through its investments in affiliates.

See Note 2 of the Consolidated Financial Statements on the classification of the Trade Secret salon concept as a discontinued operation.  The locations listed above include 672 company-owned salons and 63 franchised North American salons (located within the United States, Canada, and Puerto Rico) that are within the Trade Secret concept being accounted for as a discontinued operation.

The Company operates its North American salon operations through five primary concepts: Regis Salons, MasterCuts, SmartStyle and Supercuts and Promenade salons. The concepts offer similar products and services, concentrate on the mass market consumer marketplace and have consistent distribution channels. All of the company-owned and franchise salons within the North American salon concepts are located in high traffic, retail shopping locations that attract mass market consumers, and the individual salons display similar long-term economic characteristics. The salons share interdependencies and a common support base. The Company’s hair restoration centers are located in the United States and Canada.

The Company operates its international salon operations, primarily in the United Kingdom, through three primary concepts: Regis, Supercuts, and Sassoon salons. Consistent with the North American concepts, the international concepts offer similar products and services, concentrate on the mass market consumer marketplace and have consistent distribution channels. All of the international salon concepts are company-owned and are located in malls, leading department stores, mass market consumers, and the individual salons display similar long-term economic characteristics. The salons share interdependencies and a common support base.

The Company’s hair restoration centers are located in the United States and Canada.

The Company’s equity method investments of $197.9 million and $12.1 million as of June 30, 2008 and 2007, respectively, are considered part of the unallocated corporate segment.

Based on the way the Company manages its business, it has reported its North American salons, international salons, and hair restoration centers as three separate reportable operating segments.

The accounting policies of the reportable operating segments are the same as those described in Note 1 to the Consolidated Financial Statements. Corporate assets detailed below are primarily comprised of property and equipment associated with the Company’s headquarters and distribution centers, corporate cash, inventories located at corporate distribution centers, deferred income taxes, franchise receivables and other corporate assets. Intersegment sales and transfers are not significant. Summarized financial information concerning the Company’s reportable operating segments is shown in the following table as of June 30, 2008, 2007, and 2006:

	For the Year Ended June 30, 2008(1)(2)
	Salons				Hair Restoration		Unallocated
	North America		International		Centers		Corporate			Consolidated
	(Dollars in thousands)
Revenues:
Service	$	1,635,238	$	165,379	$	61,873	$	—		$	1,862,490
Product	414,909		67,078		69,299		—			551,286
Royalties and fees	39,599		23,606		4,410		—			67,615
	2,089,746		256,063		135,582		—			2,481,391
Operating expenses:
Cost of service	939,242		89,617		33,700		—			1,062,559
Cost of product	208,705		35,702		19,984		—			264,391
Site operating expenses	165,185		14,410		5,174		—			184,769
General and administrative	121,345		37,143		30,941		132,134			321,563
Rent	295,659		56,571		7,313		1,933			361,476
Depreciation and amortization	73,755		10,969		10,289		18,280			113,293
Total operating expenses	1,803,891		244,412		107,401		152,347			2,308,051
Operating income (loss)	285,855		11,651		28,181		(152,347		)	173,340
Other income (expense):
Interest expense	—		—		—		(44,279		)	(44,279		)
Interest income and other, net	—		—		—		8,173			8,173
Income (loss) from continuing operations before income taxes and equity in income of affiliated companies	$	285,855	$	11,651	$	28,181	$	(188,453	)	$	137,234
Total assets	$	1,249,827	$	120,443	$	284,898	$	580,703		$	2,235,871
Long-lived assets	355,287		35,902		11,616		79,046			481,851
Capital expenditures	51,057		10,624		4,191		19,927			85,799
Purchases of salon assets	119,822		6,719		19,036		—			145,577

(1)	On August 1, 2007, the Company contributed its accredited cosmetology schools to Empire Education Group, Inc. For the year ended June 30, 2008 the results of operations for the month ended July 31, 2007 for the accredited cosmetology schools are reported in the North American salons segment. The Company retained ownership of its one North American and four United Kingdom Sassoon schools. Subsequent to August 1, 2007 results of operations for the Sassoon schools are included in their respective North American and international salon segments.
	On January 31, 2008, the Company merged its continental European franchise salon operations with the Franck Provost Salon Group. For the year ended June 30, 2008 the results of operations for the seven months ended January 31, 2008 are reported in the international salon segment.
(2)	Beginning with the period ended December 31, 2008, the operations of Trade Secret concept within the North American reportable segment were accounted for as a discontinued operation. All comparable periods will reflect Trade Secret as a discontinued operation. See further discussion at Note 2 to the Condensed Consolidated Financial Statements.

	For the Year Ended June 30, 2007 (1)
	Salons				Beauty			Hair Restoration		Unallocated
	North America		International		Schools			Centers		Corporate			Consolidated
	(Dollars in thousands)
Revenues:
Service	$	1,482,965	$	151,057	$	76,556		$	53,902	$	—		$	1,764,480
Product	391,009		65,675		9,071			63,157		—			528,912
Royalties and fees	38,206		36,698		—			5,042		—			79,946
	1,912,180		253,430		85,627			122,101		—			2,373,338
Operating expenses:
Cost of service	846,978		80,256		32,583			29,129		—			988,946
Cost of product	194,985		38,957		5,462			18,859		—			258,263
Site operating expenses	157,246		11,989		16,366			5,013		—			190,614
General and administrative	108,283		45,179		9,848			27,191		127,222			317,723
Rent	273,720		50,410		9,272			6,535		1,885			341,822
Depreciation and amortization	71,577		9,091		3,355			9,813		17,628			111,464
Goodwill impairment	—		—		23,000			—		—			23,000
Total operating expenses	1,652,789		235,882		99,886			96,540		146,735			2,231,832
Operating income (loss)	259,391		17,548		(14,259		)	25,561		(146,735		)	141,506
Other income (expense):
Interest	—		—		—			—		(41,647		)	(41,647		)
Other, net	—		—		—			—		5,053			5,053
Income (loss) from continuing operations before income taxes	$	259,391	$	17,548	$	(14,259	)	$	25,561	$	(183,329	)	$	104,912
Total assets	$	1,058,643	$	210,629	$	163,818		$	262,295	$	436,729		$	2,132,114
Long-lived assets	334,568		34,569		16,664			9,461		98,823			494,085
Capital expenditures	49,294		8,057		2,493			4,590		25,645			90,079
Purchases of salon assets	64,614		2,895		(73		)	1,869		—			69,305

(1) Beginning with the period ended December 31, 2008, the operations of Trade Secret concept within the North American reportable segment were accounted for as a discontinued operation.  All comparable periods will reflect Trade Secret as a discontinued operation.  See further discussion at Note 2 to the Condensed Consolidated Financial Statements.

	For the Year Ended June 30, 2006 (1)
	Salons				Beauty		Hair Restoration		Unallocated
	North America		International		Schools		Centers		Corporate			Consolidated
	(Dollars in thousands)
Revenues:
Service	$	1,366,436	$	133,323	$	58,281	$	46,471	$	—		$	1,604,511
Product	368,641		53,796		5,671		58,143		—			486,251
Royalties and fees	38,609		33,543		—		5,088		—			77,240
	1,773,686		220,662		63,952		109,702		—			2,168,002
Operating expenses:
Cost of service	780,136		71,110		24,757		26,624		—			902,627
Cost of product	186,081		32,168		4,278		17,592		—			240,119
Site operating expenses	156,387		9,755		10,272		4,536		—			180,950
General and administrative	99,264		41,963		8,270		23,254		112,243			284,994
Rent	253,419		42,756		6,999		6,215		1,385			310,774
Depreciation and amortization	67,182		9,348		2,610		9,908		14,026			103,074
Terminated acquisition income, net	—		—		—		—		(33,683		)	(33,683		)
Total operating expenses	1,542,469		207,100		57,186		88,129		93,971			1,988,855
Operating income (loss)	231,217		13,562		6,766		21,573		(93,971		)	179,147
Other income (expense):
Interest	—		—		—		—		(34,913		)	(34,913		)
Other, net	—		—		—		—		621			621
Income (loss) from continuing operations before income taxes	$	231,217	$	13,562	$	6,766	$	21,573	$	(128,263	)	$	144,855
Total assets	$	1,030,720	$	187,556	$	177,295	$	259,739	$	330,014		$	1,985,324
Long-lived assets	340,105		30,094		16,003		7,203		90,359			483,764
Capital expenditures	71,507		8,978		3,681		2,833		32,915			119,914
Purchases of salon assets	82,123		4,556		62,753		8,176		—			157,608

(1)Beginning with the period ended December 31, 2008, the operations of Trade Secret concept within the North American reportable segment were accounted for as a discontinued operation.  All comparable periods will reflect Trade Secret as a discontinued operation.  See further discussion at Note 2 to the Condensed Consolidated Financial Statements.

Total revenues and long-lived assets associated with business operations in the United States and all other countries in aggregate were as follows:

	Year Ended June 30,(1)
	2008				2007				2006
	Total Revenues		Long-lived Assets		Total Revenues		Long-lived Assets		Total Revenues		Long-lived Assets
	(Dollars in thousands)
United States	$	2,080,178	$	425,131	$	2,005,939	$	439,650	$	1,845,483	$	432,377
Other countries	401,213		56,720		367,399		54,435		322,519		51,387
Total	$	2,481,391	$	481,851	$	2,373,338	$	494,085	$	2,168,002	$	483,764

(1)Beginning with the period ended December 31, 2008, the operations of Trade Secret concept within the North American reportable segment were accounted for as a discontinued operation.  All comparable periods will reflect Trade Secret as a discontinued operation.  See further discussion at Note 2 to the Condensed Consolidated Financial Statements.

QUARTERLY FINANCIAL DATA

(Unaudited)

	Quarter Ended										Year
	September 30		December 31		March 31			June 30			Ended
	(Dollars in thousands, except per share amounts)
2008
Revenues	$	607,330	$	614,666	$	618,857		$	640,538		$	2,481,391
Gross profit, including site depreciation	266,158		264,669		271,047			284,952			1,086,826
Operating income(a)(c)	38,946		41,644		43,141			49,609			173,340
Income from continuing operations	19,448		20,725		19,146			24,582			83,901
Income (loss) from discontinued operations	1,151		1,831		(178		)	(1,501		)	1,303
Net income(a)(c)	20,599		22,556		18,968			23,081			85,204
Income from continuing operations per share, basic(d)	0.44		0.48		0.45			0.58			1.94
Income (loss) from discontinued operations per share, basic(d)	0.03		0.04		(0.01		)	(0.04		)	0.03
Net income per basic share	0.47		0.52		0.44			0.54			1.97
Income from continuing operations per share, diluted	0.44		0.47		0.44			0.57			1.92
Income (loss) from discontinued operations per share, diluted(d)	0.03		0.04		(0.00		)	(0.03		)	0.03
Net income per diluted share(d)	0.46		0.51		0.44			0.54			1.95
Dividends declared per share	0.04		0.04		0.04			0.04			0.16
	Quarter Ended										Year
	September 30		December 31		March 31			June 30			Ended
	(Dollars in thousands, except per share amounts)
2007
Revenues	$	573,781	$	584,548	$	596,935		$	618,074		$	2,373,338
Gross profit, including site depreciation	252,244		257,011		262,866			274,062			1,046,183
Operating income(a)(b)(c)	36,773		37,814		19,253			47,666			141,506
Income from continuing operations(a)(b)(c)	18,349		20,761		2,606			26,023			67,739
Income from discontinued operations	4,744		6,113		2,722			1,852			15,431
Net income	23,093		26,874		5,328			27,875			83,170
Income from continuing operations per share, basic(d)	0.41		0.46		0.06			0.59			1.51
Income from discontinued operations per share, basic	0.11		0.14		0.06			0.04			0.35
Net income per basic share(d)	0.51		0.60		0.12			0.63			1.86
Income from continuing operations per share, diluted(d)	0.40		0.46		0.06			0.58			1.48
Income from discontinued operations per share, diluted(d)	0.10		0.13		0.06			0.04			0.34
Net income per diluted share(d)	0.50		0.59		0.12			0.62			1.82
Dividends declared per share	0.04		0.04		0.04			0.04			0.16

Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 6 in this Form 10-K for explanations of items which impacted fiscal year 2008 revenues, operating and net income.

(a)Operating income and income from continuing operations increase as a result of $3.2 million ($2.0 million net of tax), $3.7 million ($2.3 million net of tax), $7.4 million ($4.8 million of tax), and $2.6 million ($2.2 million net of tax) was recorded in the fourth quarter ended June 30, 2008, second quarter ended December 31, 2007, fourth quarter ended June 30, 2007, and third quarter ended March 31, 2007, respectively, related to a change in estimate in the Company’s self-insurance accruals, primarily, prior years’ workers’ compensation claims reserves, due to our safety and return-to-work programs over the recent years, as well as changes in state laws.

(b)Expense of $23.0 million ($19.6 million net of tax) was recorded in the third quarter ended March 31, 2007 related to our beauty school business, related to the Company’s annual goodwill impairment analysis.

(c)Expenses of $6.1 million ($3.7 million net of tax) and $5.1 million ($3.4 million net of tax) were recorded in the fourth quarters ended June, 30, 2008 and 2007, respectively, related to the impairment of property and equipment at underperforming locations.

(d)           Total is a recalculation; line items calculated individually may not sum to total.

EX-99.4

Exhibit No. 99.4

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results.  Our MD&A is presented in five sections:

·Management’s Overview

·Critical Accounting Policies

·Overview of Results

·Results of Operations

·Liquidity and Capital Resources

MANAGEMENT’S OVERVIEW

Regis Corporation (RGS, we, our, or us) owns, franchises or holds ownership interests in beauty salons, hair restoration centers and educational institutions. As of September 30, 2008, we owned, franchised or held ownership interests in over 13,600 worldwide locations. Our locations consisted of 10,767 system wide North American and International salons, 94 hair restoration centers and approximately 2,700 locations in which we maintain an ownership interest. Our salon concepts offer generally similar products and services and serve mass market consumers. Our salon operations are organized to be managed based on geographical location. Our North American salon operations include 10,299 salons, including 2,095 franchise salons, operating in the United States, Canada and Puerto Rico primarily under the trade names of Regis Salons, MasterCuts, Trade Secret, SmartStyle, Supercuts and Cost Cutters. Our International salon operations include 468 company-owned salons, located in the United Kingdom. Our hair restoration centers, operating under the trade name Hair Club for Men and Women, include 94 North American locations, including 33 franchise locations. As of September 30, 2008, we had approximately 65,000 corporate employees worldwide.

On February 16, 2009, the Company sold its Trade Secret salon concept (Trade Secret).  The Company concluded, after a comprehensive review of strategic and financial options, to divest Trade Secret.  The sale of Trade Secret included 659 company-owned salons and 62 franchise salons, all of which had historically been reported within the Company’s North America reportable segment.  The sale of Trade Secret included Cameron Capital I, Inc. (CCI). CCI owned and operated PureBeauty and BeautyFirst salons which were acquired by the Company on February 20, 2008.  The locations listed above as of September 30, 2008, included 668 company-owned salons and 62 franchised salons within the Trade Secret concept being accounted for as a discontinued operation, all within the North American reportable segment

On January 31, 2008, we merged our continental European franchise salon operations with the Franck Provost Salon Group in exchange for a 30.0 percent equity interest in the newly formed entity, Provalliance. This transaction is expected to create significant growth opportunities for Europe’s salon brands. The Provost Salon Group management structure has a proven platform to build and acquire company-owned stores as well as a strong franchise operating group that is positioned for expansion. Provalliance operates over 2,400 company-owned and franchise salons.

On August 1, 2007, we contributed our 51 accredited cosmetology schools to Empire Education Group, Inc., creating the largest beauty school operator in North America. As of September 30, 2008, we own a 55.1 percent equity interest in Empire Education Group, Inc. (EEG). Our investment in EEG is accounted for under the equity method as Empire Beauty School retains majority voting interest and has full responsibility for managing EEG. This transaction leverages EEG’s management expertise, while enabling us to maintain a vested interest in the beauty school industry. The combined Empire Education Group, Inc. includes 87 accredited cosmetology schools with annual revenues of approximately $130 million. Results of operations of the accredited beauty schools for the month ended July 31, 2007 are reported in the North American salons segment. The Company retained ownership of its one North American and four United Kingdom Vidal Sassoon schools. Results of operations for the Vidal Sassoon schools are included in the respective North American and International salon segments.

Our growth strategy consists of two primary, but flexible, components. Through a combination of organic and acquisition growth, we seek to achieve our long-term objective of six to ten percent annual revenue growth. We anticipate that going

forward, the mix of organic and acquisition growth will be roughly equal. However, depending on several factors, including the ability of our salon development program to keep pace with the availability of real estate for new construction, hair restoration lead generation, the availability of attractive acquisition candidates and same-store sales trends, this mix will vary from year to year. We believe achieving revenue growth of four to six percent, including same-store sales increases of 0.5 to 2.5 percent, will allow us to increase annual earnings at a mid to high single-digit growth rate. We anticipate expanding our presence in North America.

Maintaining financial flexibility is a key element in continuing our successful growth. In the current credit crisis economic environment, the Company maintains its position to access financing as the Company continues to have a predictable business model, strong operating cash flow and balance sheet.

We are in compliance with all covenants and other requirements of our financing arrangements as of September 30, 2008. However, the continued global economic downturn and credit crisis have negatively impacted our operating results in the quarter ended September 30, 2008. Accordingly we are taking immediate steps to reduce debt and interest expense by repatriating cash from foreign locations to the United States, reducing capital expenditure and acquisition budgets, reducing inventory levels, and reducing overhead. We believe these steps should help us continue to be in compliance with our financial debt covenants provided same store sale results do not decline below the results we experienced during the period ended September 30, 2008.

Salon Business

The strength of our salon business is in the fundamental similarity and broad appeal of our salon concepts that allow flexibility and multiple salon concept placements in shopping centers and neighborhoods. Each concept generally targets the middle market customer, however, each attracts a different demographic. We anticipate expanding all of our salon concepts. When commercial opportunities arise, we anticipate testing and developing new salon concepts to complement our existing concepts.

We execute our salon growth strategy by focusing on real estate. Our salon real estate strategy is to add new units in convenient locations with good visibility and customer traffic, as well as appropriate trade demographics. Our various salon and product concepts operate in a wide range of retailing environments, including regional shopping malls, strip centers and Wal-Mart Supercenters. We believe that the availability of real estate will augment our ability to achieve the aforementioned long-term growth objectives. In fiscal 2009, our outlook for constructed salons is between 175 and 200 units, and we expect to add between 350 and 370 net locations through a combination of organic, acquisition and franchise growth. Capital expenditures in fiscal year 2009, excluding acquisition expenditures which are currently budgeted for $55.0 million, are projected to be approximately $75.0 million.

Organic salon revenue growth is achieved through the combination of new salon construction and salon same-store sales increases. Each fiscal year, we anticipate building several hundred company-owned salons. We anticipate our franchisees will open approximately 100 to 125 salons as well. Older, unprofitable salons will be closed or relocated. Our long-term outlook for our salon business is for annual consolidated low single digit same-store sales increases. Based on current economic cycles (i.e., lengthening of customer visitation patterns), we project our annual fiscal year 2009 consolidated same-store sales to be in the range of negative 1.0 to positive 1.0 percent.

Historically, our salon acquisitions have varied in size from as small as one salon to over one thousand salons. The median acquisition size is approximately ten salons. From fiscal year 1994 to September 30, 2008, we acquired 7,952 salons, net of franchise buybacks. We anticipate adding several hundred company-owned salons each year from acquisitions. Some of these acquisitions may include buying salons from our franchisees.

Hair Restoration Business

In December 2004, we acquired Hair Club for Men and Women. Hair Club for Men and Women is a provider of hair loss solutions with an estimated five percent share of the $4 billion domestic market. This industry is comprised of numerous locations domestically and is highly fragmented. As a result, we believe there is an opportunity to consolidate this industry through acquisition. Expanding the hair loss business organically and through acquisition would allow us to add incremental revenue which is neither dependent upon, nor dilutive to, our existing salon business.

Our organic growth plans for hair restoration include the construction of a modest number of new locations in untapped markets domestically and internationally. However, the success of our hair restoration business is not dependent on the same real estate criteria used for salon expansion. In an effort to provide confidentiality for our customers, hair restoration centers

operate primarily in professional or medical office buildings. Further, the hair restoration business is more marketing intensive. As a result, organic growth at our hair restoration centers will be dependent on successfully generating new leads and converting them into hair restoration customers. Our growth expectations for our hair restoration business are not dependent on referral business from, or cross marketing with, our hair salon business, but these concepts are continually evaluated closely for additional growth opportunities.

CRITICAL ACCOUNTING POLICIES

The Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the Condensed Consolidated Financial Statements, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the Condensed Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Changes in these estimates could have a material effect on our Condensed Consolidated Financial Statements.

Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements contained in Part II, Item 8 of the June 30, 2008 Annual Report on Form 10-K, as well as Note 1 to the Condensed Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q. We believe the accounting policies related to the valuation of goodwill, the valuation and estimated useful lives of long-lived assets, purchase price allocations, revenue recognition, the cost of product used and sold, self-insurance accruals, stock-based compensation expense, legal contingencies and estimates used in relation to tax liabilities and deferred taxes are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations. Discussion of each of these policies is contained under “Critical Accounting Policies” in Part II, Item 7 of our June 30, 2008 Annual Report on Form 10-K. Other than the valuation of goodwill, there were no significant changes in or application of our critical accounting policies during the three months ended September 30, 2008.

Goodwill:

As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008, we perform our impairment analysis of goodwill during the third quarter of each fiscal year in accordance with Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (SFAS No. 142).  Fair values are estimated based on our best estimate of the expected present value of future cash flows and compared with the corresponding carrying value of the reporting unit, including goodwill.  Where available and as appropriate comparative market multiples are used to corroborate the results of the present value method.  We consider our various concepts to be reporting units when we test for goodwill impairment because that is where we believe goodwill resides.

We have experienced a decline in same-store sales which has negatively impacted our operating results during the three months ended September 30, 2008. The most significant decline in our same-store sales was within our Trade Secret concept, which is in the early stages of a strategy to improve the concept’s operating results by converting product assortment.  In addition, subsequent to September 30, 2008, the fair value of our stock has declined such that it began trading below book value per share.  Adverse changes in expected operating results, continuation of our stock trading below book value per share, and unfavorable changes in other economic factors will require us to reassess goodwill impairment prior to the third quarter of the fiscal year.

As of September 30, 2008, we do not believe a triggering event under SFAS No. 142 requiring an assessment of goodwill impairment has occurred.  Although the most significant decline in our same-store sales was within our Trade Secret concept, we are in the process of revising our transformation strategy.

OVERVIEW OF RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008

·Revenues increased 1.0 percent to $613.5 million, primarily related to built and acquired locations and consolidated same-store sales decreased 0.1 percent during the three months ended September 30, 2008.

·During the three months ended September 30, 2008, we acquired 108 corporate locations (none of which were Trade Secret locations), including 82 franchise location buybacks (two of which were hair restoration centers). We built 52 corporate locations (six of which were Trade Secret locations) and closed, converted or relocated 68 locations (10 of

which were Trade Secret locations). Our franchisees constructed 29 locations and closed, sold back to us, converted or relocated 97 locations during the three months ended September 30, 2008. As of September 30, 2008, we had 8,672 company-owned locations, 2,095 franchise locations and 94 hair restoration centers (61 company-owned and 33 franchise locations).  As of September 30, 2008, Trade Secret locations represented 668 of the 8,672 company-owned locations and 62 of the 2,095 franchise locations listed above.

·Lease termination costs of $1.2 million ($1.2 million pre-tax, or $0.7 million net of tax is included in continuing operations, with less than $0.1 million pre-tax, or less than $0.1 million net of tax, included in loss from discontinued operations) were incurred as a result of 21 stores (20 included in continuing operations and one included in discontinued operations) that ceased using the right to use the leased property or negotiated a lease termination agreement in connection with the Company’s planned closure of up to 160 underperforming company-owned salons.

·Product margins have decreased 130 basis points compared to the three months ended September 30, 2007 due to negative payroll leverage and increased sales of promotional products.

RESULTS OF OPERATIONS

As of December 31, 2008 the Trade Secret concept within the North American reportable segment was accounted for as a discontinued operation.  All comparable periods will reflect Trade Secret as a discontinued operation.  The following discussion of results of operations will reflect results from continuing operations.  Discontinued operations will be discussed at the end of this section.

Consolidated Results of Operations

The following table sets forth, for the periods indicated, certain information derived from our Condensed Consolidated Statement of Operations, expressed as a percent of revenues. The percentages are computed as a percent of total consolidated revenues, except as noted.

	For the Three Months Ended September 30,
Results of Operations as a Percent of Revenues	2008		2007
Service revenues	76.4	%	74.6	%
Product revenues	21.9		22.0
Franchise royalties and fees	1.7		3.4
Operating expenses:
Cost of service (1)	56.9		56.7
Cost of product (2)	48.9		47.6
Site operating expenses	7.9		8.1
General and administrative	12.7		13.7
Rent	15.0		14.4
Lease termination costs	0.2		—
Depreciation and amortization	4.4		4.7
Operating income	5.5		6.4
Income from continuing operations before income taxes and equity in income (loss) of affiliated companies	4.2		5.0
Income taxes	1.6		1.8
Equity in income (loss) of affiliated companies, net of income taxes	0.1		(0.1	)
Income from continuing operations	2.6		3.2
(Loss) income from discontinued operations, net of income taxes	(0.3	)	0.2
Net income (3)	2.4		3.4

(1)           Computed as a percent of service revenues and excludes depreciation expense.

(2)Computed as a percent of product revenues and excludes depreciation expense.

(3)Total is a recalculation; line items calculated individually will not sum to total.

Consolidated Revenues

Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees, hair restoration center revenues, and franchise royalties and fees. As compared to the respective prior fiscal year, consolidated revenues increased 1.0 percent to $613.5 million during the three months ended September 30, 2008. The following table details our consolidated revenues by concept. All service revenues, product revenues (which include product and equipment sales to franchisees), and franchise royalties and fees are included within their respective concept within the table.

	For the Three Months Ended September 30,
	2008			2007
	(Dollars in thousands)
North American salons:
Regis	$	122,322		$	127,597
MasterCuts	43,431			43,589
SmartStyle	131,256			122,103
Strip Centers(1)	232,925			213,079
Other(2)	—			5,558
Total North American salons	529,934			511,926
International salons(1)(3)	48,448			63,281
Hair restoration centers(1)	35,147			32,123
Consolidated revenues	613,529			607,330
Percent change from prior year	1.0		%	5.8		%
Salon same-store sales (decrease) increase(4)	(0.1		)%	2.0		%

The percent changes in consolidated revenues during the three months ended September 30, 2008 and 2007, respectively, were driven by the following:

	For the Three Months Ended September 30,
Percentage Increase (Decrease) in Revenues	2008		2007
Acquisitions (previous twelve months)	4.5	%	3.4	%
Organic	(0.6	)	5.1
Foreign currency	(0.3	)	1.2
Franchise revenues(3)	(1.7	)	0.1
Closed salons(2)(3)	(0.9	)	(4.0	)
	1.0	%	5.8	%

(1)	Includes aggregate franchise royalties and fees of $10.3 and $20.9 million for the three months ended September 30, 2008 and 2007, respectively. North American salon franchise royalties and fees represented 93.8 and 48.0 percent of total franchise revenues in the three months ended September 30, 2008 and 2007, respectively. The decrease in aggregate franchise, royalties, and fees and increase in North American salon franchise royalties and fees as a percent of total franchise revenues for the three months ended September 30, 2008 is a result of the deconsolidation of the Company’s European franchise salon operations.
(2)	On August 1, 2007, the Company contributed its 51 accredited cosmetology schools to Empire Education Group, Inc. Accordingly, revenue growth was negatively impacted as a result of the deconsolidation. For the three months ended September 30, 2007, the accredited cosmetology schools generated revenue of $5.6 million, respectively, which represented 0.8 percent of consolidated revenues.
(3)	On January 31, 2008, the Company deconsolidated the results of operations of its European franchise salon operations. Accordingly, revenue growth was negatively impacted as a result of the deconsolidation. For the three months ended September 30, 2007 the European franchise salon operations generated revenue of $14.5 million which represented 2.2 percent of consolidated revenues.
(4)	Salon same-store sales increases or decreases are calculated on a daily basis as the total change in sales for company-owned salons which were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date salon same-store sales increases are the sum of the same-store sales increases

computed on a daily basis. Relocated salons are included in same-store sales as they are considered to have been open in the prior period. International same-store sales are calculated in local currencies so that foreign currency fluctuations do not impact the calculation. Management believes that same-store sales, a component of organic growth, are useful in determining the increase in salon revenues attributable to its organic growth (new salon construction and same-store sales growth) versus growth from acquisitions.

We acquired 333 salons (including 170 franchise salon buybacks and seven hair restoration centers) during the twelve months ended September 30, 2008. The organic growth was due to the construction of 274 company-owned salons during the twelve months ended September 30, 2008. We closed 213 salons (including 92 franchise salons) during the twelve months ended September 30, 2008.

During the three months ended September 30, 2008 the foreign currency impact was driven by the weakening of the United States dollar against the Canadian dollar and Euro, offset by the strengthening of United States dollar against the British pound, as compared to the exchange rates for the comparable prior period. The impact of foreign currency was calculated by multiplying current year revenues in local currencies by the change in the foreign currency exchange rate between the current and prior fiscal year.

During the twelve months ended September 30, 2007, we acquired 356 salons (including 112 franchise salon buybacks) and three hair restoration centers. The organic growth stemmed from the construction of 359 company-owned salons during the twelve months ended September 30, 2007.  We closed 291 salons (including 162 franchise salons) during the twelve months ended September 30, 2007.

During the three months ended September 30, 2007, the foreign currency impact was driven by the weakening of the United States dollar against the Canadian dollar, British pound and Euro as compared to the exchange rates for the comparable prior period. The impact of foreign currency was calculated by multiplying current year revenues in local currencies by the change in the foreign currency exchange rate between the prior fiscal year.

Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees.  Fluctuations in these three major revenue categories were as follows:

Service Revenues.  Service revenues include revenues generated from company-owned salons and service revenues generated by hair restoration centers. Total service revenues for the three months ended September 30, 2008 and 2007 were as follows:

			Increase Over Prior Fiscal Year
Periods Ended September 30,	Revenues		Dollar		Percentage
	(Dollars in thousands)
2008	$	469,035	$	16,272	3.6	%
2007	452,763		25,666		6.0

The growth in service revenues during the three months ended September 30, 2008 was driven primarily by acquisitions. Consolidated same-store service sales increased 0.5 percent during the three months ended September 30, 2008, as compared to an increase of 2.5 percent for the three months ended September 30, 2007. Growth was negatively impacted as a result of the deconsolidation of our 51 accredited cosmetology schools to Empire Education Group, Inc. on August 1, 2007. In addition, hurricanes Gustav and Ike that hit the United States during the three months ended September 30, 2008 negatively impacted 250 of the Company’s salons.

The growth in service revenues during the three months ended September 30, 2007 was driven primarily by acquisitions and new salon construction (a component of organic growth). Growth was negatively impacted as a result of the contribution of our 51 accredited cosmetology schools to Empire Education Group, Inc. on August 1, 2007. Consolidated same-store service sales increased 2.5 percent during the three months ended September 30, 2007, as compared to an increase of 0.2 percent during the comparable prior period.

Product Revenues.  Product revenues are primarily sales at company-owned salons, hair restoration centers and sales of product and equipment to franchisees. Total product revenues for the three months ended September 30, 2008 and 2007 were as follows:

			Increase Over Prior Fiscal Year
Periods Ended September 30,	Revenues		Dollar		Percentage
	(Dollars in thousands)
2008	$	134,183	$	523	0.4	%
2007	133,660		6,603		5.2

The growth in product revenues during the three months ended September 30, 2008 was primarily due to acquisitions, offset by same-store product sales decreases of 2.4 percent. This increase in negative same-store sales is due to the continued decline in the global economic condition and increased appeal of mass retail hair care lines by the consumer.

The growth in product revenues during the three months ended September 30, 2007 was primarily due to acquisitions. Consolidated same-store product sales increased 0.2 percent during the three months ended September 30, 2007, as compared to a decrease of 0.7 percent during the comparable prior period. Growth during the three months ended September 30, 2007 was not as robust as compared to the comparable prior period due increased appeal of mass retail hair care lines by the consumer.

Royalties and Fees.  Total franchise revenues, which include royalties and fees, for the three months ended September 30, 2008 and 2007 were as follows:

			Increase (Decrease) Over Prior Fiscal Year
Periods Ended September 30,	Revenues		Dollar			Percentage
	(Dollars in thousands)
2008	$	10,311	$	(10,596	)	(50.7	)%
2007	20,907		1,280			6.5

Total franchise locations open at September 30, 2008 were 2,066, including 33 franchise hair restoration centers, as compared to 3,777, including 40 franchise hair restoration centers, at September 30, 2007. We purchased 170 of our franchise salons and seven franchise hair restoration centers during the twelve months ended September 30, 2008.

The decrease in consolidated franchise revenues during the three month period ended September 30, 2008 was primarily due to the merger of the 1,587 European franchise salon operations with Franck Provost Salon Group on January 31, 2008.

Total franchise locations open at September 30, 2007 were 3,777, including 40 franchise hair restoration centers, as compared to 3,790, including 42 franchise hair restoration centers, at September 30, 2006. We purchased 112 of our franchise salons during the twelve months ended September 30, 2007, and acquired a franchisor of product - focused salons which operates 42 franchise locations, which drove the overall decrease in the number of franchise salons between periods. The increase in consolidated franchise revenues during the three months ended September 30, 2007 and 2006 was primarily due to the weakening of the United States dollar against the Canadian dollar, British pound and Euro as compared to the exchange rates for the comparable prior period, partially offset by a decreased number of franchise salons, as discussed above.

Gross Margin (Excluding Depreciation)

Our cost of revenues primarily includes labor costs related to salon and hair restoration center employees, the cost of product used in providing services and the cost of products sold to customers and franchisees.  The resulting gross margin for the three months ended September 30, 2008 and 2007 was as follows:

	Gross		Margin as % of Service and		Increase (Decrease) Over Prior Fiscal Year
Periods Ended September 30,	Margin		Product Revenues		Dollar		Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	270,522	44.8	%	$	4,364	1.6	%	(60	)
2007	266,158		45.4		13,914		5.5		(10	)

(1)Represents the basis point change in gross margin as a percent of service and product revenues as compared to the corresponding periods of the prior fiscal year.

Service Margin (Excluding Depreciation).  Service margin for the three months ended September 30, 2008 and 2007 was as follows:

	Service		Margin as % of Service		Increase (Decrease) Over Prior Fiscal Year
Periods Ended September 30,	Margin		Revenues		Dollar		Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	201,958	43.1	%	$	5,848	3.0	%	(20	)
2007	196,110		43.3		8,078		4.3		(70	)

(1)Represents the basis point change in service margin as a percent of service revenues as compared to the corresponding periods of the prior fiscal year.

The basis point decrease in service margin as a percent of service revenues during the three months ended September 30, 2008 was primarily due to the absence of the beauty school segment service revenue from consolidated service revenues. Also contributing to the basis point decrease was negative payroll leverage due to hurricanes Gustav and Ike.

The basis point decrease in service margins as a percent of service revenues during the three months ended September 30, 2007 was primarily due to a reclassification change made during the quarter as a result of refinements made to our inventory tracking systems. The refinements resulted in better tracking and accounting for retail products that our salon stylists transfer from retail shelves to the back bar for use in servicing customers. The cost of these products had historically been included as a component of our product gross margin, whereas they are now more appropriately included in our service margin. These retail-to-shop transfers amount to approximately $1.0 million each quarter. This reclassification accounted for 30 basis points of the total 70 basis point deterioration and had no impact on total gross margin. The deterioration was also due to the absence of the beauty school segment service revenue from consolidated service revenues (10 basis points), an increase in North America service payroll costs related to recent salon acquisitions (10 basis points) and an increase in international service costs (10 basis points).

Product Margin (Excluding Depreciation).  Product margin for the three months ended September 30, 2008 and 2007 was as follows:

	Product		Margin as % of Product		Increase (Decrease) Over Prior Fiscal Year
Periods Ended September 30,	Margin		Revenues		Dollar			Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	68,564	51.1	%	$	(1,484	)	(2.1	)%	(130	)
2007	70,048		52.4		5,836			9.1		190

(1)Represents the basis point change in product margin as a percent of product revenues as compared to the corresponding periods of the prior fiscal year.

The basis point decrease in product margin as a percent of product revenues during the three months ended September 30, 2008 was primarily due to negative payroll leverage primarily related to negative same-store retail sales of 2.4 percent and an increase in consumers’ preference to purchase promotional products.

The basis point improvement in product margins as a percent of product revenues during the three months ended September 30, 2007 was primarily due to a reclassification change made during the quarter as a result of refinements made to our inventory tracking systems. The refinements resulted in better tracking and accounting for retail products that our salon stylists transfer from retail shelves to the back bar for use in servicing customers. The cost of these products had historically been included as a component of our product gross margin, whereas they are now more appropriately included in our service margin. These retail-to-shop transfers amount to approximately $1.0 million each quarter. The reclassification had no impact on total gross margin. The absence of the beauty school segment also improved product margins. These basis point improvements were partially offset by an increase in sales of lower margin items and negative payroll leverage.

Site Operating Expenses

This expense category includes direct costs incurred by our salons and hair restoration centers such as on-site advertising, workers’ compensation, insurance, utilities and janitorial costs. Site operating expenses for the three months ended September 30, 2008 and 2007 were as follows:

	Site		Expense as % of Consolidated		Increase (Decrease) Over Prior Fiscal Year
Periods Ended September 30,	Operating		Revenues		Dollar			Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	48,402	7.9	%	$	(929	)	(1.9	)%	(20	)
2007	49,331		8.1		(2,107		)	(4.1	)	(90	)

(1)Represents the basis point change in site operating expenses as a percent of consolidated revenues as compared to the corresponding periods of the prior fiscal year.

The basis point improvement in site operating expenses as a percent of consolidated revenues during the three months ended September 30, 2008 was primarily due to the result of cost savings initiatives we have implemented throughout the past year.

The basis point improvement in site operating expenses as a percent of consolidated revenues during the three months ended September 30, 2007 was due to the absence of the beauty school segment site operating expenses from consolidated site operating expenses and a reduction in workers’ compensation costs as a result of continued improvement of our safety and return-to-work programs over the recent years.

General and Administrative

General and administrative (G&A) includes costs associated with our field supervision, salon training and promotions, product distribution centers and corporate offices (such as salaries and professional fees), including costs incurred to support franchise and hair restoration center operations. G&A expenses for the three months ended September 30, 2008 and 2007 were as follows:

			Expense as % of Consolidated		Increase (Decrease) Over Prior Fiscal Year
Periods Ended September 30,	G&A		Revenues		Dollar			Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	77,764	12.7	%	$	(5,492	)	(6.6	)%	(100	)
2007	83,256		13.7		8,083			10.8		60

(1)Represents the basis point change in G&A as a percent of consolidated revenues as compared to the corresponding periods of the prior fiscal year.

The basis point improvement in G&A costs as a percent of consolidated revenues during the three months ended September 30, 2008 was primarily due to deconsolidation of the European franchise salon operations.

The basis point deterioration in G&A costs as a percent of consolidated revenues during the three months ended September 30, 2007 was primarily due to planned increases in salon-level collateral expenditures as well as increases in professional fees and promotional hair restoration advertising.

Rent

Rent expense, which includes base and percentage rent, common area maintenance, and real estate taxes, for the three months ended September 30, 2008 and 2007, was as follows:

			Expense as % of Consolidated		Increase Over Prior Fiscal Year
Periods Ended September 30,	Rent		Revenues		Dollar		Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	92,211	15.0	%	$	4,962	5.7	%	60
2007	87,249		14.4		5,292		6.5		10

(1)Represents the basis point change in rent as a percent of consolidated revenues as compared to the corresponding periods of the prior fiscal year.

The basis point increase in rent expense as a percent of consolidated revenues for the three months ended September 30, 2008 was primarily due rent expense increasing at a faster rate than location same-store sales and the deconsolidation of the schools and European franchise salon operations.

The basis point deterioration in rent expense as a percent of consolidated revenues during the three months ended September 30, 2007 was primarily due to negative leverage in this fixed cost category, as salon rents are increasing at a slightly faster rate than our overall same-store sales.

Lease Termination Costs

Lease termination costs for the three months ended September 30, 2008 and 2007 were as follows:

	Lease		Expense as %
	Termination		of Consolidated		Increase (Decrease) Over Prior Fiscal Year
Periods Ended September 30,	Costs		Revenues		Dollar		Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	1,151	0.2	%	$	1,151	100	%	20
2007	—		—		—		—		—

(1)Represents the basis point change in lease termination costs as a percent of consolidated revenues as compared to the corresponding periods of the prior fiscal year.

The lease termination costs are associated with the Company’s plan to close up to 160 underperforming company-owned salons in fiscal year 2009. During the three months ended September 30, 2008 we closed 20 salons within the North America reportable segment. See further discussion within Note 7 of the Condensed Consolidated Financial Statements.

Depreciation and Amortization

Depreciation and amortization expense (D&A) for the three months ended September 30, 2008 and 2007 was as follows:

			Expense as %
			of Consolidated		Increase (Decrease) Over Prior Fiscal Year
Periods Ended September 30,	D&A		Revenues		Dollar			Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	27,268	4.4	%	$	(1,015	)	(3.6	)%	(30	)
2007	28,283		4.7		1,753			6.6		10

(1)Represents the basis point change in D&A as a percent of consolidated revenues as compared to the corresponding periods of the prior fiscal year.

The basis point improvement in D&A as a percent of consolidated revenues during the three months ended September 30, 2008 was primarily due to the $4.5 million write off of fixed assets recorded in fiscal year 2008 related to the Company’s decision to close up to 160 underperforming company-owned salons. The resulting rate improvement for the three months ended September 30, 2008 relates to no longer depreciating the assets that were subject to the fixed asset write off.

The basis point deterioration in D&A as a percent of consolidated revenues during the three months ended September 30, 2007 was primarily due to D&A expense increasing at a faster rate than location same-store sales.

Interest

Interest expense for the three months ended September 30, 2008 and 2007 was as follows:

			Expense as% of Consolidated		Increase (Decrease) Over Prior Fiscal Year
Periods Ended September 30,	Interest		Revenues		Dollar			Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	10,220	1.7	%	$	(293	)	(2.8	)%	—
2007	10,513		1.7		698			7.1		—

(1)Represents the basis point change in interest expense as a percent of consolidated revenues as compared to the corresponding periods of the prior fiscal year.

The basis point decrease in interest expense as a percent of consolidated revenues during the three months ended September 30, 2008 was primarily due to decreased borrowing rates.

The basis point increase in interest expense as a percent of consolidated revenues during the three months ended September 30, 2007 was primarily due to increased debt levels used to fund customary acquisitions and investments.

Equity in Income (Loss) of Affiliated Companies, Net of Income Taxes

Equity in income (loss) of affiliates, represents the income or loss generated by our equity investment in Empire Education Group, Inc., Provalliance, and other equity method investments, for the three months ended September 30, 2008 and 2007, was as follows:

	Equity in			Income (Loss) as% of Consolidated		Increase (Decrease) Over Prior Fiscal Year
Periods Ended September 30,	Earnings			Revenues		Dollar			Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	492		0.1	%	$	826		247.3	%	20
2007	(334		)	(0.1	)	(334		)	(100.0	)	(10	)

(1)Represents the basis point change in equity in income (loss) of affiliates as a percent of consolidated revenues as compared to the corresponding periods of the prior fiscal year.

This income relates to our equity investments in Empire Education Group, Inc. (EEG), Provalliance, and other equity method investments as detailed in Note 6 to the Condensed Consolidated Financial Statements.

Income Taxes

Our reported effective income tax rate for the three months ended September 30, 2008 and 2007 was as follows:

			Basis Point(1)
Periods Ended September 30,	Effective Rate		Increase
2008	39.0	%	370
2007	35.3		140

(1)Represents the basis point change in income tax expense as a percent of consolidated revenues as compared to the corresponding periods of the prior fiscal year.

The basis point increase in our overall effective income tax rate for the three months ended September 30, 2008 was due primarily to the shift in income from low to high tax jurisdictions as a result of the merger of European franchise salon operations with the Franck Provost Salon Group in January 2008. In addition, new state taxes in Texas, Michigan, and other states have increased the effective tax rate for the three months ended September 30, 2008. The increase in the effective tax rate for the three months ended September 30, 2008 was partially offset by Work Opportunity and Welfare-to-Work tax credits.

The basis point increase in our overall effective tax rate during the three months ended September 30, 2007 was due to a favorable ruling from the IRS we received during the three months ended September 30, 2006 which did not recur during the three months ended September 30, 2007. The effective income tax rate during the three months ended September 30, 2007 of 35.3 percent was adversely affected by the adoption of FIN 48.

(Loss) Income from Discontinued Operations

(Loss) income from discontinued operations for the three months ended September 30, 2008 and 2007 was as follows:

	(Loss) Income From			(Decrease) Increase Over Prior Fiscal Year
Periods Ended September 30,	Discontinued Operations			Dollar			Percentage
	(Dollars in thousands)
2008	$	(1,600	)	$	(2,751	)	(239.0	)%
2007	1,151			(3,593		)	(75.7	)

During the quarter ended December 31, 2008, we concluded that Trade Secret was held for sale and presented as a discontinued operation for all comparable prior periods.  The loss from discontinued operations for the three months ended September 30, 2008 is the result of negative payroll leverage at our Trade Secret salons due to same-store sales decreasing 14.9 percent as compared to decreasing 7.9 percent during the three months ended September 30, 2007.  See Note 2 to the Condensed Consolidated Financial Statements for further discussion.

Recent Accounting Pronouncements

Recent accounting pronouncements are discussed in Note 1 to the Condensed Consolidated Financial Statements.

Effects of Inflation

We compensate some of our salon employees with percentage commissions based on sales they generate, thereby enabling salon payroll expense as a percent of company-owned salon revenues to remain relatively constant. Accordingly, this provides us certain protection against inflationary increases, as payroll expense and related benefits (our major expense components) are variable costs of sales. In addition, we may increase pricing in our salons to offset any significant increases in wages. Therefore, we do not believe inflation has had a significant impact on the results of our operations.

Constant Currency Presentation

The presentation below demonstrates the effect of foreign currency exchange rate fluctuations from year to year. To present this information, current period results for entities reporting in currencies other than United States dollars are converted into United States dollars at the average exchange rates in effect during the corresponding period of the prior fiscal year, rather

than the actual average exchange rates in effect during the current fiscal year. Therefore, the foreign currency impact is equal to current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year.  During the three months ended September 30, 2008, foreign currency translation had an unfavorable impact on consolidated revenues due to the strengthening of the United States dollar against the British pound, partially offset by the weakening of United States dollar against the Canadian dollar and Euro, as compared to the exchange rates for the comparable prior period. During the three months ended September 30, 2007, foreign currency translation had a favorable impact on consolidated revenues due to the strengthening of the Canadian dollar, British pound and Euro as compared to the comparable prior periods.

	Impact on Revenues					Impact on Income Before Income Taxes
Impact of Foreign Currency Exchange Rate Fluctuations	September 30, 2008			September 30, 2007		September 30, 2008			September 30, 2007
				(Dollars in thousands)
Canadian dollar	$	636		$	2,025	$	103		$	368
British pound	(2,457		)	3,476		(53		)	145
Euro	210			1,217		134			170
Total	$	(1,611	)	$	6,718	$	184		$	683

Results of Operations by Segment

Based on our internal management structure, we report three segments: North American salons, International salons and hair restoration centers. Significant results of operations are discussed below with respect to each of these segments.

North American Salons

North American Salon Revenues.  Total North American salon revenues for the three months ended September 30, 2008 and 2007 were as follows:

			Increase Over Prior Fiscal Year				Same-Store Sales
Periods Ended September 30,	Revenues		Dollar		Percentage		Increase
			(Dollars in thousands)
2008	$	529,934	$	18,008	3.5	%	0.1	%
2007	511,926		42,482		9.0		2.2

The percentage increases (decreases) during the three months ended September 30, 2008 and 2007 were due to the following factors:

	For the Three Months Ended September 30,
Percentage Increase (Decrease) in Revenues	2008		2007
Acquisitions (previous twelve months)	4.1	%	4.0	%
Organic	(0.3	)	4.9
Foreign currency	0.1		0.4
Franchise revenues	—		0.1
Closed salons	(0.4	)	(0.4	)
	3.5	%	9.0	%

We acquired 333 North American salons during the twelve months ended September 30, 2008, including 170 franchise buybacks. The decline in organic growth was the result of the deconsolidation of EEG on August 1, 2007.

We acquired 322 North American salons during the twelve months ended September 30, 2007, including 108 franchise buybacks. The organic growth was due primarily to the construction of 336 company-owned salons in North America during the twelve months ended September 30, 2007. The organic growth was also due to a same-store service sales increase of 2.9 percent during the three months ended September 30, 2007 and beauty school segment revenues for the month ended July 31, 2007. The foreign currency impact during the three months ended September 30, 2007 was driven by the weakening of the United States dollar against the Canadian dollar as compared to the exchange rate for the comparable prior period.

North American Salon Operating Income.  Operating income for the North American salons for the three months ended September 30, 2008 and 2007 was as follows:

			Operating Income as % of
	Operating		Total		Increase (Decrease) Over Prior Fiscal Year
Periods Ended September 30,	Income		Revenues		Dollar			Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	64,808	12.2	%	$	(2,639	)	(3.9	)%	(100	)
2007	67,447		13.2		6,044			9.8		10

(1)Represents the basis point change in North American salon operating income as a percent of North American salon revenues as compared to the corresponding periods of the prior fiscal year.

The basis point decrease in North American salon operating income as a percent of North American salon revenues for the three months ended September 30, 2008 was primarily due to consumers’ preference to purchase promotional products and lease termination costs associated with the Company’s plan to close up to 160 underperforming company-owned salons in fiscal year 2009 and Trade Secret transformation costs.

The basis point increase in North American salon operating income as a percent of North American salon revenues for the three months ended September 30, 2007 was primarily due a reduction in workers’ compensation costs as a result of continued improvement of our safety and return-to-work programs over the recent years.

International Salons

On January 31, 2008 the Company merged its continental European franchise salon operations with the Franck Provost Salon Group for a 30.0 percent interest in Provalliance. The Company’s investment in Provalliance is accounted for under the equity method of accounting and the results of operations of our European franchise salon operations were deconsolidated.  As a result of the deconsolidation, International salon revenue and International salon operating income for the first two quarters of fiscal year 2009 will be negatively impacted.

International Salon Revenues.  Total International salon revenues for the three months ended September 30, 2008 and 2007 were as follows:

			Increase (Decrease) Over Prior Fiscal Year					Same- Store Sales
Periods Ended September 30,	Revenues		Dollar			Percentage		(Decrease)
	(Dollars in thousands)
2008	$	48,448	$	(14,833	)	(23.4	)%	(3.3	)%
2007	63,281		7,406			13.3		(3.8	)

The percentage increases (decreases) during the three months ended September 30, 2008 and 2007 were due to the following factors:

	For the Three Months Ended September 30,
Percentage Increase (Decrease) in Revenues	2008		2007
Acquisitions (previous twelve months)	4.2	%	0.9	%
Organic	(3.1	)	5.4
Foreign currency	(3.6	)	8.1
Franchise revenues	(15.1	)	0.2
Closed salons	(5.8	)	(1.3	)
	(23.4	)%	13.3	%

Growth related to acquisitions relates to acquisitions completed during the three months ended September 30, 2007, as these salons will not be a component of organic growth until the three months ended December 31, 2008. We did not acquire any international salons during the twelve months ended September 30, 2008. The decrease in organic growth was primarily due to the same-store sales decrease of 3.3 percent during the three months ended September 30, 2008. The foreign currency impact during the three months ended September 30, 2008 was driven by the weakening of the United States dollar against the British pound and the strengthening of the United States dollar against the Euro as compared to the comparable prior period. The decrease in franchise revenues and closed salons was due to the merger of our continental European franchise

salon operations with the Franck Provost Salon Group on January 31, 2008.

We acquired 34 international salons during the twelve months ended September 30, 2007, including four franchise buybacks. The organic growth was due primarily to the construction of 23 company-owned international salons during the twelve months ended September 30, 2007 and the inclusion of the four United Kingdom Vidal Sassoon schools, partially offset by a same-store sales decrease of 3.8 percent during the three months ended September 30, 2007. The foreign currency impact during the three months ended September 30, 2007 was driven by the weakening of the United States dollar against the British pound and the Euro as compared to the exchange rates for the comparable prior period.

International Salon Operating Income.  Operating income for the international salons for the three months ended September 30, 2008 and 2007 was as follows:

			Operating Income as % of
	Operating		Total		Increase (Decrease) Over Prior Fiscal Year
Periods Ended September 30,	Income		Revenues		Dollar			Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	1,698	3.5	%	$	(2,442	)	(59.0	)%	(300	)
2007	4,140		6.5		(374		)	(8.3	)	(160	)

(1)Represents the basis point change in International salon operating income as a percent of International salon revenues as compared to the corresponding periods of the prior fiscal year.

The basis point decrease in International salon operating income as a percent of International salon revenues during the three months ended September 30, 2008 was primarily due to the deconsolidation of our European franchise salon operations and negative same-store sales.

The basis point deterioration in international salon operating income as a percent of international salon revenues during the three months ended September 30, 2007 was primarily due to the planned timing of franchise magazine advertising on the continent of Europe, partially offset by the migration to a new, lower-cost product distribution model in the United Kingdom which includes shipping product from our United States distribution centers to the United Kingdom.

Hair Restoration Centers

Hair Restoration Revenues.  Total hair restoration revenues for the three months ended September 30, 2008 and 2007 were as follows:

			Increase Over Prior Fiscal Year				Same- Store Sales
Periods Ended September 30,	Revenues		Dollar		Percentage		Increase
	(Dollars in thousands)
2008	$	35,147	$	3,024	9.4	%	1.2	%
2007	32,123		3,026		10.4		8.2

The percentage increases (decreases) during the three months ended September 30, 2008 were due to the following factors:

	For the Three Months Ended September 30,
Percentage Increase (Decrease) in Revenues	2008		2007
Acquisitions (previous twelve months)	10.8	%	3.6	%
Organic	0.7		6.5
Franchise revenues	(2.1	)	0.3
	9.4	%	10.4	%

We acquired 7 hair restoration centers through franchise buybacks during the twelve months ended September 30, 2008. Hair restoration revenue from acquisitions increased 10.8 percent primarily due to these franchise buybacks during the twelve months ended September 30, 2008. Franchise revenues decreased due to the reduction in franchise centers.

We acquired three hair restoration centers during the twelve months ended September 30, 2007, including two franchise buybacks. The increase in hair restoration revenues was due to strong recurring and new customer revenues and increases in hair transplant management fees.

Hair Restoration Operating Income.  Operating income for our hair restoration centers for the three months ended September 30, 2008 and 2007 was as follows:

	Operating		Operating Income as % of Total		Increase (Decrease) Over Prior Fiscal Year
Periods Ended September 30,	Income		Revenues		Dollar			Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	5,918	16.8	%	$	(1,038	)	(14.9	)%	(490	)
2007	6,956		21.7		1,021			17.2		130

(1)Represents the basis point change in hair restoration operating income as a percent of hair restoration revenues as compared to the corresponding periods of the prior fiscal year.

The basis point decrease in hair restoration operating income as a percent of hair restoration revenues during the three months ended September 30, 2008 relates to higher legal costs and financial due diligence associated with a terminated potential acquisition, a planned increase in the cost of hair systems, and the lower operating margins on newly constructed and acquired centers.

The basis point improvement in hair restoration operating income as a percent of hair restoration revenues during the three months ended September 30, 2007 was due to strong recurring and new customer revenues and increases in hair transplant management fees, partially offset by advertising and marketing expenses.

LIQUIDITY AND CAPITAL RESOURCES

Overview

We continue to maintain a strong balance sheet to support system growth and financial flexibility. Our debt to capitalization ratio, calculated as total debt as a percentage of total debt and shareholders’ equity at fiscal quarter end, was as follows:

			Basis Point
Periods Ended	Debt to Capitalization		Increase (Decrease) (1)
September 30, 2008	45.3	%	140
June 30, 2008	43.9		(20	)

(1)Represents the basis point change in total debt as a percent of total debt and shareholders’ equity as compared to prior fiscal year end (June 30).

The increase in the debt to capitalization ratio as of September 30, 2008 compared to June 30, 2008 was primarily due to increased debt levels stemming from acquisitions and capital expenditures made during the three months ended September 30, 2008 and the foreign currency translation that decreased shareholders’ equity.

The basis point increase in the debt to capitalization ratio during the twelve months ended June 30, 2008 was primarily due to increased debt levels stemming from share repurchases, acquisitions and timing of customary income tax payments made during the twelve months ended June 30, 2008.

Total assets at September 30, 2008 and June 30, 2008 were as follows:

	September 30,		June 30,		$ Increase Over		% Increase Over
	2008		2008		Prior Period(1)		Prior Period(1)
	(Dollars in thousands)
Total Assets	$	2,273,061	$	2,235,871	$	37,190	1.7	%

(1)Change as compared to prior fiscal year end (June 30).

Acquisitions and increases in inventory levels due to the planned holiday season build-up and to support the transition of the PureBeauty operations to the Company’s distribution network caused the increase in total assets as of September 30, 2008 compared to June 30, 2008.

Total shareholders’ equity at September 30, 2008 and June 30, 2008 was as follows:

	September 30,		June 30,		$ Decrease Over			% Decrease Over
	2008		2008		Prior Period(1)			Prior Period(1)
	(Dollars in thousands)
Shareholders’ Equity	$	973,871	$	976,186	$	(2,135	)	(0.2	)%

(1)Change as compared to prior fiscal year end (June 30).

During the three months ended September 30, 2008, equity decreased primarily as a result of foreign currency translation and dividends, partially offset from earnings during the three months ended September 30, 2008.

Cash Flows

Operating Activities

Net cash provided by operating activities was $27.8 and $24.6 million during the three months ended September 30, 2008 and 2007, respectively, and was the result of the following:

	For the Three Months Ended September 30,
Operating Cash Flows	2008			2007
	(Dollars in thousands)
Net income	$	14,486		$	20,599
Depreciation and amortization	30,960			31,582
Deferred income taxes	586			1,640
Receivables	(677		)	(1,981		)
Inventories	(29,319		)	(16,654		)
Other current assets	1,024			(12,607		)
Accounts payable and accrued expenses	9,708			(476		)
Other non-current liabilities	458			3,289
Other	577			(818		)
	$	27,803		$	24,574

During the three months ended September 30, 2008, cash provided by operating activities was higher than in the corresponding period of the prior fiscal year primarily related to a decrease in prepaid expenses, primarily income taxes and rent, partially offset by the increase in inventory and accounts payable and accrued expenses related to the holiday build up and PureBeauty transition.

Investing Activities

Net cash used in investing activities was $60.9 and $79.6 million during the three months ended September 30, 2008 and 2007, respectively, and was the result of the following:

	For the Three Months Ended September 30,
Investing Cash Flows	2008			2007
	(Dollars in thousands)
Capital expenditures for remodels or other additions	$	(11,689	)	$	(10,880	)
Capital expenditures for the corporate office (including all technology-related expenditures)	(6,143		)	(4,795		)
Capital expenditures for new salon construction	(6,143		)	(6,714		)
Proceeds from sale of assets	10			10
Business and salon acquisitions	(30,987		)	(35,475		)
Loans and investments, net	(5,971		)	(14,500		)
Cash portion of beauty school assets contributed	—			(7,254		)
	$	(60,923	)	$	(79,608	)

During the three months ended September 30, 2008 cash used by investing activities was lower than in the corresponding period of the prior fiscal year primarily due to the Company investing and lending $8.5 million less to equity method investments and $4.5 million less in cash paid for business and salon acquisitions.  In addition, during the three months ended September 30, 2007, there was a $7.3 million cash contribution to EEG associated with 51 contributed accredited cosmetology schools.

The company-owned constructed and acquired locations (excluding franchise buybacks) consisted of the following number of locations in each concept:

	For the Three Months Ended September 30, 2008		For the Three Months Ended September 30, 2007
	Constructed	Acquired	Constructed	Acquired
Regis Salons	3	23	5	—
MasterCuts	9	—	3	—
Trade Secret	6	—	4	2
SmartStyle	17	—	46	—
Strip Centers	17	3	23	5
International	—	—	4	25
	52	26	85	32

Financing Activities

Net cash provided by financing activities was $35.1 and $10.2 million during the three months ended September 30, 2008 and 2007, respectively, was the result of the following:

	For the Three Months Ended September 30,
Financing Cash Flows	2008			2007
	(Dollars in thousands)
Net borrowings (payments) on revolving credit facilities	$	47,100		$	(30,400	)
Net (repayments) proceeds of long-term debt	(9,367		)	36,576
Proceeds from the issuance of common stock	2,291			698
Excess tax benefits from stock-based compensation plans	280			1
Dividend paid	(1,725		)	(1,767		)
Other	(3,507		)	5,090
	$	35,072		$	10,198

During the three months ended September 30, 2008, the net borrowings on revolving credit facilities and long-term debt were primarily used to fund loans and acquisitions during the three months ended September 30, 2008. Acquisitions funded are discussed in the paragraph below and in Note 6 to the Condensed Consolidated Financial Statements.

Acquisitions

The acquisitions during the three months ended September 30, 2008 consisted of 82 franchise buybacks and 26 acquired corporate salons. The acquisitions during the three months ended September 30, 2007 consisted of 59 franchise buybacks, including a franchisor of product - focused salons which operates 42 franchise locations, and 32 acquired corporate salons. The acquisitions were funded primarily from operating cash flow and debt.

Contractual Obligations and Commercial Commitments

As a part of our salon development program, we continue to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations, and continue to enter into transactions to acquire established hair care salons and businesses.

Financing

Financing activities are discussed above and derivative activities are discussed in Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”  There were no other significant financing activities during the three months ended September 30, 2008.

We believe that cash generated from operations and amounts available under our existing debt facilities will be sufficient to fund anticipated capital expenditures, acquisitions and required debt repayments for the foreseeable future.

On October 3, 2008, we completed an $85 million term loan that matures in July 2012.  The proceeds from the term loan were used to pay down the revolving credit facility, allowing for additional availability on the revolving credit facility if needed in the future.  In the current economic environment, we maintain our strong position to access financing as we continue to have a predictable business model, strong operating cash flow and balance sheet.  See further discussion of the term loan within Note 12 of the Condensed Consolidated Financial Statements.

We are in compliance with all covenants and other requirements of our financing arrangements as of September 30, 2008. However, the continued global economic downtown and credit crisis have negatively impacted our operating results in the quarter ended September 30, 2008.  Accordingly we are taking immediate steps to reduce debt and interest expense by repatriating cash from foreign locations to the United States, reducing capital expenditure and acquisition budgets, reducing inventory levels, and reducing overhead. We believe these steps should help us continue to be in compliance with our financial debt covenants provided same store sale results do not decline below the results we experienced during the period ended September 30, 2008.

Dividends

We paid dividends of $0.04 per share during the three months ended September 30, 2008 and 2007. On October 24, 2008, our Board of Directors declared a $0.04 per share quarterly dividend payable November 20, 2008 to shareholders of record on November 6, 2008.

SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Quarterly Report on Form 10-Q, as well as information included in, or incorporated by reference from, future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company contains or may contain “forward-looking statements” within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward—looking statements in this document reflect management’s best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. Such forward-looking statements are often identified herein by use of words including, but not limited to, “may,” “believe,” “project,” “forecast,” “expect,” “estimate,” “anticipate” and “plan.” In addition, the following factors could affect the Company’s actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include competition within the personal hair care industry, which remains strong, both domestically and internationally, and price sensitivity; changes in economic condition; changes in consumer tastes and fashion trends; labor and benefit costs; legal claims; risk inherent to international development (including currency fluctuations); the continued ability of the Company and its franchisees to obtain suitable locations for new salon development; governmental initiatives such as minimum wage rates,

taxes and possible franchise legislation; the ability of the Company to successfully identify, acquire and integrate salons that support its growth objectives; the ability to integrate the acquired business; the ability of the company to maintain satisfactory relationships with suppliers; or other factors not listed above. The ability of the Company to meet its expected revenue growth is dependent on salon acquisitions, new salon construction and same-store sales increases, all of which are affected by many of the aforementioned risks. Additional information concerning potential factors that could affect future financial results is set forth in the Company’s Annual Report on Form 10-K for the year ended June 30, 2008. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made in our subsequent annual and periodic reports filed or furnished with the SEC on Forms 10-K, 10-Q and 8-K and Proxy Statements on Schedule 14A.

EX-99.5

Exhibit No. 99.5

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in five sections:

·Management’s Overview

·Critical Accounting Policies

·Overview of Fiscal Year 2008 Results

·Results of Operations

·Liquidity and Capital Resources

MANAGEMENT’S OVERVIEW

Regis Corporation (RGS) owns or franchises beauty salons and hair restoration centers. As of June 30, 2008, we owned, franchised or held ownership interests in over 13,550 worldwide locations. Our locations consisted of 10,745 system wide North American and international salons, 92 hair restoration centers, and 2,714 locations in which we maintain an ownership interest less than 100 percent. Our salon concepts offer generally similar products and services and serve mass market consumers. Our salon operations are organized to be managed based on geographical location. Our North American salon operations include 10,273 salons, including 2,163 franchise salons, operating in the United States, Canada and Puerto Rico primarily under the trade names of Regis Salons, MasterCuts, Trade Secret, SmartStyle, Supercuts and Cost Cutters. Our international salon operations include 472 salons located in Europe, primarily in the United Kingdom. Hair Club for Men and Women includes 92 North American locations, including 35 franchise locations. During fiscal year 2008, we had approximately 65,000 corporate employees worldwide.

On February 16, 2009, the Company sold its Trade Secret salon concept (Trade Secret). The Company concluded, after a comprehensive review of strategic and financial options, to divest Trade Secret.  The locations listed above include 672 company-owned salons and 63 franchised North American salons. The sale of Trade Secret included 659 company-owned salons and 62 franchise salons, all of which had historically been reported within the Company’s North America reportable segment.  The sale of Trade Secret included Cameron Capital I, Inc. (CCI).  CCI owned and operated PureBeauty and BeautyFirst salons which were acquired by the Company on February 20, 2008.

Our growth strategy consists of two primary, but flexible, components. Through a combination of organic and acquisition growth, we seek to achieve our long-term objective of six to ten percent annual revenue growth. We anticipate that going forward, the mix of organic and acquisition growth will be roughly equal. However, depending on several factors, including the ability of our salon development program to keep pace with the availability of real estate for new construction, hair restoration lead generation, the availability of attractive acquisition candidates and same-store sales trends, this mix will vary from year to year. We believe achieving revenue growth of four to six percent, including same-store sales increases of 0.5 to 2.5 percent, will allow us to increase annual earnings at a mid to high single-digit growth rate. We anticipate expanding our presence in North America and the United Kingdom. In addition we anticipate our joint venture partners to continue to expand.

Maintaining financial flexibility is a key element in continuing our successful growth. With strong operating cash flow and balance sheet, we are confident that we will be able to financially support our long-term growth objectives.

Salon Business

The strength of our salon business is in the fundamental similarity and broad appeal of our salon concepts that allow flexibility and multiple salon concept placements in shopping centers and neighborhoods. Each concept generally targets the middle market customer, however, each attracts a different demographic. Aside from the 160 store closings of our underperforming salons, we anticipate expanding all of our salon concepts. When commercial opportunities arise, we

anticipate testing and developing new salon concepts to complement our existing concepts. An example of this would be the introduction of our new men’s concept, RAZE, introduced in Minnetonka, MN during August 2008.

We execute our salon growth strategy by focusing on real estate. Our salon real estate strategy is to add new units in convenient locations with good visibility and customer traffic, as well as appropriate trade demographics. Our various salon and product concepts operate in a wide range of retailing environments, including regional shopping malls, strip centers and Wal-Mart Supercenters. We believe that the availability of real estate will augment our ability to achieve the aforementioned long-term growth objectives. In fiscal year 2009, our outlook for constructed salons will be between 175 and 200 units, and we expect to add between 350 and 370 net locations through a combination of organic, acquisition and franchise growth. Our long-term outlook anticipates that we will add between 800 to 1,000 net locations each year through a combination of organic, acquisition and franchise growth. Capital expenditures in fiscal year 2009, excluding acquisition expenditures budgeted at $75.0 million, are projected to be approximately $95 million, which includes approximately $50 million for salon maintenance.

Organic salon revenue growth is achieved through the combination of new salon construction and salon same-store sales increases. Each fiscal year, we anticipate building several hundred company-owned salons. We anticipate our franchisees will open approximately 100 to 125 salons as well. Older, unprofitable salons will be closed or relocated. Our long-term outlook for our salon business is for annual consolidated low single digit same-store sales increases. Based on current fashion and economic cycles (i.e., longer hairstyles and lengthening of customer visitation patterns), we project our annual fiscal year 2009 consolidated same-store sales increase to be 0.5 to 2.5 percent.

Historically, our salon acquisitions have varied in size from as small as one salon to over one thousand salons. The median acquisition size is approximately ten salons. From fiscal year 1994 to fiscal year 2008, we acquired 7,926 salons, net of franchise buybacks. We anticipate adding several hundred company-owned salons each year from acquisitions. Some of these acquisitions may include buying salons from our franchisees.

Hair Restoration Business

In December 2004, we acquired Hair Club for Men and Women. Hair Club for Men and Women is a provider of hair loss solutions with an estimated five percent share of the $4 billion domestic market. This industry is comprised of numerous locations domestically and is highly fragmented. As a result, we believe there is an opportunity to consolidate this industry through acquisition. Expanding the hair loss business organically and through acquisition would allow us to add incremental revenue which is neither dependent upon, nor dilutive to, our existing salon businesses.

Our organic growth plans for hair restoration include the construction of a modest number of new locations in untapped markets domestically and internationally. However, the success of our hair restoration business is not dependent on the same real estate criteria used for salon expansion. In an effort to provide confidentiality for our customers, hair restoration centers operate primarily in professional or medical office buildings. Further, the hair restoration business is more marketing intensive. As a result, organic growth at our hair restoration centers will be dependent on successfully generating new leads and converting them into hair restoration customers. Our growth expectations for our hair restoration business are not dependent on referral business from, or cross marketing with, our hair salon business, but these concepts will be evaluated closely for additional growth opportunities.

CRITICAL ACCOUNTING POLICIES

The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the Consolidated Financial Statements, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Changes in these estimates could have a material effect on our Consolidated Financial Statements.

Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements contained in Part II, Item 8 of this Form 10-K. We believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.

Cost of Product and Services Used and Sold

Cost of product used in salon services is determined by applying estimated gross profit margins to service revenues, which are based on historical factors including product pricing trends and estimated shrinkage. In addition, the estimated gross profit margin is adjusted based on the results of physical inventory counts performed at least semi-annually and the monthly monitoring of factors that could impact our usage rates estimates. These factors include mix of service sales, discounting and special promotions. Cost of product sold to salon customers is determined based on the weighted average cost of product to the Company, adjusted for an estimated shrinkage factor. Product and service inventories are adjusted based on the results of physical inventory counts. During fiscal year 2008, we performed physical inventory counts between September and November and May and June, and adjusted our estimated gross profit margin to reflect the results of the observations. Significant changes in product costs, volumes or shrinkage could have a material impact on our gross margin.

Goodwill

Goodwill is tested for impairment annually or at the time of a triggering event in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Fair values are estimated based on our best estimate of the expected present value of future cash flows and compared with the corresponding carrying value of the reporting unit, including goodwill. Where available and as appropriate comparative market multiples are used to corroborate the results of the present value method. We consider our various concepts to be reporting units when we test for goodwill impairment because that is where we believe goodwill resides. Our policy is to perform our annual goodwill impairment test during our third quarter of each fiscal year ending June 30.

During the three months ended March 31 of fiscal years 2008, 2007, and 2006, we performed our annual goodwill impairment analysis on our reporting units. Based on our testing, a $23.0 million ($19.6 million net of tax) impairment charge was recorded during fiscal year 2007 related to our beauty school business. No impairment charges were recorded during fiscal years 2008 and 2006.

On January 31, 2008, we merged our continental European franchise salon operations with the operations of the Franck Provost Salon Group. Prior to the merger, our analysis indicated the net book value of our European franchise business approximated the fair value.

The performance challenges and necessary investments in information technology platforms and management that were required to effectively operate our beauty schools led us to exploring strategic alternatives pertaining to our beauty school operating segment. On August 1, 2007 (fiscal year 2008), we merged our 51 accredited cosmetology schools into EEG, creating the largest beauty school operator in North America. This transaction leveraged EEG’s management expertise, while enabling us to maintain a vested interest in the beauty school industry. During the three months ended March 31, 2007, the terms of the transaction indicated that the estimated fair value of the accredited cosmetology schools was less than the current carrying value of this reporting unit’s net assets, including goodwill. Thus, a $23.0 million pre-tax ($19.6 million after tax), non-cash impairment loss was recorded during the three months ended March 31, 2007.

Our fiscal year 2006 analysis indicated that the net book value of our European franchise business approximated their fair value. The fiscal year 2006 analysis indicated that the net book value of our beauty school business approximated their fair value. The fair value of our North American salons and hair restoration centers exceeded their carrying amounts.

Long-Lived Assets, Excluding Goodwill

We assess the impairment of long-lived assets annually or when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Our impairment analysis is performed on a salon by salon basis. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets. Recoverability of assets that will continue to be used in our operations is measured by comparing the carrying amount of the asset to the related total estimated future net cash flows. If an asset’s carrying value is not recoverable through those cash flows, the asset grouping is considered to be impaired. The impairment is measured by the difference between the assets’ carrying amount and their fair value, based on the best information available, including market prices or discounted cash flow analysis.

Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance. As the

ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause us to realize material impairment charges.

During fiscal years 2008, 2007 and 2006, $10.5 million ($6.1 million included in continuing operations, and $4.4 million included in income from discontinued operations), $6.8 million ($5.1 million included in continuing operations, and $1.7 million included in discontinued operations), and $8.4 million ($6.9 million included in continuing operations, and $1.5 million included in discontinued operations) of impairment was recorded within depreciation and amortization in the respective Consolidated Statement of Operations. In July 2008, we approved a plan to close up to 160 underperforming company-owned salons in fiscal year 2009. We also evaluated the appropriateness of the remaining useful lives of its affected property and equipment and whether a change to the depreciation charge was warranted. Impairment charges are included in depreciation related to company- owned salons in the Consolidated Statement of Operations.

Purchase Price Allocation

We make numerous acquisitions. The purchase prices are allocated to assets acquired, including identifiable intangible assets, and liabilities assumed based on their estimated fair values at the dates of acquisition. Fair value is estimated based on the amount for which the asset or liability could be bought or sold in a current transaction between willing parties. For our acquisitions, the majority of the purchase price that is not allocated to identifiable assets, or liabilities assumed, is accounted for as residual goodwill rather than identifiable intangible assets. This stems from the value associated with the walk-in customer base of the acquired salons, the value of which is not recorded as an identifiable intangible asset under current accounting guidance and the limited value of the acquired leased site and customer preference associated with the acquired hair salon brand. Residual goodwill further represents our opportunity to strategically combine the acquired business with our existing structure to serve a greater number of customers through our expansion strategies. Identifiable intangible assets purchased in fiscal year 2008, 2007 and 2006 acquisitions totaled $16.1, $4.5, and $17.3 million, respectively. The residual goodwill generated by fiscal year 2008, 2007, and 2006 acquisitions totaled $105.3, $50.8, and $127.3 million, respectively.

Self-insurance Accruals

We use a combination of third party insurance and self-insurance for a number of risks including workers’ compensation, health insurance, employment practice liability and general liability claims. The liability reflected on our Consolidated Balance Sheet represents an estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date. In estimating this liability, loss development factors utilize historical data to project the future development of incurred losses. Loss estimates are adjusted based upon actual claims settlements and reported claims. Although we do not expect the amounts ultimately paid to differ significantly from the estimates, self-insurance accruals could be affected if future claims experience differs significantly from the historical trends and actuarial assumptions. We recorded a positive adjustment to our self-insurance accruals of $7.1 million ($6.9 million pre-tax or $4.2 million net of tax included in continuing operations, with $0.2 million or $0.1 million net of tax, included in discontinued operations) and $10.2 million ($10.0 million pre-tax or $6.6 million net of tax included in continuing operations, with $0.2 million pre-tax or $0.2 million net of tax, included in discontinued operations) during fiscal years 2008 and 2007, respectively. The reserve reduction relates primarily to an actuarial change in estimate in prior years workers’ compensation claims reserves as a result of continued improvement of our new safety and return-to-work programs over the recent years as well as changes in state laws. In fiscal 2006 we increased self-insurance accruals related to prior year’s claims by $1.0 million ($0.9 million pre-tax included in continuing operations, with $0.1 million pre-tax included in discontinued operations.). During fiscal years 2008, 2007, and 2006, our insurance costs were $46.8 million ($44.8 million included in continuing operations, and $2.0 million including in discontinued operations), $45.2 million ($43.9 million included in continuing operations and $1.3 million included in discontinued operations) and $52.5 million ($51.0 million included in continuing operations, and $1.5 million included in discontinued operations), respectively.

Income Taxes

In determining income for financial statement purposes, management must make certain estimates and judgments. These estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense.

Management must assess the likelihood that deferred tax assets will be recovered. If recovery is not likely, we must increase our provision for taxes by recording a reserve, in the form of a valuation allowance, for the deferred tax assets that will not be ultimately recoverable. Should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which it is determined that the recovery is not more likely than not.

In addition, the calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. Management recognizes potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether and the extent to which additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. In the United States, fiscal years 2005 and after remain open for federal tax audit. For state tax audits, the statute of limitations generally spans three to four years, resulting in a number of states remaining open for tax audits dating back to fiscal year 2004. However, the company is under audit in a number of states in which the statute of limitations has been extended to fiscal years 2000 and forward. Internationally (including Canada), the statute of limitations for tax audits varies by jurisdiction, but generally ranges from three to five years.

We adopted the provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109, effective July 1, 2007. FIN No. 48 provides guidance regarding the recognition, measurement, presentation, and disclosure in the financial statements of tax positions taken or expected to be taken on a tax return, including the decision whether to file or not to file in a particular jurisdiction. As a result of the adoption of FIN No. 48, effective July 1, 2007, the Company recognized a $20.7 million increase in the liability for unrecognized income tax benefits, including interest and penalties. As of June 30, 2008 the Company’s unrecognized income tax benefits were $27.6 million. See Note 9, to the Consolidated Financial Statements, for further information.

Stock-based Compensation Expense

Compensation expense for stock-based compensation is estimated on the grant date using an option-pricing model. During fiscal years 2008, 2007, and 2006, stock- based compensation expense totaled $6.8, $4.9, and $4.9 million, respectively. Our specific weighted average assumptions for the risk free interest rate, expected term, expected volatility and expected dividend yield are documented in Note 11 to the Consolidated Financial Statements. Additionally, under SFAS No. 123R, we are required to estimate pre-vesting forfeitures for purposes of determining compensation expense to be recognized. Future expense amounts for any particular quarterly or annual period could be affected by changes in our assumptions or changes in market conditions.

Contingencies

We are involved in various lawsuits and claims that arise from time to time in the ordinary course of our business. Accruals are recorded for such contingencies based on our assessment that the occurrence is probable, and where determinable, an estimate of the liability amount. Management considers many factors in making these assessments including past history and the specifics of each case. However, litigation is inherently unpredictable and excessive verdicts do occur, which could have a material impact on our Consolidated Financial Statements.

OVERVIEW OF FISCAL YEAR 2008 RESULTS

The following summarizes key aspects of our fiscal year 2008 results:

·Revenues from continuing operations increased 4.6 percent to $2.5 billion and consolidated same-store sales increased 1.5 percent during fiscal year 2008. North American same-store service sales increased 4.1 and 3.4 percent during the third and fourth quarter, respectively, of the fiscal year, the Company’s largest comparable increases in eight years. An increase in average ticket price was partially offset by the continued decline in visitation patterns due to fashion trends resulted in an increase in consolidated same-store sales of 1.5 percent. The revenue increase was partially offset by deconsolidation of accredited cosmetology schools and European franchise salon operations. The Company expects fiscal year 2009 same-store sales growth to be 0.5 to 2.5 percent.

·A long-lived asset impairment charge of $10.5 million ($6.1 million included in continuing operations, and $4.4 million included in discontinued operations) was recorded during fiscal year 2008 related to the approval of a plan to close up to 160 underperforming company-owned salons in fiscal year 2009.

·Total debt at the end of the fiscal year was $764.7 million and our debt-to-capitalization ratio, calculated as total debt as a percentage of total debt and shareholders’ equity at fiscal year end, increased 20 basis points to 43.9 percent as compared to June 30, 2007.

·Share repurchases of $50.0 million and $79.7 million occurred during fiscal years 2008 and 2007, respectively.

·The effective income tax rate was adversely impacted by $3.0 million tax charge, of which $1.3 million was recorded through income tax expense and $1.7 million was recorded through other comprehensive income. primarily associated with repatriating approximately $30.0 million of cash previously considered to be indefinitely reinvested outside of the United States, which caused a 1.0 percent increase in the rate. The joint venture partnership with Franck Provost Group resulted in higher overall taxes being paid by Regis due to Regis’ income being subject to higher overall tax rates. In addition, Texas passed a new gross margins tax which, together with a number of states’ tax initiatives, negatively affected the tax rate by 1.9 percent. These events were partially offset by Work Opportunity and Welfare-to-Work Tax Credits earned during the fiscal year, which caused a 2.0 percent decrease in the rate.

·Site operating expenses were positively impacted by a $7.1 million ($6.9 million pre-tax or $4.2 million net of tax included in continuing operations and $0.2 million pretax or $0.1 million net of tax, included in income from discontinued operations) change in estimate of the Company’s self-insurance accruals, primarily workers’ compensation, due to the continued improvement of our safety and return-to-work programs over the recent years as well as changes in state laws.

·Income from continuing operations per share increased to $1.92 per diluted share, up from $1.48 per diluted share in fiscal year 2007, primarily related to the schools goodwill impairment charge in fiscal year 2007.

RESULTS OF OPERATIONS

Beginning with the period ended December 31, 2008 the operations of the Trade Secret concept within the North American reportable segment were accounted for as a discontinued operation. All periods presented will reflect Trade Secret as a discontinued operation. The following discussion of results of operations will reflect results from continuing operations. Discontinued operations will be discussed at the end of this section.

Consolidated Results of Operations

The following table sets forth, for the periods indicated, certain information derived from our Consolidated Statement of Operations in Item 8, expressed as a percent of revenues. The percentages are computed as a percent of total revenues, except as noted.

Results of Operations as a Percent of Revenues

	For the Years Ended June 30,
	2008		2007		2006
Service revenues	75.1	%	74.3	%	74.0	%
Product revenues	22.2		22.3		22.4
Royalties and fees	2.7		3.4		3.6
Operating expenses:
Cost of service(1)	57.1		56.0		56.3
Cost of product(2)	48.0		48.8		49.4
Site operating expenses	7.4		8.0		8.3
General and administrative	13.0		13.4		13.1
Rent	14.6		14.4		14.3
Depreciation and amortization	4.6		4.7		4.8
Goodwill impairment	—		1.0		—
Terminated acquisition income, net	—		—		(1.6	)
Operating income	7.0		6.0		8.3
Income from continuing operations before income taxes and equity in income of affiliated companies	5.5		4.4		6.7
Income taxes	2.2		1.6		2.4
Equity in income of affiliated companies, net of tax	0.0		—		—
Income from continuing operations(3)	3.4		2.9		4.3
Income from discontinued operations, net of taxes	0.1		0.7		0.8
Net income(3)	3.4		3.5		5.1

(1)Computed as a percent of service revenues and excludes depreciation expense.

(2)Computed as a percent of product revenues and excludes depreciation expense.

(3)Total is a recalculation; line items calculated individually will not sum to total.

Consolidated Revenues

Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees, hair restoration center revenues, and franchise royalties and fees. As compared to the prior fiscal year, consolidated revenues increased 4.6 percent to $2.5 billion during fiscal year 2008 and 9.5 percent to $2.4 billion during fiscal year 2007. The following table details our consolidated revenues by concept. All service revenues, product revenues (which include product and equipment sales to franchisees), and franchise royalties and fees are included within their respective concept within the table.

	For the Years Ended June 30,
	2008			2007			2006
	(Dollars in thousands)
North American salons:
Regis	$	514,219		$	498,577		$	481,760
MasterCuts	175,974			174,287			174,674
SmartStyle	507,349			462,321			413,907
Strip Center(1)	886,646			776,995			703,345
Other(3)	5,558			—			—
Total North American Salons(5)	2,089,746			1,912,180			1,773,686
International salons(1)(2)	256,063			253,430			220,662
Beauty schools(3)	—			85,627			63,952
Hair restoration centers(1)	135,582			122,101			109,702
Consolidated revenues	$	2,481,391		$	2,373,338		$	2,168,002
Percent change from prior year	4.6		%	9.5		%	11.7		%
Salon same-store sales increase(4)	1.5		%	0.9		%	0.7		%

(1)Includes aggregate franchise royalties and fees of $67.6, $79.9, and $77.2 million in fiscal years 2008, 2007, and 2006, respectively. North American salon franchise royalties and fees represented 58.6, 47.8, and 50.0 percent of total franchise revenues in fiscal years 2008, 2007, and 2006, respectively. The decrease in aggregate franchise royalties and fees and the increase in North American salon franchise royalties and fees as a percent of total revenues for fiscal year 2008 is a result of the deconsolidation of the Company’s European franchise salon operations.

(2)On January 31, 2008, the Company deconsolidated the results of operations of its European franchise salon operations. Accordingly, revenue growth was negatively impacted as a result of the deconsolidation. See Item 6, Selected Financial Data, for further information

(3)On August 1, 2007, the Company contributed its 51 accredited cosmetology schools to Empire Education Group, Inc. Accordingly, revenue growth was negatively impacted as a result of the deconsolidation. See Item 6, Selected Financial Data, for further information. For the fiscal year ended June 30, 2008, the results of operations for the month ended July 31, 2007 for the accredited cosmetology schools are reported in the North American salons segment. The Company retained ownership of its one North American and four United Kingdom Sassoon schools. Subsequent to August 1, 2007 results of operations for the Sassoon schools are included in the respective North American and international salon segments.

(4)Same-store sales increases or decreases are calculated on a daily basis as the total change in sales for company-owned locations which were open on a specific day of the week during the current period and the corresponding prior period. Annual same-store sales increases are the sum of the same-store sales increases computed on a daily basis. Relocated locations are included in same-store sales as they are considered to have been open in the prior period. International same-store sales are calculated in local currencies so that foreign currency fluctuations do not impact the calculation. We began including hair restoration centers in same-store sales calculations beginning with the third fiscal quarter of 2007. Management believes that same-store sales, a

component of organic growth, are useful in order to help determine the increase in salon revenues attributable to its organic growth (new salon construction and same-store sales growth) versus growth from acquisitions.

(5)Beginning with the period ended December 31, 2008, the operations of the Trade Secret concept within the North American reportable segment were accounted for as a discontinued operation.  All periods presented reflect Trade Secret as a discontinued operation.  Accordingly, Trade Secret revenues are excluded from this presentation.

The 4.6, 9.5, and 11.7 percent increases in consolidated revenues during fiscal years 2008, 2007 and 2006, respectively, were driven by the following:

	Percentage Increase (Decrease) in Revenues For the Years Ended June 30,
Factor	2008		2007		2006
Acquisitions (previous twelve months)	4.6	%	4.8	%	8.1	%
Organic growth	3.4		4.0		4.3
Foreign currency	1.1		1.1		(0.1	)
Franchise revenues	(0.6	)	0.0		(0.1	)
Closed salons	(3.9	)	(0.4	)	(0.5	)
	4.6	%	9.5	%	11.7	%

We acquired 354 company-owned salons (including 145 franchise buybacks), and bought back 6 hair restoration centers from franchisees during fiscal year 2008 compared to 351 company-owned salons (including 97 franchise buybacks), one beauty school and two company-owned hair restoration centers (including one franchise buyback) during fiscal year 2007. The organic growth stemmed primarily from the construction of 309 and 400 company-owned salons during the twelve months ended June 30, 2008 and 2007, respectively, as well as consolidated same-store sales increases. Franchise revenues decreased primarily due to the merger of our 1,587 continental Europe franchise salons with Franck Provost Salon Group on January 31, 2008. We closed 264 and 288 salons (including 103 and 168 franchise salons) during the twelve months ended June 30, 2008 and 2007, respectively. The decrease in closed salons as a percent of revenues was primarily due to the 51 accredited cosmetology schools contributed to Empire Education Group, Inc. on August 1, 2007.

We acquired 351 company-owned salons (including 97 franchise buybacks), one beauty school and two company-owned hair restoration centers (including one franchise buyback) during fiscal year 2007 compared to 283 company-owned salons (including 137 franchise buybacks), 30 beauty schools and eight company-owned hair restoration centers (including seven franchise buybacks) during fiscal year 2006. The organic growth stemmed primarily from the construction of 400 and 498 company-owned salons during the twelve months ended June 30, 2007 and 2006, respectively, as well as consolidated same-store sales increases. We closed 288 and 390 salons (including 168 and 229 franchise salons) during the twelve months ended June 30, 2007 and 2006, respectively.

During fiscal years 2008 and 2007, the foreign currency impact was driven by the continued weakening of the United States dollar against the Canadian dollar, British pound, and Euro as compared to the prior fiscal year’s exchange rates. During fiscal year 2006, the foreign currency impact was driven by the strengthening of the United States dollar against the British pound and Euro as compared to the prior fiscal year’s exchange rates, partially offset by the continued weakening of the United States dollar against the Canadian dollar.

Consolidated revenues are primarily composed of service and product revenues, as well as franchise royalties and fees. Fluctuations in these three major revenue categories were as follows:

Service Revenues.  Service revenues include revenues generated from company-owned salons and service revenues generated by hair restoration centers. Consolidated service revenues were as follows:

			Increase Over Prior Fiscal Year
Years Ended June 30,	Revenues		Dollar		Percentage
	(Dollars in thousands)
2008	$	1,862,490	$	98,010	5.6	%
2007	1,764,480		159,969		10.0
2006	1,604,511		166,336		11.6

The growth in service revenues during fiscal year 2008 was driven by acquisitions and new salon construction (a component of organic growth). Service revenue growth was driven by a consolidated same-store service sales increase of 2.2 percent during the twelve months ended June 30, 2008 as a result of price increases. Growth was negatively impacted as a result of the deconsolidation of our 51 accredited cosmetology schools to Empire Education Group, Inc. on August 31, 2007.

The growth in service revenues during fiscal year 2007 was driven primarily by acquisitions and new salon construction (a component of organic growth). Consolidated same-store service sales increased 1.1 percent during the twelve months ended June 30, 2007. Additionally, hair restoration service revenues contributed to the increase in consolidated service revenues during the twelve months ended June 30, 2007 due to strong recurring and new customer revenues and increases in hair transplant management fees. Same-store sales were negatively impacted by the sustained long-hair trend, as customer visitation patterns continued to be modest related to the fashion trend towards longer hairstyles.

The growth in service revenues during fiscal year 2006 was driven primarily by acquisitions and new salon construction (a component of organic growth). Same-store service sales in our salons continued to be modest due to a slight lengthening of customer visitation patterns stemming from a fashion trend towards longer hairstyles.

Product Revenues.  Product revenues are primarily sales at company-owned salons, hair restoration centers, and sales of product and equipment to franchisees. Consolidated product revenues were as follows:

			Increase Over Prior Fiscal Year
Years Ended June 30,	Revenues		Dollar		Percentage
	(Dollars in thousands)
2008	$	551,286	$	22,374	4.2	%
2007	528,912		42,661		8.8
2006	486,251		61,815		14.6

The growth in product revenues during fiscal year 2008 was primarily due to acquisitions, offset by same-store product sales decrease of 0.8 percent during the twelve months ended June 30, 2008. This decrease is due to the recent decline in the global economic condition and the continued trend of product diversion and increased appeal of mass hair care lines by the consumer.

The growth in product revenues during fiscal year 2007 was primarily due to acquisitions. Growth was not as robust compared to the prior fiscal year due to a same-store product sales increase of 0.2 percent during the twelve months ended June 30, 2007, related to product diversion, reduced promotions and increased appeal of mass retail hair care lines by the consumer.

The growth in product revenues during fiscal year 2006 was primarily due to acquisitions and an increase in same-store product sales increase of 1.2 percent during fiscal year 2006.

Franchise Royalties and Fees.  Consolidated franchise revenues, which include royalties and franchise fees, were as follows:

			Increase (Decrease) Over Prior Fiscal Year
Years Ended June 30,	Revenues		Dollar			Percentage
	(Dollars in thousands)
2008	$	67,615	$	(12,331	)	(15.4	)%
2007	79,946		2,706			3.5
2006	77,240		(1,508		)	(1.9	)

Total franchise locations open at June 30, 2008 and 2007 were 2,134 (including 35 franchise hair restoration centers) and 3,764 (including 41 franchise hair restoration centers). The decrease in consolidated franchise revenues during fiscal year 2008 was primarily due to the merger of the 1,587 European franchise salon operations with Franck Provost Salon Group on January 31, 2008. The decrease in consolidated franchise revenues during fiscal year 2008 was partially offset due to the weakening of the United States dollar against the Canadian dollar, British pound and Euro as compared to the exchange rates for fiscal year 2007.

Total franchise locations open at June 30, 2007 and 2006 were 3,764 (including 41 franchise hair restoration centers) and 3,797 (including 42 franchise hair restoration centers). We purchased 97 of our franchise salons during the twelve months ended June 30, 2007 compared to 137 during the twelve months ended June 30, 2006, which drove the overall decrease in the number of franchise salons between periods. The increase in consolidated franchise revenues during fiscal year 2007 was primarily due to the weakening of the United States dollar against the Canadian dollar, British pound and Euro as compared to the exchange rates for fiscal year 2006, partially offset by a decreased number of franchise salons, as discussed above.

The decrease in consolidated franchise revenues during fiscal year 2006 was primarily due to the impact of unfavorable foreign currency fluctuations, as well as 137 franchise buybacks during the twelve months ended June 30, 2006.

Gross Margin (Excluding Depreciation)

Our cost of revenues primarily includes labor costs related to salon employees and hair restoration center employees, the cost of product used in providing services and the cost of products sold to customers and franchisees. The resulting gross margin was as follows:

	Gross		Margin as % of Service and Product		Increase (Decrease) Over Prior Fiscal Year
Years Ended June 30,	Margin		Revenues		Dollar		Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	1,086,826	45.0	%	$	40,643	3.9	%	(60	)
2007	1,046,183		45.6		98,167		10.4		30
2006	948,016		45.3		112,852		13.5		50

(1)Represents the basis point change in gross margin as a percent of service and product revenues as compared to the corresponding period of the prior fiscal year.

Service Margin (Excluding Depreciation).  Service margin was as follows:

	Service		Margin as % of		Increase (Decrease) Over Prior Fiscal Year
Years Ended June 30,	Margin		Service Revenues		Dollar		Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	799,931	42.9	%	$	24,397	3.1	%	(110	)
2007	775,534		44.0		73,650		10.5		30
2006	701,884		43.7		75,651		12.1		20

(1)Represents the basis point change in service margin as a percent of service revenues as compared to the corresponding period of the prior fiscal year.

The basis point decrease in service margins as a percent of service revenues during fiscal year 2008 was primarily due to the absence of the beauty school segment service revenue from consolidated service revenues. The decrease was also due to a change made during the first fiscal quarter as a result of refinements made to our inventory tracking systems. The refinements resulted in better tracking and accounting for retail products that our salon stylists transfer from retail shelves to the back bar for use in servicing customers. The cost of these products had historically been included as a component of our product gross margin, whereas they are now more appropriately included in our service margin. During fiscal year 2009, we are forecasting service margins to be in the low 42 percent range of service revenues.

The basis point improvement in service margins as a percent of service revenues during fiscal year 2007 was primarily due to a same-store service sales increase of 1.1 percent during the twelve months ended June 30, 2007 compared to 0.6 percent during the twelve months ended June 30, 2006. The improvement was also due to increased tuition in the schools segment, increased hair restoration service revenues due to strong recurring and new customer revenues and increases in hair transplant management fees and the continued focus on management of salon payroll costs.

The basis point improvement in service margins as a percent of service revenues during fiscal year 2006 was primarily due to improved payroll and payroll-related costs and a same-store service sales increase of 0.6 percent during the twelve months ended June 30, 2006.

Product Margin (Excluding Depreciation).  Product margin was as follows:

	Product		Margin as % of		Increase Over Prior Fiscal Year
Years Ended June 30,	Margin		Product Revenues		Dollar		Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	286,895	52.0	%	$	16,246	6.0	%	80
2007	270,649		51.2		24,517		10.0		60
2006	246,132		50.6		37,201		17.8		140

(1)Represents the basis point change in product margin as a percent of product revenues as compared to the corresponding period of the prior fiscal year.

The basis point improvement in product margins as a percentage of product revenues during fiscal year 2008 was due to refinements made to our inventory tracking systems. The refinements resulted in better tracking and accounting for retail products that our salon stylists transfer from retail shelves to the back bar for use in servicing customers.  The cost of these products had historically been included as a component of our product gross margin, whereas they are now more appropriately included in our service margin.  In addition, product margins improved due to the deconsolidation of the beauty schools and European franchise salon operations.  During fiscal year 2009, we are forecasting product margins to be in the high 48 percent range of product revenues.

The basis point improvement in product margins as a percent of product revenues during fiscal year 2007 was primarily due to a reduction in retail promotional discounting as compared to fiscal year 2006.

The basis point improvement in product margins as a percent of product revenues during fiscal year 2006 was primarily related to product sales from the hair restoration centers, which have higher product margins than sales of retail products in salons, for the full year as compared to seven months (since the date of acquisition) during the prior fiscal year. This benefit was partially offset by reduced sales margins realized on several vendor product lines repackaged during the fiscal year.

Site Operating Expenses

This expense category includes direct costs incurred by our salons and hair restoration centers, such as on-site advertising, workers’ compensation, insurance, utilities and janitorial costs. Site operating expenses were as follows:

	Site		Expense as % of Consolidated		(Decrease) Increase Over Prior Fiscal Year
Years Ended June 30,	Operating		Revenues		Dollar			Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	184,769	7.4	%	$	(5,845	)	(3.1	)%	(60	)
2007	190,614		8.0		9,664			5.3		(30	)
2006	180,950		8.3		14,935			9.0		(30	)

(1)Represents the basis point change in site operating expenses as a percent of consolidated revenues as compared to the corresponding period of the prior fiscal year.

The basis point improvement in site operating expenses as a percent of consolidated revenues during fiscal year 2008 was primarily due to a decrease in workers’ compensation expense due to a continued reduction in the frequency and severity of injury claims from our successful salon safety programs. During fiscal year 2009, we are forecasting site operating expenses be in the high seven percent range of consolidated revenue.

The basis point improvement in site operating expenses as a percent of consolidated revenues during fiscal year 2007 was primarily due to an actuarial reduction in insurance claims reserves, primarily workers’ compensation, as a result of the continued improvement of our safety and return-to-work programs over the recent years, as well as changes in state laws, providing an additional benefit of $10.0 million ($6.6 million net of tax) during fiscal year 2007. The basis point improvement in site operating expenses as a percent of consolidated revenues during fiscal year 2006 was primarily due to reduced workers’ compensation insurance-related costs stemming from decreased claims activity.

General and Administrative

General and administrative (G&A) includes costs associated with our field supervision, salon training and promotions, product distribution centers and corporate offices (such as salaries and professional fees), including costs incurred to support franchise and hair restoration center operations. G&A expenses were as follows:

			Expense as % of Consolidated		Increase (Decrease) Over Prior Fiscal Year
Years Ended June 30,	G&A		Revenues		Dollar		Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	321,563	13.0	%	$	3,840	1.2	%	(40	)
2007	317,723		13.4		32,729		11.5		30
2006	284,994		13.1		32,963		13.1		10

(1)Represents the basis point change in G&A as a percent of consolidated revenues as compared to the corresponding period of the prior fiscal year.

The basis point improvement in G&A costs as a percentage of consolidated revenues during fiscal year 2008 was primarily due to the deconsolidation of the European franchise salon operations and accredited cosmetology schools. During fiscal year 2009, we are forecasting G&A expenses to be in the high 11 percent range of consolidated revenues.

The planned basis point increase in G&A costs as a percent of consolidated revenues during fiscal year 2007 was primarily due to increases in salon supervisor salaries, benefits, travel expenses, professional fees and the timing of promotional salon and hair restoration advertising.

The basis point increase in G&A costs as a percent of consolidated revenues during fiscal year 2006 was primarily due to $2.8 million related to the settlement of a Fair Labor Standards Act (FLSA) lawsuit over wage and hour disputes. Excluding the ten basis point impact of this settlement, G&A expenses were relatively consistent as a percent of revenues compared to the prior fiscal year.

Rent

Rent expense, which includes base and percentage rent, common area maintenance and real estate taxes, was as follows:

			Expense as % of Consolidated		Increase Over Prior Fiscal Year
Years Ended June 30,	Rent		Revenues		Dollar		Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	361,476	14.6	%	$	19,654	5.7	%	20
2007	341,822		14.4		31,048		10.0		10
2006	310,774		14.3		36,398		13.3		20

(1)Represents the basis point change in rent expense as a percent of consolidated revenues as compared to the corresponding period of the prior fiscal year.

The basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2008 was primarily due to rent expense increasing at a faster rate than location same-store sales and the deconsolidation of the schools and European franchise salon operations, offset by recent salon acquisitions having a lower occupancy cost. During fiscal year 2009, we are forecasting rent expense as a percent of consolidated revenues to be approximately 15 percent of consolidated revenues, excluding the impact of closing 112 stores. We expect to record an additional $15.0 million to $20.0 million of lease termination costs in fiscal year 2009 related to the 112 underperforming Company-owned salons that the Company has approved to close in fiscal year 2009.

The basis point increase in rent expense as a percent of consolidated revenues during fiscal years 2007 and 2006 was primarily due to rent expense increasing at a faster rate than location same-store sales. Additionally, fiscal year 2007 is impacted by an extra week of rent in the United Kingdom.

During fiscal year 2006, $5.7 million ($3.7 million, net of tax) in lease termination costs were recognized through rent expense. These costs resulted from our decision to close 59 company-owned salon locations and refocus efforts on improving the sales and operations of nearby salons. Additionally, the increase in this fixed-cost expense as a percent of consolidated revenues was due to salon rent increasing at a faster rate than salon same-store sales during fiscal year 2006.

Depreciation and Amortization

Depreciation and amortization expense (D&A) was as follows:

			Expense as % of Consolidated		Increase (Decrease) Over Prior Fiscal Year
Periods Ended June 30,	D&A		Revenues		Dollar		Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	113,293	4.6	%	$	1,829	1.6	%	(10	)
2007	111,464		4.7		8,390		8.1		(10	)
2006	103,074		4.8		21,516		26.4		60

(1)Represents the basis point change in depreciation and amortization as a percent of consolidated revenues as compared to the corresponding period of the prior fiscal year.

The basis point improvement in D&A as a percent of consolidated revenues during fiscal year 2008 was primarily due to same-store sales increasing at a faster rate than D&A.  The improvement was partially offset by higher salon impairment charges in fiscal year 2008 related to the Company’s decision to close 112 underperforming salons in fiscal year 2009, when compared to salon impairment charges in fiscal year 2007. Impairment charges of $6.1 million ($3.7 million net of tax) were recorded during fiscal 2008 related to the impairment of property and equipment at underperforming locations. The majority of closings are expected to occur in the first half of fiscal year 2009. The decision to close the underperforming stores was the result of a comprehensive review of our salon portfolio, further continuing our initiative to enhance profitability. During fiscal year 2009, we are forecasting D&A to be in the mid four percent range of consolidated revenue.

The basis point improvement in D&A for fiscal year 2007 relates primarily to lower salon impairment charges in fiscal year 2007 when compared to salon impairment charges in fiscal year 2006. Impairment charges of $5.1 million

($3.2 million net of tax) were recorded during fiscal 2007 related to the impairment of property and equipment at underperforming locations.

The basis point increase in D&A as a percent of consolidated revenues during fiscal year 2006 was primarily due to increased salon impairment charges during fiscal year 2006 over fiscal year 2005, stemming from lower same-store sales volumes during recent fiscal years. Impairment charges of $5.9 and $1.0 million were recognized for the North American and international operations, respectively, during fiscal year 2006. Additionally, $2.1 million in losses on disposal of property and equipment was recognized related to the fourth quarter closure of 59 salons. We decided to close these company-owned salon locations in order to refocus efforts on improving the sales and operations of nearby salons.

Goodwill Impairment

Goodwill impairment was as follows:

	Goodwill		Expense as % of Consolidated		(Decrease) Increase Over Prior Fiscal Year
Years Ended June 30,	Impairment		Revenues		Dollar			Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	—	—	%	$	(23,000	)	—	%	(100	)
2007	23,000		1.0		23,000			—		100
2006	—		—		(38,319		)	—		(200	)

(1)Represents the basis point change in goodwill impairment as a percent of consolidated revenues as compared to the corresponding period of the prior fiscal year.

A $23.0 million ($19.6 million net of tax) impairment charge was recorded during fiscal year 2007 related to our beauty school business. No impairment charges were recorded during fiscal years 2008 and 2006.

Terminated Acquisition Income, net

Terminated acquisition income, net was as follows:

	Terminated Acquisition			Expense as % of Consolidated		Increase (Decrease) Over Prior Fiscal Year
Years Ended June 30,	Income, net			Revenues		Dollar			Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	—		—	%	$	—		—	%	—
2007	—			—		33,683			—		(160	)
2006	(33,683		)	1.6		(33,683		)	—		160

(1)Represents the basis point change in terminated acquisition income, net as a percent of consolidated revenues as compared to the corresponding period of the prior fiscal year.

A net settlement gain of $33.7 million ($21.7 million net of tax) was recognized during fiscal year 2006 stemming from a termination fee collected from Alberto-Culver Company due to the terminated merger agreement for Sally Beauty Company. The termination fee gain is net of direct transaction related expenses associated with terminated merger agreement. No termination income was recorded during fiscal years 2008 and 2007.

Interest

Interest expense was as follows:

			Expense as % of Consolidated		Increase Over Prior Fiscal Year
Years Ended June 30,	Interest		Revenues		Dollar		Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	44,279	1.8	%	$	2,632	6.3	%	—
2007	41,647		1.8		6,734		19.3		20
2006	34,913		1.6		10,519		43.1		30

(1)Represents the basis point change in interest expense as a percent of consolidated revenues as compared to the corresponding period of the prior fiscal year.

Interest as a percent of consolidated revenues during the twelve months ended June 30, 2008 was consistent with the twelve months ended June 30, 2007. During fiscal year 2009, we expect interest expense to decrease to approximately $41 million.

The basis point increase in interest expense as a percent of consolidated revenues during fiscal year 2007 was primarily due to increased debt levels due to the Company’s repurchase of $79.7 million of our outstanding common stock, acquisitions and the timing of income tax payments during the fiscal year.

The basis point increase in interest expense as a percent of consolidated revenues during fiscal year 2006 was primarily due to an increase in our debt level stemming from fiscal year 2006 acquisition activity. Additionally, increased borrowing rates contributed to the fiscal year 2006 increase in interest expense as a percent of consolidated revenues.

Income Taxes

Our reported effective tax rate was as follows:

Years Ended June 30,	Effective Rate		Basis Point Increase (Decrease)
2008	39.5	%	410
2007	35.4		(50	)
2006	35.9		(1,200	)

The basis point increase in our overall effective income tax rate for the fiscal year ended June 30, 2008 is primarily the result of the shift in income from low to high tax jurisdictions as a result of the merger of European franchise salon operations with the Franck Provost Salon Group. As a result of the merger with the Franck Provost Salon Group, the Company repatriated approximately $30 million cash previously considered to be indefinitely reinvested outside of the United States. In addition, certain costs related to the transaction were not deductible for tax purposes. The combined effect of these items caused an increase in the tax rate of 2.1%. In addition, Texas and other states introduced new taxes or restrictive rules. The combined effect of these new taxes, together with other adjustments, caused an increase in the tax rate of 1.9%.

The basis point improvement in our overall effective income tax rate for the fiscal year ended June 30, 2007 was primarily due to the tax benefit received during the three months ended December 31, 2006 related to the retroactive reinstatement to January 1, 2006 of the Work Opportunity and Welfare-to-Work Tax Credits. The basis point improvement was also due to increases in international income subject to tax in lower tax foreign jurisdictions, partially offset by the pre-tax, non-cash goodwill impairment charge of $23.0 million ($19.6 million net of tax) recorded during the three months ended March 31, 2007. The majority of the impairment charge was not deductible for tax purposes.

In December 2006, President Bush signed the Tax Relief and Health Care Act of 2006 into law. This Act retroactively reinstated the Work Opportunity and Welfare-to-Work Tax Credits for a two year period beginning January 1, 2006. In accordance with generally accepted accounting principles, the financial impact of the tax credits earned during the entire calendar year was required to be reflected in the Company’s tax rate for the quarter in which the Act was signed into law, which was the Company’s quarter ended December 31, 2006. The fiscal year 2007 tax rate reflects $4.1 million related to Work Opportunity and Welfare-to-Work Tax Credits, a portion of which was earned during fiscal year 2006, but not

reflected in the related financial statements due to the expiration of the prior statute. Under the prior law which was retroactive to January 1, 2004 and expired on December 31, 2005, the Company earned employment credits of $0.8 and $1.8 million during fiscal years 2006 and 2005, respectively. On May 26, 2007, President Bush signed into law the Small Business and Work Opportunity Tax Act of 2007. Whereas under the Tax Relief and Health Care Act of 2006 the Work Opportunity and Welfare-to-Work Tax Credits were to expire on December 31, 2007, this Act enhances and extends the credits to September 1, 2011.

The basis point improvement in our overall effective income tax rate for the fiscal year ended June 30, 2006 was related to the 2005 goodwill impairment charge in the international salon segment, which is non-deductible for tax purposes. The goodwill impairment caused an 11.0 percent increase in the fiscal year 2005 tax rate. Excluding the impact of the goodwill impairment, the increase in the fiscal year 2006 tax rate over the prior year was primarily due to the elimination of the Work Opportunity and Welfare-to-Work Tax Credits, which expired on December 31, 2005. During fiscal year 2005, excluding the impact of the goodwill impairment, the improvement in the effective tax rate over fiscal year 2004 was primarily due to the successful settlement of our federal audit and the retroactive reinstatement of the Work Opportunity and Welfare-to-Work Tax Credits during fiscal year 2005.

Income from Discontinued Operations, net of Taxes

Income from discontinued operations was as follows:

	Income from Discontinued Operations,		Decrease Over Prior Fiscal Year
Years Ended June 30,	Net of Taxes		Dollar			Percentage
	(Dollars in thousands)
2008	$	1,303	$	(14,128	)	(91.6	)%
2007	15,431		(1,244		)	(7.5	)
2006	16,675		(9,082		)	(35.3	)

During the quarter ended December 31, 2008, we concluded that Trade Secret was held for sale and presented as a discontinued operation for all comparable prior periods. The income for the years ended June 30, 2008, 2007, and 2006 are the result of the operating income, net of tax.  The decrease in income from discontinued operations during fiscal year 2008 was primarily due to same-store sales decreasing 7.9 percent and reduced retail product margins, largely the result of recent salon acquisitions which have lower product margins. The decrease in income from discontinued operations during fiscal year 2008 was also due to long-lived asset  impairment charges increased to $4.4 million as compared to $1.7 million during fiscal year 2007.  See Note 2 to the Consolidated Financial Statements for further discussion.

Recent Accounting Pronouncements

Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements.

Effects of Inflation

We compensate some of our salon employees with percentage commissions based on sales they generate, thereby enabling salon payroll expense as a percent of company-owned salon revenues to remain relatively constant. Accordingly, this provides us certain protection against inflationary increases, as payroll expense and related benefits (our major expense components) are variable costs of sales. In addition, we may increase pricing in our salons to offset any significant increases in wages. Therefore, we do not believe inflation has had a significant impact on the results of our operations.

Constant Currency Presentation

The presentation below demonstrates the effect of foreign currency exchange rate fluctuations from year to year. To present this information, current period results for entities reporting in currencies other than United States dollars are converted into United States dollars at the average exchange rates in effect during the corresponding period of the prior fiscal year, rather than the actual average exchange rates in effect during the current fiscal year. Therefore, the foreign currency impact is equal to current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year.

During the fiscal years ended June 30, 2008 and 2007, foreign currency translation had a favorable impact on consolidated revenues due to the strengthening of the Canadian dollar, British pound, and Euro against the United States dollar.

During the fiscal year ended June 30, 2006, foreign currency translation had a negative impact on consolidated revenues due to the weakening of the British pound and Euro against the United States dollar, partially offset by the strengthening of the Canadian dollar.

	Favorable (Unfavorable) Impact of Foreign Currency Exchange Rate Fluctuations
(Dollars in thousands)	Impact on Revenues							Impact on Income Before Income Taxes
Currency	Fiscal 2008		Fiscal 2007		Fiscal 2006			Fiscal 2008		Fiscal 2007		Fiscal 2006
Canadian dollar	$	14,400	$	3,396	$	6,830		$	2,487	$	567	$	972
British pound	7,689		15,167		(6,753		)	134		616		(341		)
Euro	3,831		4,388		(2,472		)	755		782		(292		)
Total	$	25,920	$	22,951	$	(2,395	)	$	3,376	$	1,965	$	339

Results of Operations by Segment

Based on our internal management structure, we report three segments: North American salons, international salons and hair restoration centers. Significant results of operations are discussed below with respect to each of these segments.

North American Salons

North American Salon Revenues.  Total North American salon revenues were as follows:

			Increase Over Prior Fiscal Year				Same-Store
Years Ended June 30,	Revenues		Dollar		Percentage		Sales Increase
	(Dollars in thousands)
2008	$	2,089,746	$	177,566	9.3	%	1.8	%
2007	1,912,180		138,494		7.8		0.9
2006	1,773,686		152,410		9.4		1.1

The percentage increases during the years ended June 30, 2008, 2007, and 2006 were due to the following factors:

	Percentage Increase (Decrease) in Revenues For the Years Ended June 30,
Factor	2008		2007		2006
Acquisitions (previous twelve months)	4.6	%	4.5	%	4.7	%
Organic growth	4.2		3.5		4.7
Foreign currency	0.8		0.2		0.4
Franchise revenues	0.1		0.0		(0.1	)
Closed salons	(0.4	)	(0.4	)	(0.3	)
	9.3	%	7.8	%	9.4	%

We acquired 287 North American salons during the twelve months ended June 30, 2008, including 145 franchise buybacks. The organic growth was due primarily to the construction of 294 company-owned salons in North America during the twelve months ended June 30, 2008, and a same-store sales increase of 1.8 percent during the twelve months ended June 30, 2008. The Company experienced the largest comparable increase in same-store service sales in eight years during the third and fourth quarter of fiscal year 2008, 4.1 percent and 3.4 percent, respectively. The foreign currency impact during fiscal year 2008 was driven by the weakening of the United States dollar against the Canadian dollar as compared to the exchange rate for fiscal year 2007.

We acquired 335 North American salons during the twelve months ended June 30, 2007, including 93 franchise buybacks. The organic growth was due primarily to the construction of 375 company-owned salons in North America during the twelve months ended June 30, 2007, partially offset by a lower same-store sales increase of 0.9 percent during the twelve months ended June 30, 2007 as compared to 1.1 percent during the twelve months ended June 30, 2006. The foreign currency

impact during fiscal year 2007 was driven by the weakening of the United States dollar against the Canadian dollar as compared to the exchange rate for fiscal year 2006.

We acquired 271 North American salons during the twelve months ended June 30, 2006, including 135 franchise buybacks. The organic growth stemmed primarily from the construction of 465 company-owned salons in North America during the twelve months ended June 30, 2006. The foreign currency impact during fiscal year 2006 was driven by the weakening of the United States dollar against the Canadian dollar as compared to the exchange rate for fiscal year 2005.

North American Salon Operating Income.  Operating income for the North American salons was as follows:

	Operating		Operating Income as		Increase (Decrease) Over Prior Fiscal Year
Years Ended June 30,	Income		% of Total Revenues		Dollar		Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	285,855	13.7	%	$	26,464	10.2	%	10
2007	259,391		13.6		28,174		12.2		60
2006	231,217		13.0		19,414		9.2		(10	)

(1)Represents the basis point change in North American salon operating income as a percent of total North American salon revenues as compared to the corresponding period of the prior fiscal year.

The basis point increase in North American salon operating income as a percent of North American salon revenues during fiscal year 2008 was primarily due a decrease in workers’ compensation expense due to a continued reduction in the frequency and severity of injury claims from our successful salon safety programs.  Partially offsetting the increase was impairment losses on the disposal of property and equipment stemming from salon closures. In July 2008 (fiscal year 2009), we approved a plan to close up to 112 underperforming company-owned salon locations in fiscal year 2009 prior to the lease end date in order to enhance overall profitability, which resulted in impairment charges of $6.1 million.

The basis point improvement in North American salon operating income as a percent of North American salon revenues during fiscal year 2007 was due to improved product margins and a reduction in workers’ compensation expense as a result of the continued improvement of our safety and return-to-work programs over the recent years, as well as changes in state laws and rent expense increasing at a faster rate than salon same-store sales.

The basis point decrease in North American salon operating income as a percent of North American salon revenues during fiscal year 2006 was primarily due to reduced retail product margins, largely the result of increased costs associated with the repackaging efforts by suppliers of several top retail product lines. Additionally, rent and depreciation and amortization expenses increased as a percent of North American salon revenues due to lease termination costs and losses on the disposal of property and equipment stemming from salon closures. During the fourth quarter of fiscal year 2006, we decided to close 59 company-owned salon locations prior to the lease end date in order to refocus efforts on improving the sales and operations of nearby salons. Increased salon impairment charges during fiscal year 2006 and lower same-store sales volumes during recent fiscal years also contributed to the increase in depreciation and amortization expenses during fiscal year 2006.

International Salons

International Salon Revenues.  Total international salon revenues were as follows:

			Increase (Decrease) Over Prior Fiscal Year					Same-Store Sales
Years Ended June 30,	Revenues		Dollar			Percentage		(Decrease)
	(Dollars in thousands)
2008	$	256,063	$	2,633		1.0	%	(4.3	)%
2007	253,430		32,768			14.8		(0.6	)
2006	220,662		(6,122		)	(2.7	)	(3.0	)

The percentage increases (decreases) during the years ended June 30, 2008, 2007, and 2006 were due to the following factors.

	Percentage Increase (Decrease) in Revenues For the Years Ended June 30,
	2008		2007		2006
Acquisitions (previous twelve months)	4.1	%	2.6	%	1.8	%
Organic growth	(0.7	)	4.4		2.0
Foreign currency	4.5		8.5		(3.9	)
Franchise revenues	(5.9	)	0.3		(0.5	)
Closed salons	(1.0	)	(1.0	)	(2.1	)
	1.0	%	14.8	%	(2.7	)%

We acquired 25 international salons during the twelve months ended June 30, 2008, none of which were franchise buybacks. The decrease in organic growth was due to a decrease of same-store sales of 4.3 percent for the twelve months ended June 30, 2008 and due an additional week in the fiscal year 2007 reporting period as compared to the fiscal year 2008 reporting period. This decrease was partially offset by the 15 company-owned international salons constructed and the inclusion of the four United Kingdom Sassoon schools for the twelve months ended June 30, 2008. The foreign currency impact during fiscal year 2008 was driven by the weakening of the United States dollar against the British Pound and Euro as compared to the exchange rates for fiscal year 2007. Franchise revenues decreased primarily due to the merger of our continental Europe franchise salon operations with Franck Provost Salon Group on January 31, 2008.

We acquired 16 international salons during the twelve months ended June 30, 2007, including four franchise buybacks. The organic growth was due to the construction of 25 company-owned international salons during the twelve months ended June 30, 2007 and the additional week in the fiscal year 2007 reporting period as compared to the fiscal year 2006 reporting period, partially offset by a same-store sales decrease of 0.6 percent for the twelve months ended June 30, 2007. The foreign currency impact during fiscal year 2007 was driven by the weakening of the United States dollar against the British pound and the Euro as compared to the exchange rates for fiscal year 2006.

We acquired 12 international salons during the twelve months ended June 30, 2006, including two franchise buybacks. The organic growth stemmed from the construction of 33 company-owned international salons during the twelve months ended June 30, 2006, partially offset by a same-store sales decrease of 3.0 percent during the twelve months ended June 30, 2006. The foreign currency impact during fiscal year 2006 was driven by the strengthening of the United States dollar against the British pound and the Euro as compared to the exchange rates for fiscal year 2005. The decrease in franchise revenues was primarily due to the closure and sale of 116 franchise salons during fiscal year 2006.

International Salon Operating Income.  Operating income for the international salons was as follows:

	Operating		Operating Income as % of		Increase (Decrease) Over Prior Fiscal Year
Years Ended June 30,	Income		Total Revenues		Dollar			Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	11,651	4.6	%	$	(5,897	)	(33.6	)%	(230	)
2007	17,548		6.9		3,986			29.4		80
2006	13,562		6.1		31,695			174.8		1,410

(1)Represents the basis point change in international salon operating income (loss) as a percent of total international salon revenues as compared to the corresponding period of the prior fiscal year.

The basis point decrease in international salon operating income as a percent of international salon revenues during fiscal year 2008 was primarily due to the deconsolidation of our European franchise salon operations, negative same-store sales, and higher impairment charges of $1.1 million related to the Company approved plan to close underperforming company-owned salon locations in fiscal year 2009. These decreases were offset by the inclusion of the Sassoon schools in the segment.

The basis point improvement in international salon operating income as a percent of international salon revenues during fiscal year 2007 was primarily due to improved product margins and severance expenses incurred in fiscal 2006 that

did not occur in fiscal 2007. A same-store product sales increase of 7.1 percent for the twelve months ended June 30, 2007 also contributed to the improvement.

The basis point improvement in international salon operating income as a percent of international salon revenues during fiscal year 2006 was primarily due to the goodwill impairment charge of $38.3 million recorded during the three months ended March 31, 2005, offset by a $1.0 million charge in fiscal year 2006 related to the impairment of certain salons’ property and equipment which contributed to an increase in depreciation and amortization expense. Exclusive of the prior year goodwill impairment charge, operating income decreased 280 basis points as a percentage of total international salon revenues. This decrease was primarily due to the impact of certain fixed cost categories, such as rent and depreciation expense, measured as a percentage of lower same-store sales, as well as the $1.0 million of property and equipment impairment charges.

Hair Restoration Centers

Hair Restoration Center Revenues.  Total hair restoration center revenues were as follows:

			Increase Over Prior Fiscal Year				Same-Store Sales
Years Ended June 30,	Revenues		Dollar		Percentage		Increase
	(Dollars in thousands)
2008	$	135,582	$	13,481	11.0	%	5.2	%
2007	122,101		12,399		11.3		8.7
2006(1)	109,702		50,314		84.7		N/A

(1)We did not own or operate any hair restoration centers until December 2004.

The percentage increases during the years ended June 30, 2008, 2007, and 2006 were due to the following factors:

	Percentage Increase (Decrease) in Revenues For the Years Ended June 30,
	2008		2007		2006
Acquisitions (previous twelve months)	8.1	%	4.7	%	81.4	%
Organic growth	4.2		6.6		3.8
Franchise revenues	(1.3	)	0.0		(0.5	)
	11.0	%	11.3	%	84.7	%

We acquired six hair restoration centers during the twelve months ended June 30, 2008, all of which were franchise buybacks, and constructed three hair restoration centers during the twelve months ended June 30, 2008. The increase in organic hair restoration revenues during fiscal year 2008 was due to the increase in same-store sales of 5.2 percent.

We acquired two hair restoration centers during the twelve months ended June 30, 2007, one of which was a franchise buyback. The increase in total hair restoration revenues during fiscal year 2007 was due to strong recurring and new customer revenues and increases in hair transplant management fees.

We acquired eight hair restoration centers during the twelve months ended June 30, 2006, including seven franchise buybacks, and constructed one hair restoration center during the twelve months ended June 30, 2006. The franchise buybacks drove the decrease in franchise revenues. The increase in total hair restoration revenues during fiscal year 2006 was due to the acquisition of 42 company-owned and 49 franchise hair restoration centers in conjunction with the initial acquisition of Hair Club for Men and Women in December 2004.

Hair Restoration Center Operating Income.  Operating income for our hair restoration centers was as follows:

	Operating		Operating Income as		Increase (Decrease) Over Prior Fiscal Year
Years Ended June 30,	Income		% of Total Revenues		Dollar		Percentage		Basis Point(1)
	(Dollars in thousands)
2008	$	28,181	20.8	%	$	2,620	10.3	%	(10	)
2007	25,561		20.9		3,988		18.5		120
2006	21,573		19.7		9,309		75.9		(100	)

(1)Represents the basis point change in hair restoration center operating income as a percent of total hair restoration center revenues as compared to the corresponding period of the prior fiscal year.

The basis point decrease in hair restoration operating income as a percent of hair restoration revenues during fiscal year 2008 was primarily due to lower operating margins at the six acquired franchise centers during the twelve months ended June 30, 2008.

The basis point improvement in hair restoration operating income as a percent of hair restoration revenues during fiscal year 2007 was due to strong recurring and new customer revenues and increases in hair transplant management fees, partially offset by an increase in professional fees and advertising and marketing expenses.

The basis point decrease in hair restoration operating income as a percent of hair restoration revenues during fiscal year 2006 was due to the write-off of approximately $0.5 million of software acquired as part of the original Hair Club acquisition, as it was determined that the software would no longer be used. The remaining 50 basis point fluctuation in hair restoration center operating income as a percent of hair restoration center revenues was primarily due to our integration of the recently acquired centers.

LIQUIDITY AND CAPITAL RESOURCES

Overview

We continue to maintain a strong balance sheet to support system growth and financial flexibility. Our debt to capitalization ratio, calculated as total debt as a percentage of total debt and shareholders’ equity at fiscal year end, was as follows:

As of June 30,	Debt to Capitalization		Basis Point (Decrease) Increase
2008	43.9	%	(20	)
2007	43.7		(200	)
2006	41.7		130

(1)Represents the basis point change in debt to capitalization as compared to prior fiscal year end (June 30).

The basis point decrease in the debt to capitalization ratio as of June 30, 2008 compared to June 30, 2007 and June 30, 2007 compared to June 30, 2006 was primarily due to increased debt levels stemming from share repurchases, acquisitions and timing of customary income tax payments made during fiscal year 2008 and 2007. As of June 30, 2008 and 2007, approximately $230.2 million and $223.4 million, respectively, of our debt outstanding is classified as a current liability. We have a revolving credit facility which provides for possible acceleration of the maturity date based on provisions that are not objectively determinable and we have therefore included the outstanding borrowings under our revolving credit facility in our current portion of debt. As of June 30, 2008 and 2007 we had borrowings on our revolving credit facility of $139.1 million and $147.8 million, respectively. Our principal on-going cash requirements are to finance construction of new stores, remodel certain existing stores, acquire salons and purchase inventory. Customers pay for salon services and merchandise in cash at the time of sale, which reduces our working capital requirements.

The basis point improvement in the debt to capitalization ratio as of June 30, 2006 as compared to June 30, 2005 was due to increased equity levels stemming primarily from fiscal year 2006 earnings.

Total assets at June 30, 2008, 2007, and 2006 were as follows:

	Total		Increase Over Prior Fiscal Year
As of June 30,	Assets		Dollar		Percentage
	(Dollars in thousands)
2008	$	2,235,871	$	103,757	4.9	%
2007	2,132,114		146,790		7.4
2006	1,985,324		259,348		15.0

Acquisitions and new salon construction (a component of organic growth) were the primary drivers of the increase in total assets as of June 30, 2008 compared to June 30, 2007. Acquisitions and new salon construction were primarily funded by a combination of operating cash flow, debt, and assumption of liabilities.

Acquisitions and new salon construction (a component of organic growth) were the primary drivers of the increase in total assets as of June 30, 2007 compared to June 30, 2006. Cash increases in our international segment accounted for $11.1 million of the $49.4 million increase in consolidated cash for the twelve months ended June 30, 2007.

Acquisitions and organic growth were the primary drivers of the increase in total assets as of June 30, 2006 compared to June 30, 2005. Acquisitions were primarily funded by a combination of operating cash flows, debt and the assumption of acquired liabilities.

Total shareholders’ equity at June 30, 2008, 2007, and 2006 was as follows:

	Shareholders’		Increase Over Prior Fiscal Year
As of June 30,	Equity		Dollar		Percentage
	(Dollars in thousands)
2008	$	976,186	$	62,878	6.9	%
2007	913,308		41,901		4.8
2006	871,407		116,695		15.5

During the twelve months ended June 30, 2008, equity increased primarily as a result of net income and increased accumulated other comprehensive income due primarily to foreign currency translation adjustments as the result of the strengthening of foreign currencies that underlie our investments in those markets, partially offset by lower common stock and additional paid-in capital balances stemming from share repurchases during the twelve months ended June 30, 2008.

During the twelve months ended June 30, 2007, equity increased primarily as a result of net income and increased accumulated other comprehensive income due primarily to foreign currency translation adjustments as the result of the strengthening of foreign currencies that underlie our investments in those markets, partially offset by lower common stock and additional paid-in capital balances stemming from share repurchases during the twelve months ended June 30, 2007.

During the twelve months ended June 30, 2006, equity increased as a result of net income, additional paid-in capital recorded in connection with the exercise of stock options, and increased accumulated other comprehensive income due to foreign currency translation adjustments stemming from the strengthening of foreign currencies that underlie our investments in those markets, partially offset by share repurchases under our stock repurchase program.

Cash Flows

Operating Activities

Net cash provided by operating activities during the twelve months ended June 30, 2008, 2007 and 2006 were a result of the following:

	Operating Cash Flows For the Years Ended June 30,
	2008			2007			2006
	(Dollars in thousands)
Net income	$	85,204		$	83,170		$	109,578
Depreciation and amortization	119,977			117,327			107,470
Deferred income taxes	(3,789		)	(6,243		)	7,409
Goodwill and asset impairments	10,471			29,813			12,740
Receivables	(709		)	(4,092		)	(4,918		)
Inventories	(5,232		)	2,709			(6,068		)
Other current assets	2,554			(15,818		)	(7,551		)
Accounts payable and accrued expenses	9,249			26,436			46,924
Other noncurrent liabilities	(14,083		)	15,067			16,463
Other	18,741			(6,509		)	(362		)
	$	222,383		$	241,860		$	281,685

During fiscal year 2008, cash provided by operating activities was lower than in the twelve months ended June 30, 2007 primarily due to a decrease in working capital cash flow.

During fiscal year 2007, cash provided by operating activities was lower than in the twelve months ended June 30, 2006 due to accounts payable and accrued expenses generating less cash in fiscal 2007 than fiscal 2006, which is primarily related to the timing of income tax payments. Depreciation and amortization increased primarily due to the amortization of acquired intangible assets and increased fixed assets. The goodwill impairment charge of $23.0 million ($19.6 million net of tax) related to our beauty school business. Inventories increased slightly during the twelve months ended June 30, 2007 and 2006 due to growth in the number of salons, partially offset by the Company’s planned initiatives to reduce inventory levels in fiscal year 2007. Receivables increased during the twelve months ended June 30, 2007 primarily due to credit card receivables and increased student enrollment in the beauty school segment as compared to June 30, 2006.

During fiscal year 2006, depreciation and amortization increased primarily due to the amortization of intangible assets that we acquired in the acquisition of the hair restoration centers during December 2004 and the amortization of intangibles acquired in conjunction with recent beauty school acquisitions. Also, losses on the disposal of property and equipment (which is included in depreciation and amortization) from salons which were closed during the fourth quarter contributed to the increase. The asset impairment charge was primarily due to impairment charges for underperforming salons and the impairment of a minority investment in a privately held company. SFAS No. 123R requires that the cash retained as a result of the tax deductibility of increases in the value of stock-based arrangements be presented as a cash outflow from operating activities and a cash inflow from financing activities in the Consolidated Statement of Cash Flows (shown as Excess tax benefit from stock-based compensation plans). In periods prior to the three months ended September 30, 2005, and the Company’s adoption of SFAS No. 123R, the tax benefit realized upon exercise of stock options was presented as an operating activity (included within accrued expenses) and totaled $9.1 million for the year ended June 30, 2005.

Investing Activities

Net cash used in investing activities during the twelve months ended June 30, 2008, 2007 and 2006 were the result of the following:

	Investing Cash Flows For the Years Ended June 30,
	2008			2007			2006
	(Dollars in thousands)
Business and salon acquisitions	$	(132,971	)	$	(68,747	)	$	(155,481	)
Capital expenditures for remodels or other additions	(35,212		)	(35,299		)	(41,246		)
Capital expenditures for the corporate office (including all technology-related expenditures)	(18,310		)	(21,452		)	(30,455		)
Payment of contingent purchase price	—			—			(3,630		)
Capital expenditures for new salon construction	(32,277		)	(33,328		)	(44,583		)
Proceeds from loans and investments	10,000			5,250			—
Disbursements for loans and investments	(46,400		)	(30,673		)	(6,000		)
Transfer of cash related to contribution of schools and European franchise salon operations	(10,906		)	—			—
Net investment hedge settlement	—			(8,897		)	—
Proceeds from sale of assets	47			97			730
	$	(266,029	)	$	(193,049	)	$	(280,665	)

Acquisitions during fiscal year 2008 were primarily funded by a combination of operating cash flows and debt. Additionally the Company completed 186 major remodeling projects were completed during fiscal year 2008, compared to 155 and 170 during fiscal years 2007 and 2006, respectively. We constructed 325 company-owned salons, three hair restoration centers and acquired 382 company-owned salons (150 of which were franchise buybacks) and six hair restoration centers, all of which were franchise buybacks, Investing activities also included a $36.4 million loan to Empire Education Group, Inc. In addition, there was $10.9 million in cash held by the schools and European salon businesses that were deconsolidated.

Acquisitions during fiscal year 2007 were primarily funded by a combination of operating cash flows and debt. Additionally, 155 major remodeling projects were completed during fiscal year 2007, compared to 170 and 205 during fiscal years 2006 and 2005, respectively. We constructed 420 company-owned salons and two beauty schools and acquired 354 company-owned salons (97 of which were franchise buybacks), one beauty school and two hair restoration centers (one of which was a franchise buyback) during fiscal year 2007. During fiscal year 2007, loans and investments, net, included $9.9 million related to an equity investment the Company made in October 2006, $8.2 million related to a cost method investment made in April 2007, $3.1 million related to the cost method investment made in April 2007 and $4.0 million related to a note receivable issued under a credit agreement with the entity that is the majority corporate investor of an entity in which we hold a minority interest. Investing activities also included an $8.9 million cash outlay related to the settlement of our cross-currency swap (which had a notional amount of $21.3 million and hedged a portion of the Company’s net investment in its foreign operations).

We constructed 531 company-owned salons, two beauty schools and one hair restoration center and acquired 290 company-owned salons (142 of which were franchise buybacks), 30 beauty schools and eight hair restoration centers (seven of which were franchise buybacks) during fiscal year 2006. During fiscal year 2006, we entered into a credit agreement with a third party, under which we lent $6.0 million, and in 2007, we extended the term of the note to March 31, 2009. Refer to Note 4, to the Consolidated Financial Statements for further details surrounding this arrangement.

The company-owned constructed and acquired locations (excluding franchise buybacks) consisted of the following number of locations in each concept:

	Years Ended June 30,
	2008		2007		2006
	Constructed	Acquired	Constructed	Acquired	Constructed	Acquired
Regis	14	4	17	49	38	14
MasterCuts	7	—	15	—	32	—
Trade Secret (1)	16	65	20	3	33	2
SmartStyle	207	—	242	—	215	—
Promenade	66	138	101	193	180	122
International	15	25	25	12	33	10
Beauty schools	—	—	2	1	2	30
Hair restoration centers	3	—	—	1	1	1
	328	232	422	259	534	179

(1) Beginning with the period ended December 31, 2008, the operations of the Trade Secret concept within the North American reportable segment were accounted for as a discontinued operation.  All comparable periods will reflect Trade Secret as a discontinued operation.

Financing Activities

Net cash (used in) or provided by financing activities during the twelve months ended June 30, 2008, 2007 and 2006 were the result of the following:

	Financing Cash Flows For the Years Ended June 30,
	2008			2007			2006
	(Dollars in thousands)
Net (payments) borrowings on revolving credit facilities	$	(8,613	)	$	84,806		$	56,250
Net borrowings (repayments) of long-term debt	46,839			(15,888		)	(20,787		)
Proceeds from the issuance of common stock	8,893			14,310			14,410
Repurchase of common stock	(49,957		)	(79,710		)	(20,280		)
Excess tax benefit from stock-based compensation plans	1,420			4,536			4,556
Dividend payments	(6,964		)	(7,169		)	(7,256		)
Other	(2,622		)	(7,310		)	1,678
	$	(11,004	)	$	(6,425	)	$	28,571

During fiscal year 2008, 2007, and 2006, net borrowings were primarily used to fund loans and acquisitions, share repurchases, and customary income tax payments. Acquisitions funded are discussed in Note 4 to the Consolidated Financial Statements. The proceeds from the issuance of common stock were related to the exercise of stock options. The excess tax benefit from stock-based employee compensation plans was recorded in accordance with the provisions of SFAS No. 123R.

New Financing Arrangements

Fiscal Year 2008

During fiscal year 2008, we refinanced our $350.0 million revolving credit facility. Among other changes, this amendment extended the credit facility’s expiration date to July 2012, reduced the interest rate on borrowings under the credit facility and modified certain financial covenants. Additionally, we borrowed $125.0 million, and amended the fixed charge coverage ratio under our Private Shelf Agreement.

Under the terms of the July 12, 2007 revolving credit agreement, our ratio of earnings before interest, taxes, depreciation, amortization, and rent expense (EBITDAR) to fixed charges (which includes rent and interest expenses) may not drop below 1.50 on a rolling four quarter basis. We were in compliance with all covenants and other requirements of our credit agreement and senior notes as of June 30, 2008. Additionally, the credit agreements do not include rating triggers or subjective clauses that would accelerate maturity dates.

Fiscal Year 2007

During fiscal year 2007, we neither entered into new borrowing arrangements, nor were any significant amendments made to existing agreements. Under the terms of the April 7, 2005 amended and restated revolving credit agreement, our ratio of earnings before interest, taxes, depreciation, amortization and rent expense (EBITDAR) to fixed charges (which includes rent and interest expenses) may not drop below 1.65 on a rolling four quarter basis. We were in compliance with all covenants and other requirements of our credit agreements and senior notes during fiscal year 2007.

Fiscal Year 2006

During fiscal year 2006, we neither entered into new borrowing arrangements, nor were any significant amendments made to existing agreements. Under the terms of the April 7, 2005 amended and restated revolving credit agreement, our ratio of earnings before interest, taxes, depreciation, amortization and rent expense (EBITDAR) to fixed charges (which includes rent and interest expense) may not drop below 1.65 on a rolling four quarter basis. We were in compliance with all covenants and other requirements of our credit agreements and senior notes during fiscal year 2006.

Other Financing Arrangements

Private Shelf Agreement

At June 30, 2008 and 2007, we had $255.2 and $189.7 million, respectively, in unsecured, fixed rate, senior term notes outstanding under a Private Shelf Agreement. The notes require quarterly payments, and final maturity dates range from July 2008 through December 2017. The interest rates on the notes range from 4.65 to 8.39 percent as of June 30, 2008 and 2007. In fiscal 2008, we borrowed $125.0 million, and amended the fixed charge coverage ratio under Private Shelf Agreement.

The Private Shelf Agreement includes financial covenants including debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratios, fixed charge coverage ratios and minimum net equity tests (as defined within the Private Shelf Agreement), as well as other customary terms and conditions. The maturity date for the debt may be accelerated upon the occurrence of various Events of Default, including breaches of the agreement, certain cross-default situations, certain bankruptcy related situations, and other customary events of default.

As a result of the fair value hedging activities discussed in Note 6 of Part II, Item 8 of this Form 10-K, an adjustment of approximately $0.3 and $0.9 million was made to increase the carrying value of the Company’s long-term fixed rate debt at June 30, 2008 and 2007, respectively.

Acquisitions

Acquisitions are discussed throughout Management’s Discussion and Analysis in this Item 7, as well as in Note 4 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K. The most significant of these acquisitions relates to the purchase of the hair restoration centers; refer to Note 4 of the Consolidated Financial Statements for related pro forma information. The remainder of the acquisitions, individually and in the aggregate, was not material to our operations. The acquisitions were funded primarily from operating cash flow, debt and the issuance of common stock.

Contractual Obligations and Commercial Commitments

The following table reflects a summary of obligations and commitments outstanding by payment date as of June 30, 2008:

	Payments due by period
Contractual Obligations	Within 1 years		1-3 years		3-5 years		More than 5 years		Total
	(Dollars in thousands)
On-balance sheet:
Long-term debt obligations	$	217,494	$	128,306	$	212,224	$	171,429	$	729,453
Capital lease obligations	12,730		17,005		5,559		—		35,294
Other long-term liabilities	2,197		3,098		2,137		21,598		29,030
Total on-balance sheet	232,421		148,409		219,920		193,027		793,777
Off-balance sheet(a):
Operating lease obligations	326,974		486,964		254,383		166,929		1,235,250
Interest on long-term debt and capital lease obligations	38,644		65,612		34,669		15,735		154,660
Other long-term obligations	206		—		—		—		206
Total off-balance sheet	365,824		552,576		289,052		182,664		1,390,116
Total(b)	$	598,245	$	700,985	$	508,972	$	375,691	$	2,183,893

(a)In accordance with accounting principles generally accepted in the United States of America, these obligations are not reflected in the Consolidated Balance Sheet.

(b)As of June 30, 2008, we have liabilities for uncertain tax positions. We are not able to reasonably estimate the amount by which the liabilities will increase or decrease over time; however, at this time, we do not expect a significant payment related to these obligations within the next fiscal year. See Note 9 to the Consolidated Financial Statements for more information on our uncertain tax positions, the amount that may be settled in chase, and the amount reasonably possible to change in the next 12 months.

On-Balance Sheet Obligations

Our long-term obligations are composed primarily of senior term notes and a revolving credit facility. Certain senior term notes are hedged by contracts with financial institutions commonly referred to as interest rate swaps, as discussed in Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.” At June 30, 2008, $0.3 million represented a deferred gain related to the termination of certain interest rate hedge contracts. Additionally, no adjustment was necessary to mark the hedged portion of the debt obligation to fair value (a reduction to long-term debt). Interest payments on long-term debt and capital lease obligations were estimated based on our total average interest rate at June 30, 2008 and scheduled contractual repayments.

Other long-term liabilities include a total of $19.9 million related to the Executive Profit Sharing Plan and a salary deferral program, $9.7 million (including $0.6 million in interest) related to established contractual payment obligations under retirement and severance payment agreements for a small number of retired employees.

This table excludes the short-term liabilities, other than the current portion of long-term debt, disclosed on our balance sheet as the amounts recorded for these items will be paid in the next year. We have no unconditional purchase obligations, as defined by SFAS No. 47, Disclosure of Long-Term Obligations. Also excluded from the contractual obligations table are payment estimates associated with employee health and workers’ compensation claims for which we are self-insured. The majority of our recorded liability for self-insured employee health and workers’ compensation losses represents estimated reserves for incurred claims that have yet to be filed or settled.

The Company has unfunded deferred compensation contracts covering certain management and executive personnel. The deferred compensation contracts are offered to key executives based on their accomplishments within the Company. Because we cannot predict the timing or amount of our future payments related to these contracts, such amounts were not included in the table above. Related obligations totaled $20.2, $20.1, and $15.3 million at June 30, 2008, 2007, and 2006, respectively, and are included in other noncurrent liabilities in the Consolidated Balance Sheet. Refer to Note 10 of the Consolidated Financial Statements for additional information. The obligations are funded by insurance contracts.

Off-Balance Sheet Arrangements

Operating leases primarily represent long-term obligations for the rental of salon and hair restoration center premises, including leases for company-owned locations, as well as future salon franchisee lease payments of approximately $156.8 million, which are reimbursed to the Company by franchisees. Regarding the franchisee subleases, we generally retain the right to the related salon assets net of any outstanding obligations in the event of a default by a franchise owner. Management has not experienced and does not expect any material loss to result from these arrangements.

Other long-term obligations represent our guarantees, primarily entered into during previous fiscal years, on a limited number of equipment lease agreements between our salon franchisees and leasing companies. If the franchisee should fail to make payments in accordance with the lease, we will be held liable under such agreements and retain the right to possess the related salon operations. We believe the fair value of the salon operations exceeds the maximum potential amount of future lease payments for which we could be held liable. The existing guaranteed lease obligations, which have an aggregate undiscounted value of $0.2 million at June 30, 2008, terminate within fiscal year 2009. The Company has not experienced and does not expect any material loss to result from these arrangements.

We have interest rate swap contracts and forward foreign currency contracts. See Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” for a detailed discussion of our derivative instruments. Future net settlements under these agreements are not included in the table above.

We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business. These contracts primarily relate to our commercial contracts, operating leases and other real estate contracts, financial agreements, agreements to provide services, and agreements to indemnify officers, directors and employees in the performance of their work. While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that we expect to result in a material liability.

We do not have other unconditional purchase obligations or significant other commercial commitments such as commitments under lines of credit and standby repurchase obligations or other commercial commitments.

Under the terms of the July 12, 2007 revolving credit facility, our ratio of earnings before interest, taxes, depreciation, amortization and rent expense (EBITDAR) to fixed charges (which includes rent and interest expenses) may not drop below 1.50 on a rolling four quarter basis. We were in compliance with all covenants and other requirements of our credit agreements and senior notes during fiscal year 2008 and are currently in fiscal 2009. Additionally, the credit agreements do not include rating triggers or subjective clauses that would accelerate maturity dates.

As a part of our salon development program, we continue to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations, and continue to enter into transactions to acquire established hair care salons and businesses.

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes at June 30, 2008. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Financing

Financing activities are discussed under “Liquidity and Capital Resources” in this Item 7 and in Note 5 to the Consolidated Financial Statements in Part II, Item 8. Derivative activities are discussed in Note 6 to the Consolidated Financial Statements in Part II, Item 8 and Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.”

Management believes that cash generated from operations and amounts available under existing debt facilities will be sufficient to fund its anticipated capital expenditures, acquisitions and required debt repayments for the foreseeable future. As of June 30, 2008, we have available an unused committed line of credit amount of $179.2 million under our existing revolving credit facility.

Dividends

We paid dividends of $0.16 per share during fiscal years 2008, 2007 and 2006. On August 25, 2008, the Board of Directors of the Company declared a $0.04 per share quarterly dividend payable September 17, 2008 to shareholders of record on September 3, 2008.

Share Repurchase Program

In May 2000, the Company’s Board of Directors (BOD) approved a stock repurchase program. Originally, the program authorized up to $50.0 million to be expended for the repurchase of the Company’s stock. The BOD elected to increase this maximum to $100.0 million in August 2003, to $200.0 million on May 3, 2005, and to $300.0 million on April 26, 2007. The timing and amounts of any repurchases will depend on many factors, including the market price of the common stock and overall market conditions. Historically, the repurchases to date have been made primarily to eliminate the dilutive effect of shares issued in conjunction with acquisitions, restricted stock grants and stock option exercises. All repurchased shares become authorized but unissued shares of the Company. This repurchase program has no stated expiration date. As of June 30, 2008, 2007, and 2006, a total accumulated 6.8, 5.1, and 3.0 million shares have been repurchased for $226.5, $176.5, and $96.8 million, respectively. As of June 30, 2008, $73.5 million remains to be spent on share repurchases under this program.

SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This annual report, as well as information included in, or incorporated by reference from, future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company contains or may contain “forward-looking statements” within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document reflect management’s best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. Such forward-looking statements are often identified herein by use of words including, but not limited to, “may,” “believe,” “project,” “forecast,” “expect,” “estimate,” “anticipate,” and “plan.” In addition, the following factors could affect the Company’s actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include competition within the personal hair care industry, which remains strong, both domestically and internationally, price sensitivity; changes in economic conditions; changes in consumer tastes and fashion trends; labor and benefit costs; legal claims; risk inherent to international development (including currency fluctuations); the continued ability of the Company and its franchisees to obtain suitable locations and financing for new salon development; governmental initiatives such as minimum wage rates, taxes and possible franchise legislation; the ability of the Company to successfully identify, acquire and integrate salons that support its growth objectives; the ability of the Company to maintain satisfactory relationships with suppliers; or other factors not listed above. The ability of the Company to meet its expected revenue growth is dependent on salon acquisitions, new salon construction and same-store sales increases, all of which are affected by many of the aforementioned risks. Additional information concerning potential factors that could affect future financial results is set forth under Item 1A of this Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made in our subsequent annual and periodic reports filed or furnished with the SEC on Forms 10-Q and 8-K and Proxy Statements on Schedule 14A.