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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

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|(Mark One)                                                         |                                                                                         
|------------------------------------------------------------------ | ----------------------------------------------------------------------------------------
|ý                                                                  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 30, 2007                       
|OR                                                                
|o                                                                  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                                  to

Commission file number 001-32465

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BARE ESCENTUALS, INC.(Exact name of Registrant as Specified in its Charter)

|DELAWARE(State or Other Jurisdiction of Incorporation or Organization)                    |  | 20-1062857(I.R.S. Employer Identification No.)
|----------------------------------------------------------------------------------------- |  | ----------------------------------------------
|71 Stevenson Street, 22nd Floor
San Francisco, CA(Address of Principal Executive Offices) |  | 94105(Zip Code)                               
|(415) 489-5000(Registrant's Telephone Number, Including Area Code)                       
|Securities registered pursuant to Section 12(b) of the Act:                              
|Title of Each Class                                                                       |  | Name of Each Exchange on Which Registered     
|Common Stock, $.001 par value                                                             |  | The NASDAQ Stock Market LLC                   

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

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ý    No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

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

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

|Large accelerated filer ý |  | Accelerated filer o |  | Non-accelerated filer o (Do not check if a smaller
reporting company) |  | Smaller reporting company o
|------------------------- |  | ------------------- |  | --------------------------------------------------------------------- |  | ---------------------------

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o    No ý

As of July 1, 2007, the aggregate market value of the common stock of the registrant held by non-affiliates was approximately
$1.6 billion based on the Company's estimation of the fair value of $34.15 per share of its common stock on July 1, 2007.

There
were 91,299,159 shares of the registrant's common stock issued and outstanding as of the close of business on February 19, 2008.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for its 2008 Annual Meeting of Stockholders to be held on May 15, 2008 are incorporated by reference
in the Annual Report on Form 10-K in response to Part III, Items 10, 11, 12, 13, and 14.



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BARE ESCENTUALS, INC.
2007 ANNUAL REPORT ON FORM 10-K
INDEX



|PART I.   |  |                                                                                                                 
|--------- |  | ----------------------------------------------------------------------------------------------------------------
|Item 1.   |  | Business                                                                                                        
|Item 1A.  |  | Risk Factors                                                                                                    
|Item 1B.  |  | Unresolved Staff Comments                                                                                       
|Item 2.   |  | Properties                                                                                                      
|Item 3.   |  | Legal Proceedings                                                                                               
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                             
|PART II.  |  |                                                                                                                 
|Item 5.   |  | Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|Item 6.   |  | Selected Financial Data                                                                                         
|Item 7.   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                           
|Item 7A.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                      
|Item 8.   |  | Financial Statements and Supplementary Data                                                                     
|Item 9.   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            
|Item 9A.  |  | Controls and Procedures                                                                                         
|Item 9B.  |  | Other Information                                                                                               
|PART III. |  |                                                                                                                 
|Item 10.  |  | Directors and Executive Officers of the Registrant                                                              
|Item 11.  |  | Executive Compensation                                                                                          
|Item 12.  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  
|Item 13.  |  | Certain Relationships and Related Transactions                                                                  
|Item 14.  |  | Principal Accountant Fees and Services                                                                          
|PART IV.  |  |                                                                                                                 
|Item 15.  |  | Exhibits and Financial Statement Schedules                                                                      

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PART I

ITEM 1.    BUSINESS

Overview

Bare Escentuals is one of the fastest growing prestige beauty companies in the U.S. and a leader by sales and consumer awareness in mineral-based cosmetics. We
develop, market and sell cosmetics, skin care, and body care products under ourbareMinerals,bareVitamins,
RareMinerals,i.d.and namesakeBare Escentualsbrands, and professional skin
care products under ourmd formulationsbrand. We believe ourbareMineralscosmetics, particularly our
core foundation products, offer a highly differentiated, healthy and lightweight alternative to conventional liquid- or cream-based cosmetics while providing light to maximum coverage for all skin
types. As such, we believe our foundation products have broad appeal to women of all ages including women who did not previously wear foundation before using bareMinerals.We utilize a distinctive
marketing strategy and a multi-channel distribution model consisting of infomercials, home shopping television,
specialty beauty retailers, company-owned boutiques, spas and salons and online shopping. This model has enabled us to increase our brand awareness, consumer loyalty and market share and achieve
favorable operating margins.Bare Escentualswas the top-selling cosmetics brand company-wide at leading specialty beauty
retailers Sephora and Ulta during 2005, 2006 and 2007. From 2003 through 2007, we increased net sales approximately 52.4% on a compound annual basis, and during the fiscal year ended
December 30, 2007, our operating income was 33.1% of net sales.

OurbareMinerals-branded products include our core foundation products and a variety of eye, lip and complexion products such as blushes,
all-over-face colors, liner shadows,
eyeshadows and lip colors. OurbareMineralsproducts are made primarily from finely milled minerals and do not contain any of the chemical additives
commonly found in liquid, cream and pressed cosmetics, such as preservatives, oil, fragrances, talc, waxes, binders and other potential skin irritants. We design our products to provide women with the
look and feel of "bare" skin while effectively concealing skin imperfections such as blemishes, rosacea and acne that can be exacerbated by traditional cosmetics. We believe that bareMineralsappeals to
women who prefer a more natural look relative to traditional foundation or simply prefer products with a natural formulation. In
addition to ourbareMineralsproducts, we offer a broad range of other cosmetics and accessories, including finishing powders, facial-prep
products, lipsticks, lip-glosses, lip liners, mascaras, application tools and brushes under ouri.d., bareVitaminsand Bare Escentuals brand
names. Additionally, we sell a mineral-based skin care line utilizing patent-pending mineral extraction technology under ourRareMineralsbrand. We also
offer a wide range of professional skin care products under themd formulationsbrand and body care products under ourBare
Escentualsbrand.

A
core element of our success is our distinctive marketing strategy and multi-channel distribution model. We focus on educating consumers about the unique benefits of our products,
developing intimate relationships with those consumers, and capitalizing on our multi-channel distribution strategy to effectively reach and engage those consumers. We believe educational media such
as infomercials and home shopping television are particularly effective at informing consumers about the innovative product formulation, application technique and resulting benefits of our bareMineralscosmetics. We also believe that our company-owned boutiques enhance the authenticity of our brand and provide a personal environment in
which we offer our broadest product assortment and provide one-on-one consumer consultations and product demonstrations. At the same time, our physical presence at specialty
beauty retailers such as Sephora and Ulta have helped to further strengthen our brand image and provide additional points of contact to educate consumers about our products. Moreover, this model
allows us to:



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As
of December 30, 2007, our domestic points of distribution included direct-response television such as our infomercials and home shopping television, approximately 508 retail
locations consisting of specialty beauty retailers Sephora and Ulta as well as department stores Nordstrom, Macy's and Sephora inside JC Penney, and 51 open company-owned boutiques. Our products are
also sold in approximately 1,200 spa and salon locations and online atwww.bareescentuals.com, www.bareminerals.comandwww.mdformulations.com. We also sell products internationally in the United
Kingdom, Japan, France, and Germany as well as in smaller international markets via distributors.



The Bare Escentuals brand dates back to the opening of our first boutique in 1976. The Company was originally incorporated in Delaware on March 9, 2004
under the name STB Beauty, Inc. On February 24, 2006, the Company changed its name to Bare Escentuals, Inc. The Company was incorporated in order to acquire through its wholly
owned subsidiary, STB Beauty Acquisition, Inc., 100% of the outstanding capital stock of MD Beauty, Inc. in a merger and recapitalization transaction (the "June 2004 Recapitalization").
Contemporaneous with the June 2004 Recapitalization, on June 10, 2004, STB Beauty Acquisition, Inc. was merged with and into MD Beauty, with MD Beauty being the surviving corporation
operating as a wholly owned subsidiary of the Company.

In
June 2004, we completed the June 2004 recapitalization, in which affiliates of Berkshire Partners LLC, a Boston-based private investment firm, JH Partners, LLC, a San
Francisco-based private equity firm, and members of our management acquired a majority controlling interest in our company. In the transaction, we incurred approximately $100.0 million of new
indebtedness, raised approximately $87.5 million of new equity financing and used $169.6 million to repurchase outstanding shares of capital stock and fully vested options. Stockholders
who controlled a majority voting interest in our predecessor prior to the June 2004 recapitalization retained shared control of our outstanding capital stock immediately following the
recapitalization.

In
February 2005, we incurred approximately $224.5 million of new indebtedness, repaid a total of $92.6 million of existing debt and paid a special dividend to stockholders
of $122.4 million. In October 2005, we incurred approximately $187.5 million of new indebtedness and paid a special dividend to
stockholders of $183.5 million. In June 2006, we incurred approximately $331.6 million of new indebtedness and paid a special dividend to stockholders of $340.4 million. We refer
to these transactions as our February 2005 recapitalization, October 2005 recapitalization and June 2006 recapitalization, respectively.

We
completed our initial public offering of common stock on October 4, 2006, in which we raised net proceeds of $373.8 million. We used these proceeds to repay outstanding
indebtedness and to buy out the management agreements with Berkshire Partners LLC and JH Partners, LLC.

On
April 3, 2007, we completed our acquisition of U.K.-based Cosmeceuticals Limited ("Cosmeceuticals"), which distributes Bare Escentuals' bareMinerals,md
formulationsandMD Fortebrands
primarily to spas and salons and QVC U.K. The acquired entity has been renamed Bare

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Escentuals
UK Ltd. The Company's primary reason for the acquisition was to reacquire its distribution rights and to expand its market share. The consideration for the purchase was cash of
$23.1 million, comprised of $22.4 million in cash consideration and $0.7 million of transaction costs. The Company's consolidated financial statements include the operating
results of the business acquired from the date of acquisition.

Our Market

We operate within the large and steadily growing worldwide cosmetics and toiletries industry. The cosmetics and toiletries industry includes color cosmetics, skin
care, body care and hand care products. According to Euromonitor, a market research firm, the cosmetics and toiletries worldwide and within the U.S. represented over $269.6 billion and
$50.2 billion, respectively, in retail sales in 2006. Five of the largest countries by retail sales in the cosmetics and toiletries industry, according to Euromonitor, are the U.S., Japan,
Brazil, France and Germany with 2006 retail sales of $50.2 billion, $29.8 billion, $18.2 billion, $14.1 billion and $13.6 billion, respectively. Within the cosmetics
and toiletries market, we compete primarily in the color cosmetics and skin care segments. Color cosmetics and skin care products constituted 93.8% and 6.2%, respectively, of our net sales for the
year ended December 30, 2007.



Color Cosmetics Market: The U.S. color cosmetics market, which includes facial makeup, eye makeup, lip products and nail products, is estimated by Euromonitor to
have had retail sales of $8.6 billion in
2006. The market for facial makeup is the largest segment of the U.S. cosmetics market, with estimated retail sales of $3.1 billion in 2006, according to Euromonitor. In addition, the markets
for eye makeup, lip products, and nail products are estimated to have had retail sales of $2.7 billion, $2.2 billion, and $0.6 billion, respectively, in 2006.

Skin
Care Market: U.S. retail sales of skin care, which include facial care, body care and hand care products, were an estimated $7.8 billion in 2006, according to Euromonitor.
The facial care market, the largest segment of the skin care market, was estimated at $5.9 billion in 2006 with approximately 89% of sales in this segment derived from facial moisturizers,
anti-aging products, and cleansers.



Color Cosmetics Market: The international color cosmetics market is estimated by Euromonitor to have had retail sales of $35.7 billion in 2006. The market
for facial makeup is the largest segment of the international cosmetics market, with estimated sales of $13.0 billion in 2006, according to Euromonitor. In addition, Euromonitor estimates that
the markets for eye makeup, lip products, and nail products had retail sales of $9.4 billion, $9.9 billion, and $3.3 billion, respectively, in 2006.

Skin
Care Market: International retail sales of skin care products were an estimated $60.1 billion in 2006, according to Euromonitor. Euromonitor estimates that the international
facial care market, the largest segment of the skin care market, had retail sales of $47.3 billion in 2006.

Brands and Products



bareMinerals.OurbareMinerals-branded products
include our core foundation products and a wide variety of eye, cheek, and face products such as blushes, all-over-face colors, liner shadows, eyeshadows and glimmers. All of
ourbareMinerals-branded products are made primarily from finely milled minerals and do not contain any of the chemical additives commonly found in
liquid, cream and pressed cosmetics, such as preservatives, oil, fragrances, talc, waxes, binders and other potential skin

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irritants.
We believe the efficacy of our products, as well as their positioning as a healthy and natural alternative to conventional cosmetics, appeals to a broad range of women who prefer a more
natural look and feel, have skin conditions such as allergies, rosacea or acne that can be exacerbated by traditional cosmetics, or simply prefer products with a natural formulation.

i.d. cosmetics, bareVitamins, Bare Escentuals.Ouri.d.,
bareVitaminsandBare Escentualsbranded cosmetics and products include a broad assortment of fashionable color cosmetics and
accessories including finishing powders, prep-products, lipsticks, lip glosses, lip liners, mascaras, and application tools and brushes.

Our
cosmetics products inclusive of thebareMinerals, Bare Escentuals, bareVitaminsand i.d.brands comprised approximately 93.8% and 92.9% of our net sales
for the years ended December 30, 2007 and December 31, 2006,
respectively. OurbareMineralsfoundation comprised approximately 46.0% and 47.6% of our net sales for the years ended December 30, 2007 and
December 31, 2006, respectively.



RareMinerals.RareMineralsrepresents an innovative
extension of our mineral-based expertise into the skin care category and offers women a natural, mineral-based alternative to traditional skin care products. Based on a patent-pending mineral
extraction technology,RareMineralsdelivers concentrated organic macro and micro minerals to the skin to reduce the appearance of imperfections and
increase skin firmness and hydration. The RareMinerals line currently includes nighttime skin treatment, facial cleanser and acne treatment products.

md formulations.Our md formulations brand provides a complete professional skin care solution
addressing the anti-aging market. Products in the retail line include cleansers, corrective treatments, antioxidant moisturizers and sun protectors. The brand also offers a complete line
of professional-use-only products for use by aestheticians, such as glycolic peels, to complement the consumer retail line.

Merchandising and Product Packaging

Our product formulations and branding are consistent across our distribution channels. However, we tailor product offerings to our distribution channels by
creating unique and differentiated "kits" or assortments of products which help us to:



For
example, our introductory complexion kit, which we market across all distribution channels, includes an assortment of our core products, including two different shades of bareMineralsfoundation,Mineral Veil, Warmth,an application brush, a full coverage brush, a maximum
coverage concealer brush and an instructional video. We also offer promotional kits which are typically "themed" to address specific end uses, targeted consumer segments or seasonal offerings. In
addition, we produce limited quantities of many of our kits, which helps to generate excitement among consumers due to product scarcity.

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Distribution Channels

We believe that a core element of our success is our distinctive multi-channel distribution model consisting of infomercials, home shopping television, premium
wholesale, company-owned boutiques, spas and salons and online shopping. We believe that this distribution model, through which each channel reinforces the others, provides:



We
use infomercials and home shopping television to develop brand awareness and educate consumers on product differentiation, proper application and resulting benefits. We believe this
increased brand awareness drives consumers to shop in our company-owned boutiques and other retail distribution points where we are able to sell a broader assortment of our products and can interact
with consumers on a one-on-one basis. In turn, we believe that our physical presence at specialty beauty retailers Sephora and Ulta further enhances our brand image and
validates the premium positioning of our products.

Our
domestic distribution model is summarized as follows:

|Media       
|------------
|
|Infomercials
|           
|           
|           
|            

|
|

|Traditional            
|-----------------------
|
|Company-owned Boutiques
|Online                 
|                      
|                      
|                       



The premium wholesale channel accounted for 32.1% of our net sales for the year ended December 30, 2007. Our premium wholesale channel enables us to
provide additional points of contact to educate
consumers about our products, expand our traditional retail location penetration with limited capital investment, and further strengthen our brand image. As with our own boutiques, this channel allows
us to target a consumer who may be less inclined to shop at home and provides an inviting venue to experience the products personally and discuss product features with experienced sales personnel. We
have increased our sales within the premium wholesale channel by introducing our products into Ulta in 1997 and Sephora in 2004.Bare Escentualswas the
top-selling cosmetics brand company-wide at Sephora and Ulta in 2005, 2006 and 2007. In addition, we have also expanded into select Nordstrom and Macy's locations as well as
with Sephora inside JCPenney. As of December 30, 2007, our products were distributed in a total of approximately 508 domestic premium wholesale locations in addition to approximately
200 Sephora France stores.

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Our company-owned boutiques accounted for 16.8% of our net sales for the year ended December 30, 2007. We opened our first retail boutique in 1976 which
offered a broad assortment of our bath, body, and cosmetics products under theBare Escentualsbrand. We believe that our company-owned boutiques
reinforce our brand image, generate strong sales productivity and can be readily adapted to different location requirements. Our boutiques typically offer our broadest assortment of Bare Escentualsproducts, including ourbareMineralsand i.d.cosmetics, ourRareMineralsproducts andmd
formulationsproducts. We believe that our boutiques enhance our ability to build strong consumer relationships and promote additional product use as we provide personal
demonstrations and product consultations.

Below
is a summary of our boutique locations open as of December 30, 2007:

|CaliforniaBerkeley, CAFourth Street
    Canoga Park, CATopanga Plaza
    Corte Madera, CATown Center
    Costa Mesa, CASouth Coast Plaza
    Los Angeles, CAWestside Pavilions
    Pleasanton, CAStoneridge Mall
    Roseville, CARoseville Galleria
    Santa Clara, CAValley Fair Mall
    San Francisco, CAStonestown Galleria
    San Francisco, CAPier 39
    San Francisco, CASan Francisco Centre
    San Jose, CAOakridge Mall
    San Mateo, CAHillsdale Mall
    Thousand Oaks, CAThe Oaks S/C
    Walnut Creek, CABroadway Plaza ColoradoDenver, CODenver Pavilions ConnecticutDanbury, CTDanbury Fair Mall FloridaBrandon, FLBrandon Town Center
    Jacksonville, FLSt. John's Town Center
    Orlando, FLFlorida Mall GeorgiaAtlanta, GAAtlanta Airport
    Atlanta, GALenox Square
    Atlanta, GAPerimeter Mall
    Kennesaw, GATown Center at Cobb IllinoisChicago, ILWater Tower
    Oakbrook, ILOakbrook
    Schaumburg, ILWoodfield Mall IndianaIndianapolis, INKeystone Crossing MarylandAnnapolis, MDAnnapolis |  | MassachusettsNatick, MANatick Mall MinnesotaBloomington, MNMall of America MissouriChesterfield, MOChesterfield Mall
    Des Peres, MOWest County Centre
    St. Louis, MOSt. Louis Galleria New JerseyParamus, NJGarden State Plaza New YorkNew York, NYThird Avenue
    Garden City, NYRoosevelt Field
    Elmhurst, NYQueens Center Mall North CarolinaCharlotte, NCSouth Park Mall OhioColumbus, OHPolaris F/P
    Cincinnati, OHKenwood Towne Centre
    Beachwood, OHBeachwood Place OregonTigard, ORWashington Square PennsylvaniaKing of Prussia, PAKing of Prussia Mall TennesseeCollierville, TNCarriage Crossing TexasArlington, TXParks at Arlington
    Dallas, TXNorthpark Center
    San Antonio, TXThe Shops at La Cantera VirginiaMclean, VATysons Corner WashingtonBellevue, WABellevue Square WisconsinGlendale, WIBayshore Town Center
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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At
retail boutiques open for the twelve months ended December 30, 2007, our average annual net sales during that period was approximately $1,900 per square foot. Based on the
strong performance and limited geographic penetration of our boutiques to date, we believe that the opportunity exists to expand the number of boutiques that we operate. We opened seven boutiques in
2006 and eighteen boutiques in 2007, and we expect to open approximately thirty-five new boutiques in
2008. In addition, we intend to continue to refine our boutique operations including store design and product merchandising in order to maximize store financial performance.

In
addition to our partner websites such aswww.sephora.com, www.ulta.com, www.nordstrom.comand www.qvc.com, we also sell products directly through our
existing websites,www.bareminerals.comfor
sales of infomercial products,www.bareescentuals.comfor sales of ourbareMineralsand RareMineralsproducts andwww.mdformulations.comfor sales of professional skin care products. In
addition to allowing consumers to purchase a broad range of our products, our websites also educate consumers as to the benefits as well as proper usage and application techniques for each product
offered.



Our infomercial sales accounted for 24.7% of our net sales for the year ended December 30, 2007. Our infomercials, broadcast in 28-minute
"long-form" programs and 60- to 120-second "short-form" programs, create broad brand awareness, communicate the unique properties of mineral-based
cosmetics and educate the consumer regarding proper application techniques. Since we first launched our long-form infomercial in 2002, this channel has served as one of our primary
marketing mediums as well as a profitable sales and consumer acquisition channel. Our infomercials reach a large and diverse array of consumers through airings on cable and network television. Our
long-form infomercial program regularly appears on cable networks such as TV Guide Channel, The Food Network, TLC, Lifetime Television Networks, Court TV, CNBC, Travel and Women's
Entertainment (WE) and many other smaller cable stations and local networks.

We
work primarily with one independent media agency to develop a media strategy and acquire desired time slots. We seek to achieve maximum media effectiveness through, among other
techniques, regular performance evaluations of long-form and short-form programs, ongoing development of new infomercial content, management of local and national media mix and
review of television station performance.

In
addition to creating brand and category awareness and driving traffic through our other sales channels, our infomercials also serve as a direct-to-consumer
retail sales channel. The channel generates two types of direct sales: "front-end" or initial purchases generated through phone or website orders in response to our aired media, and
"back-end" continuity repurchases that replenish the initial cosmetics shipment.



Home shopping television accounted for 11.8% of our net sales for the year ended December 30, 2007. We believe that home shopping television is a strong
consumer acquisition channel that also educates the consumer. Since 1997, we have marketed and sold ourbareMineralscosmetics line along with other Bare
Escentualsproducts on-air at QVC, through QVC's website atwww.qvc.comand in a
QVC-producedBare Escentuals-specific catalog. We also have an international home shopping television presence and currently appear on QVC
in Japan, the UK, and Germany.

QVC Agreement.In December 1998, we entered into an agreement with QVC, Inc., under which we granted to QVC the
exclusive right to promote, advertise, market, sell and distribute our products in all distribution channels in the United States other than our company-owned boutiques and prestige retail channels.
For purposes of the QVC agreement, prestige retail channels means traditional department stores and specialty stores, specialty boutiques and beauty salons but excludes all other

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retail
channels of distribution, including discount stores, drug stores, warehouse stores, superstores and retail outlet stores. In September 2006, we entered into an amendment to our agreement with
QVC that gives us the right to enter into additional distribution channels. Under the amendment, we may promote, advertise, market and sell our products on our websites, and through advertising,
catalogs, direct mail promotions and telephone numbers listed in our websites, catalogs and direct mail promotions, so long as we pay QVC a specified royalty on net sales of our products in these
channels, which we refer to as Company Direct Marketing Media. Internet sales in the United States of products offered in the same configuration as on our infomercials bear a lower royalty rate than
other net sales pursuant to Company Direct Marketing Media. The amendment also states that we may sell our products through the catalogs, direct mail promotions and websites of our prestige retail
customers, again subject to payment of a specified royalty on these catalog, direct mail and website sales, which we refer to as Prestige Retail Direct Marketing Media. Our agreement prohibits us from
selling products through retail channels not considered "prestige," such as discount stores, warehouse stores and superstores and their associated websites. Under the amended agreement, we also have
the right to promote and sell our products through infomercials, so long as we give QVC thirty days to match any bona fide third-party offer for infomercial rights in the United States.

If
we develop a new product line that is not competitive with any of the products being offered by QVC, then QVC has the right of first refusal to promote the new product line on the
same terms and conditions as our other products under this agreement. Under the agreement, we may maintain a list of consumers who purchase products in our boutiques, by means of Company Direct
Marketing Media and infomercials. We have agreed that during the term of the agreement we will not promote, advertise, market or sell products to consumers on this list other than through our
boutiques, Company Direct Marketing Media or infomercials and related telephone numbers and websites, nor rent, sell or otherwise make use of this list in a manner not expressly permitted by the
agreement.

Under
the agreement, QVC issues an order for product that it holds on consignment and then issues us a report that shows all sales to its customers. The agreement had an initial term of
one year and provides for automatic renewal for successive one-year periods unless either party notifies the other at least thirty days prior to the end of any term and QVC's net sales of
our products are less than a minimum amount, subject to QVC's right to cure by paying us additional amounts to make up shortfalls. The agreement was automatically renewed in September 2007. Since the
first year of the QVC agreement, QVC's net sales of our products have been substantially in excess of the minimum amounts. In addition, either party may terminate the agreement upon the other party's
material breach, subject to notice and an opportunity to cure. If we terminate the agreement upon QVC's material breach, then QVC may continue to sell our products on a non-exclusive basis
for 36 months.

We
are required to make our spokesperson available for at least eight appearances on QVC each year. Leslie Blodgett, our Chief Executive Officer, currently serves as our spokesperson for
QVC, but we and QVC may mutually agree to replace Ms. Blodgett as our spokesperson.

Additionally,
we have granted QVC the exclusive right to promote, advertise, market and sell our products in Japan, Germany and the United Kingdom, subject to our rights to promote,
advertise, market and sell our products in the same distribution channels available to us in the United States. We may terminate QVC's exclusive rights in Japan, Germany or the United Kingdom if our
on-air minutes on QVC in any such country for a given calendar year falls below a specified minimum number of minutes for such country. We are required to pay QVC specified royalties on
net sales pursuant to Company Direct Marketing Media in Japan, Germany and the United Kingdom other than internet sales of products offered in the same configuration as on our infomercials on which we
are not required to pay a royalty. We are not required to pay a royalty on net sales in Japan, Germany or the United Kingdom pursuant to Prestige Retail Direct Marketing Media, and QVC does not have a
right of first refusal with respect to infomercials in these markets.

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Spas and salons accounted for 11.1% of our net sales for the year ended December 30, 2007. Our distribution through spas and salons provides an informative
and treatment-focused environment in which aestheticians and spa professionals can communicate the skin and complexion benefits that ourbareMineralsandmd formulationsproducts provide. As of December 30, 2007, Bare Escentuals products were offered in approximately 2,800 spa and salon
locations both domestically and in the UK. Growth in our spa and salon sales has been driven by our focus on higher-volume accounts domestically as well as the inclusion of sales to approximately
1,600 spas and salons in the UK beginning in the second quarter of 2007.



Net sales through our international distributors accounted for 3.5% of our net sales for the year ended December 30, 2007. While we report direct
international sales based upon their respective distribution channel, we also sell both ourBare Escentualsandmd
formulationsproducts in smaller international markets primarily through a network of third-party distributors. We have reduced our base of international distributors in order
to devote additional resources to countries with significant cosmetics markets. We also have partnered with a third party to build our infomercial business in Japan.

Marketing and Promotion

We have an innovative, media-driven marketing strategy which focuses on educating consumers about the benefits of our products, developing intimate relationships
with those consumers, and leveraging our multi-channel distribution approach to effectively reach and engage those consumers.

We
employ the following marketing techniques:

Educational Media.Our primary method of building brand awareness is through educational media including both our
long-form and short-form infomercial programs and home shopping television. In addition to being profitable consumer acquisition channels, these sales channels provide an
opportunity for us to communicate the benefits of our products to a broad audience as well as build brand awareness. During 2007, our short- and long-form infomercials were broadcast on
television an average of over 500 times per week.

Consumer Testimonials.We believe that one of the keys to the success of theBare
Escentualsbrands has been testimonials from our consumers regarding the benefits of our products. As opposed to other cosmetics companies that rely on image-based marketing,
we have used consumer testimonials, including before and after photos, in our marketing which allow us to demonstrate both the efficacy of our products and the increased self-confidence
that our products have given many women. We believe that consumer testimonials are a particularly powerful component of our educational media marketing.

Public Relations.We have benefited from a broad range of media and editorial coverage that has highlighted our innovative
products and success. Our products have been profiled in magazines such asLucky, Allure, Glamour, Marie Claire, Elle, Shape, Better Homes and Gardens, InStyle, O,the Oprah Magazine,Cosmopolitan and
Natural Health.We also benefit from public appearances by Ms. Blodgett at our retail events, which have been covered on local television news broadcasts.

Word of Mouth.We believe that our company benefits from strong consumer loyalty as well as the emotional connection formed
between our consumers and our brand. In turn, we believe that our consumers are strong advocates for our brand and have displayed a desire and willingness to convert others to our brand.

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Bare Escentuals Consumer Community.Strong consumer loyalty has resulted in the development of a community of consumers who
share a passion for our products and our brand. This community has expressed itself through attendance at events we sponsor, as well as events initiated by individual consumers. In addition, these
loyal consumers have established an online community independent of the company's efforts via the websitewww.beaddicts.com. This loyal community of
users provides invaluable feedback that we often incorporate into our product development.

Product Development

We focus a significant portion of our product development efforts on creating new products and improving existing products based on feedback and suggestions from
our consumers. Many of these suggestions are the catalyst for new product development and introductions. For example, we introduced two new products,Prime Time Foundation
PrimerandPrime Time Eyelid Primer,as a direct response to what our consumers suggested. We also recently launched two new
mineral-based products under ourRaremineralsproduct line,Renew & Reveal Facial Cleanserand Blemish
Therapy.

We
seek to reinforce the benefits of our products by highlighting the emotions our products are intended to inspire in our marketing and packaging. Our product development department
works with third-party laboratory teams to develop different shades and textures for our prospective products, and to determine the fragrance, opacity and viscosity of such products. After consumer
evaluations and stability and compatibility testing, the product undergoes clinical and safety testing. Finally, the product must meet adequate color, texture and performance tests before it can be
marketed.

We
also believe we have built a specialized distribution platform that we can use to market new concepts and products. We intend to continue to create new products and improve existing
products in our core product lines by incorporating consumer feedback into our product development efforts. In addition, we intend to capitalize on our extensive knowledge and experience in
mineral-based cosmetics to develop other prestige beauty products and use the success of ourbareMineralsandBare
Escentualsbrands, as well as our loyal consumer base, to market these products.

Sourcing

We use third-party contract manufacturers and suppliers to obtain substantially all raw materials, components and packaging products and to manufacture finished
products relating to ourBare Escentualsandmd formulationsbrands. We utilize approximately 30
different product and packaging suppliers from which we source and contract manufacture our products. Suppliers purchase all necessary raw materials, including the minerals used to manufacture our
products. BioKool, LLC is the sole supplier of the proprietary ingredient in ourRareMineralsproducts. Other than the ingredient supplied by
BioKool and an ingredient in certain products, we do not believe any of the raw materials used in our products is scarce or that raw materials or lack of suppliers present a potential supply chain
risk. Each supplier manufactures products that meet our established guidelines.

With
respect to our other third-party manufacturers, we make purchases through purchase orders. We believe that we have good relationships with our manufacturers and that there are
alternative sources in the event that one or more of these manufacturers is not available. We continually review our manufacturing needs against the capacity of our contract manufacturers to ensure
that we are able to meet our production goals, reduce costs, and operate more efficiently.

Fulfillment

Our fulfillment operations consist of an approximately 300,000 square foot facility in Obetz, Ohio which we opened in February 2007, an approximately 69,000
square foot company-operated distribution center in Hayward, California, an approximately 28,000 square foot facility in Basildon, UK and an approximately 110,000 square foot fulfillment and
distribution center operated by Datapak Services

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Corporation,
or Datapak, an unrelated third party, in Plymouth, Michigan. From Obetz, we distribute wholesale and bulk orders of product to our premium wholesale customers, direct to consumer orders,
spas and salons and QVC. From Hayward, we distribute to our retail boutiques, international distributors and international customers. From Basildon, we distribute to our spas and salons and QVC in the
UK and Ireland. From Plymouth, Datapak fulfills direct-to-consumer orders, including distribution of product to our infomercial and Internet customers. We have delivered notice
of non-renewal to Datapak, as in 2008 we plan to take over the entire fulfillment functions Datapak currently performs at our facility in Obetz, Ohio.

Distribution Centers.In August 2005, we moved our Company-operated distribution center from Emeryville, California to a
larger, more modern facility in Hayward, California. Built in 1997, the new facility at approximately 69,000 square feet is nearly three times larger than our previous facility. In February 2007, we
entered into a ten-year lease for an approximately 300,000 square foot facility in Obetz, Ohio. The new facility in Obetz is within two business days of approximately 60% of the US
population, and is expected to primarily service Midwest and East Coast premium wholesale customers, QVC, company-owned boutiques, infomercial and online shopping customers. The facility is expected
to expand warehouse capacity to support wholesale growth over the next five years, improve customer service, improve flexibility to offer promotional items and reduce shipping time and costs to our
premium wholesale customers, spas and company-owned boutiques located in the Midwest and the East Coast. As a result of our acquisition of Cosmeceuticals, we also have a distribution facility of an
approximately 28,000 square foot facility in Basildon, United Kingdom.

Datapak Distribution Center.Datapak specializes in fulfillment for direct response television,
business-to-business, business-to-consumer, e-commerce fulfillment and product branding campaigns and has almost 20 years of
experience in the fulfillment industry. We have had a relationship with Datapak for over four years. In January 2006, we entered into a master services agreement with Datapak. Under this agreement,
Datapak provides us with a customized order fulfillment and administrative program, which includes packaging and shipping orders of our products. In addition, Datapak maintains an inventory tracking
system and provides a customer inquiry line, telemarketing services, infomercial order processing and data and statistics regarding its services. Under this agreement, Datapak is required to ship
substantially all orders for our product within 24 hours of the time of the order. Our agreement with Datapak expired on December 31, 2007, as we have delivered notice of
non-renewal to Datapak. In December 2007, in order to facilitate the transition of Datapak's fulfillment operations to
us, we entered into a new agreement whereby Datapak will continue to provide fulfillment services on a month-to-month basis. This agreement can be voluntarily terminated by
either party by providing thirty days' prior written notice.

Information Technology

We use our information systems to manage our wholesale, retail, and corporate operations. These management information systems provide business process support
and intelligence across our multi-channel operations. Our systems consist of merchandising, wholesale order management, retail point of sale and inventory management, and finance and accounting
systems.

In
2006, we embarked on a comprehensive strategy to replace our legacy information systems infrastructure. Our new systems include core functions such as purchasing, merchandising,
finance and accounting, inventory and order management, and warehousing and distribution. This process was substantially complete as of December 30, 2007.

Our
data center is located at an offsite third-party facility with redundant systems for power, HVAC and security as well as seismic precautions and fire suppression. In addition, this
facility has been granted "Essential Facility" status according to applicable building codes, assuring that facility will

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remain
operational during and after a major earthquake, and that tenants will be allowed on-site without the city inspection required of non-essential structures.

Trademarks, Licenses and Patents

We own or have rights to use the trademarks necessary for manufacturing, marketing, distributing and selling our cosmetics, fragrances and skin care brands. These
marks include brand names for products as well as product categories, including:Bare Escentuals,md
formulations,i.d. bareMinerals,RareMinerals, bareVitamins,md forteandMineral Veil. All of these
trademarks are the subject of either registrations or pending applications in the United States, as well as numerous other countries worldwide where we do business. In general, trademarks are valid as
long as they are in use and/or their registrations are properly maintained, and trademark registrations can generally be renewed indefinitely so long as the marks are in use. We consider the
protection and enforcement of our trademark rights to be important to our business.

TriStrata Agreement.We hold a license from TriStrata Technology Inc. allowing us to use patented technology regarding
glycolic acid in our professional skin care lines. We entered into a license agreement with TriStrata in July 1999. Under the agreement, as amended to date, TriStrata granted us a
non-exclusive license of its patent rights for products containing glycolic acids and its salts for the treatment of wrinkles and fine lines, dry skin, in combination with salicylic acid
for the treatment of acne and in combination with hydroquinone 2% or less for the treatment of skin pigmentation, and as a skin cleanser, hair conditioner and shampoo. The agreement prohibits us from
marketing products using the licensed technology from TriStrata through multi-level or door-to-door channels. We pay TriStrata a royalty, including a minimum annual royalty
amount on products we sell using its patented technology. TriStrata may terminate the license agreement with us if we fail to pay any amounts required or otherwise breach a provision under the license
agreement, subject to prior written notice and an opportunity to cure. TriStrata also may terminate the license in the event of our bankruptcy or insolvency. We may terminate the license agreement on
six months' prior written notice, after which we can make no further sales of products that incorporate the licensed technology.

Rights to md formulations.Our MD Formulations Inc. subsidiary acquired rights to themd
formulationstrademarks and some of ourmd formulationsproduct rights from a large specialty pharmaceutical company in 1999. We
currently sell ourmd formulationsproducts in sales channels that arguably exceed the permitted field of use specified in the purchase agreement. The
agreement provides for the sale to MD Formulations ofmd formulationsproduct rights for use in a field of use defined as the research, development,
manufacture, marketing and sale of alpha hydroxy acid, or AHA, skin care products to "skin care aestheticians" worldwide and to physicians outside of the United States. The party from which we
purchased themd formulationsproduct rights is aware of our sales in these channels and has not requested that we discontinue sales in these channels,
although it has to date refused our requests to extend the license to explicitly cover all of these sales. However, if it were to challenge our rights to sellmd
formulationsproducts in these distribution channels, we could be required to engage in litigation or negotiation regarding these rights or enter into a commercial arrangement
with respect to these rights.

BioKool Agreement.We also hold a license with BioKool, LLC for its patent-pending mineral extraction technology,
which we use in ourRareMineralsproducts. In September 2005, we entered into a license and supply agreement with BioKool in contemplation of new
product development, pursuant to which we have the exclusive, worldwide right to use its proprietary mineral ingredients in our personal care products. BioKool has agreed to supply all of our
requirements for the ingredients. We will make orders on a purchase order basis and are not required to purchase any minimum quantity. We may cancel or change a purchase order on 30 days notice
without incurring any charges. Upon the completion of a successful clinical test during the year ended December 31, 2006, we paid BioKool

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$1.0 million.
We are required to use commercially reasonable efforts to incorporate the licensed ingredients into commercial products. In the year ended December 31, 2006, we launched
commercial sales of the products containing the licensed ingredients. We are required to pay a royalty on net sales of such products, including a minimum royalty amount. The agreement expires in
September 2015, but may be renewed thereafter. In addition, we have the sole right to renegotiate the minimum royalties or other compensation within 120 days after the second anniversary of the
first commercial launch of a product. Either party has the right to terminate the agreement if the other party fails to perform any material term of the agreement subject to 60 days' prior
written notice. Upon termination, we may sell any products in our inventory, but may not make any additional products containing the licensed ingredients. BioKool has agreed to indemnify us against
any liabilities we incur based upon a claim that the licensed ingredients or the BioKool mineral technology infringes upon any intellectual property rights of others. In addition, we have agreed to
indemnify BioKool against any liabilities to the extent based upon claims that the products we develop using the mineral technology infringe upon any intellectual property rights of others or claims
alleging misrepresentations regarding the efficacy of our products.

We
own numerous copyrights and trade dress rights for our products, product packaging, and catalogs.

Competition

The beauty industry is highly competitive and, at times, subject to rapidly changing consumer preferences and industry trends. Competition is generally a function
of brand strength, assortment and continuity of merchandise selection, reliable order fulfillment and delivery, and level of brand support and customer support. We compete with a large number of
manufacturers and marketers of beauty products, many of which have significantly greater resources than we do. Many of our competitors also have the ability to develop and market products similar to
and competitive with our products. Specifically, we compete with the major makeup and skin care companies which market many brands including Avon, Bobbi Brown, Chanel, Clarins, Clinique,
Estée Lauder, L'Oréal, Lancôme, M.A.C., Neutrogena, Shiseido and Smashbox, of which Avon, L'Oréal and
Neutrogena recently launched mineral-based makeup. We also compete with several smaller mineral-based cosmetics brands.

We
believe that we compete primarily on the basis of product differentiation, sales and marketing strategy and distribution model. In addition to the significant resources we have
devoted over time to
developing our innovative product formulation and differentiated product concepts, we believe that our expertise within the mineral-based cosmetics category, brand authenticity and loyal consumer
base, and multi-channel marketing and distribution expertise provide us with competitive advantages in the market for prestige cosmetics.

Government Regulation

We and our products are subject to regulation by the Food and Drug Administration, or the FDA, the Federal Trade Commission, State Attorneys General in the U.S.,
the international regulatory authorities in the countries in which our products are produced or sold. Such regulations principally relate to the safety of our ingredients, proper labeling,
advertising, packaging and marketing of our products. For example, in Japan, the Ministry of Health, Labor and Welfare requires our distributor to have an import business license and to register each
personal care product imported into Japan. In addition, the sale of cosmetics products is regulated in the European Union member states under the European Union Cosmetics Directive, which requires a
uniform application for foreign companies making personal care product sales. We believe that we are in substantial compliance with such regulations, as well as with applicable federal, state, local
and international and other countries' rules and regulations governing the discharge of materials hazardous to the environment. There are no capital expenditures for environmental control matters
either planned in the current year or expected in

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the
near future. However, regulations that are designed to protect consumers or the environment have an influence on our products.

Under
the Federal Food, Drug and Cosmetic Act, or the FDC Act, cosmetics are defined as articles applied to the human body to cleanse, beautify or alter the appearance. Cosmetics are not
subject to pre-market approval by the FDA but the product and ingredients must be tested to assure safety. If the product or ingredients are not tested for safety, a specific warning is
required. The FDA monitors compliance of cosmetic products through random inspection of cosmetic manufacturers and distributors. The FDA utilizes an "intended use" doctrine to determine whether a
product is a drug or cosmetic by the labeling claims made for the product. If a cosmetic product is intended for a disease condition or to affect the structure or function of the human body, the FDA
will regulate the product as a drug rather than a cosmetic. The product will then be subject to all drug requirements under the FDC Act including pre-approval by the FDA of the product
before future marketing. The labeling of cosmetic products is subject to the requirements of the FDC Act, the Fair Packaging and Labeling Act and other FDA regulations. If the FDA considers label
claims for our cosmetic products to be claims affecting the structure or function of the human body, our products may be regulated as drugs. If our products are regulated as drugs by the FDA, we would
be required to conduct clinical trials to demonstrate safety and efficacy of our products in order to continue marketing such products. However, we may not have sufficient resources to conduct any
required clinical studies and we may not be able to demonstrate sufficient efficacy or safety data to resume future marketing of such products. Any inquiries from the FDA or other foreign regulatory
authorities into the regulatory status of our cosmetic products and any related interruption in the marketing and sale of those products could severely damage our brands and company reputation in the
marketplace.

Employees

As of December 30, 2007, we had 1,571 employees, of whom 661 were full-time employees and 910 were part-time employees. During the
fourth quarter of each year, we increase the sales force at our boutiques to meet consumer demand during the peak holiday selling season. Thus, the total number of employees fluctuates with the most
changes occurring at the boutique sales level.

None
of our employees is represented by a collective bargaining agreement. There are no pending labor-related legal actions against us filed with any state, federal or foreign agency. We
believe our employee relations are good.

Available Information

Our Internet address ishttp://www.bareescentuals.com.We make available free of charge on our investor relations
website under "SEC Filings" our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
those reports as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission. The SEC maintains an internet site that contains
reports, proxy and information statements and other information regarding our filings athttp://www.sec.gov.

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ITEM 1A.    RISK FACTORS

The risks set forth below may adversely affect our business, financial condition and operating results. In addition to the risks set forth
below and the factors affecting specific business operations identified with the description of these operations elsewhere in this report, there may also be risks of which we are currently unaware, or
that we currently regard as immaterial based on the information available to us that later prove to be material.

Risks Relating to Our Business

Our success is dependent on sales of our mineral-based foundation. A change in consumer preferences for such products could harm our business.

During the year ended December 30, 2007, approximately 46.0% of our net sales were derived from our sales of foundation products. We are vulnerable to
shifting consumer tastes and demands and cannot assure you that our foundation will maintain its popularity and market acceptance. Our growth and future success will depend, in part, upon consumer
preferences for our mineral-based foundation. A decline in consumer demand for our mineral-based foundation would result in decreased net sales of our products and harm our business. Moreover, we are
identified as a mineral-based cosmetics company, and it would likely damage our reputation were these products to fall out of favor with consumers.

We do not have long-term purchase commitments from our significant customers, and a decrease or interruption in their business with us would
reduce our sales and profitability.

We depend on wholesale sales to specialty beauty retailers and QVC, Inc. for a significant portion of our net sales. Sales to Sephora, Ulta and QVC
accounted for an aggregate of 41.1% of our net sales for the year ended December 30, 2007, with sales to each of these customers accounting for greater than 10% of our net sales for the year
ended December 30, 2007. Our arrangement with QVC does not obligate QVC to make any purchases of our products or to undertake any efforts to promote our products on air or otherwise, and our
arrangements with each of Sephora and Ulta are by purchase order and are terminable at will at the option of either party. A substantial decrease or interruption in business from these significant
customers could result in inventory write-offs or in the loss of future business and could reduce our liquidity and profitability. In addition, our appearances on QVC enhance our brand
awareness and drive sales both on QVC and in our other sales channels. As a result, a decision by QVC to reduce the number of times per year it features our products on air or the type of such
appearances would cause a decline in our sales to QVC and could cause sales in our other channels to suffer.

In
the future, our significant customers may undergo restructurings or reorganizations, or realign their affiliations, any of which could decrease their orders for our products. Further,
one or more of these customers may decide to exclusively feature a competitor's mineral-based products, develop their own store-brand mineral-based products or reduce the number of brands of cosmetics
and beauty products they sell, any of which could affect our ability to sell our products to them on favorable terms, if at all. Our loss of significant customers would impair our sales and
profitability and harm our business, prospects, financial condition and results of operations.

The beauty industry is highly competitive, and if we are unable to compete effectively it could significantly harm our business, prospects, financial
condition and results of operations.

The beauty industry is highly competitive and at times changes rapidly due to consumer preferences and industry trends. Our products face, and will continue to
face, competition for consumer recognition and market share with products that have achieved significant national and international brand name recognition and consumer loyalty, such as those offered
by global prestige beauty

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companies
Avon Products, Inc., Elizabeth Arden, Inc., The Estée Lauder Companies, Inc., L'Oréal S.A. and Neutrogena, of which
Avon, L'Oréal and Neutrogena have recently launched mineral-based makeup. These companies have significantly greater resources than we have and are less leveraged than we
are. These competitors typically devote substantial resources to promoting their brands through traditional forms of advertising, such as print media and television commercials. Because of such mass
marketing methods, these competitors' products may achieve higher visibility and recognition than our products. In addition, these competitors may duplicate our marketing strategy and distribution
model to increase the breadth of their product sales. We also face competition from other companies that recently have launched, or may in the future launch, mineral-based cosmetics. Some of these
competitors have significant experience using infomercials to market and sell cosmetics and skin care products and have employed marketing strategies and distribution models similar to ours.

The
total market for prestige cosmetics is not growing rapidly. As a result, competition for market share in this cosmetics category is especially intense. In order to succeed, we must
continue to take market share from our competitors across all of our sales channels. We compete with prestige cosmetics companies primarily in department store and specialty beauty retail channels,
but prestige cosmetics companies also recently have increased their sales through infomercial and home shopping television channels. Mass cosmetics brands are sold primarily though channels in which
we do not sell our products, such as mass merchants and catalogs, but mass cosmetics companies are increasingly making efforts to acquire market share in the higher-margin prestige cosmetics category
by introducing brands and products that address this market. If we are unable to maintain or improve the inventory levels and in-store positioning of our products in third-party retailers
or maintain and increase sales of our products through our other distribution channels, including infomercials, home shopping television and other direct-to-consumer methods,
our ability to achieve and maintain significant market acceptance for our products could be severely impaired.

OurbareMineralsfoundation products face competition from liquid- or cream-based foundation and, to a lesser extent, mineral-based
foundation products, sold by our competitors. Because the process for production of mineral-based cosmetics is not subject to patent protection, there is a low barrier to entry into the market for
such products as evidenced by the number of smaller companies recently entering the market for such products. If these smaller companies' products prove successful or if global prestige beauty
companies were to significantly increase production and marketing of mineral-based cosmetics, our net sales could suffer. If consumers prefer our competitors' products over ours, we will lose market
share and our net sales will decline. New products that we develop might not generate sufficient consumer interest and sales to become profitable or to cover the costs of their development.

Advertising,
promotion, merchandising and packaging, and the timing of new product introductions and line extensions have a significant impact on consumers' buying decisions and, as a
result, our net sales. These factors, as well as demographic trends, economic conditions and discount pricing strategies by competitors, could result in increased competition and could harm our net
sales and profitability.

We may be unable to manage our growth effectively, which could cause our liquidity and profitability to suffer.

We have grown rapidly, with our net sales increasing from approximately $94.7 million for the year ended December 31, 2003 to approximately
$511.0 million for the year ended December 30, 2007. Our growth has placed, and will continue to place, a strain on our management team, information systems and other resources. To
manage growth effectively, we must:



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We may not be able to effectively manage this expansion in any one or more of these areas, and any failure to do so could significantly harm our business, prospects, financial condition
or results of operations. Our rapid growth also makes it difficult for us to adequately predict the expenditures we will need to make in the future. If we do not make the necessary overhead
expenditures to accommodate our future growth, we may not be successful in executing our growth strategy, and our prospects and results of operations would suffer.

We may be unable to sustain our growth or profitability, which could impair our future success and ability to make investments in our business.

Our ability to succeed depends, to a significant extent, on our ability to grow our business while maintaining profitability. We may not be able to sustain our
growth or profitability on a quarterly or annual basis in future periods. Our future growth and profitability has in the past and will in the future depend upon a number of factors, including, without
limitation:



We
may not be successful in executing our growth strategy, and even if we achieve our strategic plan, we may not be able to sustain profitability. Failure to execute any material part of
our strategic plan or growth strategy successfully could significantly impair our ability to service our indebtedness and make investments in our business.

A decline in general economic conditions could lead to reduced consumer demand for our products and have an adverse effect on our liquidity and
profitability.

Since purchases of our merchandise are dependent upon discretionary spending by our consumers, our financial performance is sensitive to changes in overall
economic conditions that affect consumer spending. Consumer spending habits are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, consumer
confidence and consumer perception of economic conditions. A general or perceived slowdown in the United States economy or the economies of other countries where we sell our products, or uncertainty
as to the economic outlook, could reduce discretionary spending or cause a shift in consumer discretionary spending to

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other
products. Any of these factors would likely cause us to delay or slow our expansion plans, result in lower net sales and excess inventories and hinder our ability to raise prices in line with
costs, which could, in turn, lead to increased merchandise markdowns and impairment charges, adversely affecting our profitability.

If we are unable to retain key executives and other personnel, particularly Leslie Blodgett, our Chief Executive Officer and primary spokesperson, and
recruit additional executives and personnel, we may not be able to execute our business strategy and our growth may be hindered.

Our success largely depends on the performance of our management team and other key personnel and our ability to continue to recruit qualified senior executives
and other key personnel. Our future operations could be harmed if any of our senior executives or other key personnel ceased working for us. Competition for senior management personnel is intense and
there can be no assurance that we will be able to retain our personnel or attract additional qualified personnel. The loss of a member of senior management may require the remaining executive officers
to divert immediate and substantial attention to fulfilling his or her duties and to seeking a replacement. We are currently recruiting for a Chief Information Officer, Senior Vice President of Retail
Merchandising, Head of Sales and Head of Retail positions. We may not be able to continue to attract or retain such personnel in the future. Any inability to fill vacancies in our senior executive
positions on a timely basis could harm our ability to implement our business strategy, which would harm our business and results of operations.

We
are particularly dependent on Leslie Blodgett, our Chief Executive Officer and primary spokesperson, as her talents, efforts, personality and leadership have been, and continue to be,
critical to our success. Many of our customers identify our products by their association with Ms. Blodgett, and she greatly enhances the success of our sales and marketing. There can be no
assurance that we will be successful in retaining her services. We maintain key executive life insurance policies with respect to Ms. Blodgett totaling approximately $34 million, which
is payable to the lenders under our senior secured credit facility in the event we collect payments on the policy. A diminution or loss of the services of Ms. Blodgett would significantly harm
our net sales, and as a result, our business, prospects, financial condition and results of operations.

Our senior management team has limited experience working together as a group, and may not be able to manage our business effectively.

Many members of our senior management team, including our Chief Marketing Officer, Senior Vice President of Direct to Consumer, Vice President of Real Estate,
General Counsel, and Vice President of Stores have been hired since April 2007. As a result, our senior management team has limited experience working together as a group. This lack of shared
experience could harm our senior management team's ability to quickly and efficiently respond to problems and effectively manage our business. Our success also depends on our ability to continue to
attract, manage and retain other qualified senior management members as we grow.

Our planned expansion of our boutique operations will result in increased expenses with no guarantee of increased earnings. In addition, we may close
boutiques that are not profitable or incur other costs, which could cause our results of operations to suffer.

We opened a total of eighteen new boutiques in 2007, and we plan to open approximately thirty-five new boutiques in 2008. We expect our total capital
expenditures associated with opening these new boutiques to be approximately $12.5 million in 2008. However, we may not be able to attain our target number of new boutique openings, and any of
the new boutiques that we open may not be

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profitable,
either of which could cause our financial results to suffer. Our ability to expand by opening new boutiques will depend in part on the following factors:



In
order to continue our expansion of boutiques, we will need to hire additional management and staff for our corporate offices and employees for each new boutique. In addition, we will
need to expand our information technology systems to accommodate the growth of our operations. If we are unable to hire necessary personnel or grow our existing information technology systems, our
expansion efforts may not succeed and our results of operations may suffer.

Some
of our expenses will increase with the opening of new boutiques, such as headcount and lease occupancy expenses as well as information technology system expenses. Moreover, as we
stock new boutiques with product inventory, our inventory expenditures will increase. We may not be able to manage these increased expenses without decreasing our earnings. If any of our boutiques
fails to generate attractive financial returns or otherwise does not serve our strategic goals, we may be required to close that boutique. If we were to close any boutique, we likely would incur
expenses and impairment charges in connection with such closing, would be unable to recover our investment in leasehold improvements at that boutique and would be liable for remaining lease
obligations, which could harm our results of operations.

Our media spending might not result in increased net sales or generate the levels of product and brand name awareness we desire, and we might not be
able to increase our net sales at the same rate as we increase our advertising expenditures. In addition, our infomercials might not continue to be an effective distribution channel, which could harm
our net sales.

Our future growth and profitability will depend in part on the effectiveness and efficiency of our media spending, including our ability to:



Our
infomercials and advertising may not result in increased sales or generate desired levels of product and brand name awareness, and we may not be able to increase our net sales at the
same rate as we increase our advertising expenditures.

We
depend on infomercials as one of our most significant distribution channels for marketing and selling our products. We periodically update the content of our infomercials and revise
our product offerings and pricing. If customers are not as receptive to new infomercial content or product offerings, as was the case following the launch of our new infomercial in the second fiscal
quarter of 2007, our sales through our infomercial sales channel may decline. In addition, if there is a marked increase in the price we pay for our media time, the cost-effectiveness of
our infomercials will decrease. If our infomercials are broadcast during times when viewership is low, this could also result in a decrease of the cost-effectiveness of such broadcasts,
which could cause our results of operations to suffer. Also, to

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the
extent we have committed in advance for broadcast time for our infomercials, we would have fewer resources available for potentially more effective distribution channels.

We depend on third parties to manufacture all of the products we sell and we do not have long-term contracts with all of these
manufacturers. If we are unable to maintain these manufacturing relationships or enter into additional or different arrangements, we may fail to meet customer demand and our net sales and
profitability may suffer as a result.

All of our products are contract manufactured or supplied by third parties. We do not have long-term contracts with all of these manufacturers of our
products. The fact that we do not have long-term contracts with all of our other third-party manufacturers means that they could cease manufacturing these products for us at any time and
for any reason. In addition, our third-party manufacturers are not restricted from manufacturing our competitors' products, including mineral-based products. We also source some of our products
through a supplier agent that purchases products from third-party manufacturers. Some of the ingredients in certain products are also sole-sourced. If we are unable to obtain adequate
supplies of suitable products or ingredients because of the loss of one or more key vendors or manufacturers or our supplier agent or otherwise, our business and results of operations would suffer
because we would be missing products from our merchandise mix unless and until we could make alternative supply arrangements. In addition, identifying and selecting alternative vendors would be
time-consuming and expensive, and we might experience significant delays in production during this selection process. Our inability to secure adequate and timely supplies of merchandise
would harm inventory levels, net sales and gross profit, and ultimately our results of operations.

Our
manufacturers also may increase the cost of the products we purchase from them. If our manufacturers increase our costs, our margins would suffer unless we were able to pass along
these increased costs to our customers. We may not be able to develop relationships with new vendors and manufacturers, and even if we do establish such relationships, such new vendors and
manufacturers might not allocate sufficient capacity to us to meet our requirements. Furthermore, products from alternative sources, if any, may be of a lesser quality or more expensive than those we
currently purchase. In addition, if we increase our product orders significantly from the amounts we have historically ordered from our manufacturers, our manufacturers might be unable to meet this
increased demand. To the extent we fail to obtain additional products from our manufacturers, we may not be able to meet customer demand, which could harm our net sales and profitability.

Our third-party manufacturers may not continue to produce products that are consistent with our standards or applicable regulatory requirements, which
could harm our brand, cause customer dissatisfaction and require us to find alternative suppliers of our products.

Our third-party manufacturers may not maintain adequate controls with respect to product specifications and quality and may not continue to produce products that
are consistent with our standards or applicable regulatory requirements, as described below. If we are forced to rely on products of inferior quality, then our customer satisfaction and brand
reputation would likely suffer, which would lead to reduced net sales. In addition, we may be required to find new third-party manufacturers to supply our products. There can be no assurance that we
would be successful in finding third-party manufacturers that make products meeting our standards of quality.

In
accordance with the FDC Act, and regulations enforced by the FDA, the manufacturing processes of our third party manufacturers must comply with the FDA's current Good Manufacturing
Practices, or cGMPs, for manufacturing drug products. The manufacturing of our cosmetic products are subject to the misbranding and adulteration sections of the FDC Act applicable to cosmetics. The
FDA may inspect our facilities and those of our third-party manufacturers periodically to determine if we and our third-party manufacturers are complying with cGMPs and the FDC Act provisions
applicable

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to
manufacturing cosmetic products. We have limited control over the FDA compliance of our third-party manufacturers. A history of past compliance is not a guarantee that future FDA regulatory
manufacturing requirements will not mandate other compliance steps with associated expense.

If
we or our third-party manufacturers fail to comply with federal, state or foreign regulations, we could be required to suspend manufacturing operations, change product formulations,
suspend the sale of products with non-complying specifications, initiate product recalls or change product labeling, packaging or advertising or take other corrective action. In addition,
sanctions under the FDC Act may include seizure of products, injunctions against future shipment of products, restitution and disgorgement of profits, operating restrictions and criminal prosecution.
If any of the above events
occurs, we would be required to expend significant resources to comply with FDA requirements and we might need to seek the services of alternative third-party manufacturers. Obtaining the required
regulatory approvals, including from the FDA, to use alternative third-party manufacturers may involve a lengthy and uncertain process. A prolonged interruption in the manufacturing of one or more of
our products as a result of non-compliance could decrease our supply of products available for sale which could reduce our net sales, gross profits and market share, as well as harm our
overall business, prospects, financial condition and results of operations.

We have depended on Datapak Services Corporation, or Datapak, for fulfillment of products sold through our infomercials, and we are planning to take
over the fulfillment functions it has performed.

We depend on Datapak for fulfillment of our infomercial sales, which represented 24.7% of our net sales for the year ended December 30, 2007. We contract
with Datapak for inventory management, call center operation, hosting of ourbareminerals.comwebsite and packing and shipping of product to our
customers. Our contract with Datapak expired on December 31, 2007 as we have delivered notice of nonrenewal to Datapak based on our intention to take over the fulfillment functions Datapak
currently performs at our new facility in Obetz, Ohio. In December 2007, we entered into a new agreement whereby Datapak will continue to provide fulfillment services on a
month-to-month basis in order to facilitate the transition of Datapak's fulfillment operations to us. However, this agreement can be voluntarily terminated by either party by
providing thirty days' prior written notice. If Datapak were to terminate its relationship with us before we had fully transitioned the services it performs, we could experience a delay in
reestablishing our ability to pack and ship product to our infomercial customers, which could harm our business. We have limited experience with fulfilling direct to consumer infomercial orders, and
as a result, even if our transition away from Datapak occurs on the anticipated timetable, we may experience disruptions or delays in accepting orders, processing them or delivering product to
infomercial customers as we take over the services previously provided by Datapak. Additionally, our ability to provide satisfactory levels of customer service depends, to a large degree, on the
efficient and uninterrupted operation of Datapak's customer call center operations. In the past, we have received customer complaints related to the services provided by Datapak's customer call center
operations. Additionally, in November 2007, we contracted with Center Partners, Inc. to provide customer call center services. Because our success depends in large part on keeping our customers
satisfied, and because infomercial sales constitute a significant portion of our net sales, any failure by Datapak or Center Partners, Inc. to provide satisfactory levels of customer service or
any failure by us to provide satisfactory levels of customer service, would likely impair our reputation and harm our business, prospects, financial condition and results of operations.

Our manufacturers ship a significant portion of the product we order to our distribution centers in Obetz, Ohio and Hayward, California, and any
significant disruption of the operations of the centers would hurt our ability to make timely delivery of our products.

We distribute products to our premium wholesale, spas and salons, direct to consumer and QVC from our facility in Obetz, Ohio. Approximately 80% of our net sales
for the year ended December 30,

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2007
were derived from these sales channels. We distribute products to our company-owned boutiques and international customers from our facility in Hayward, California. Approximately 20% of our net
sales for the year ended December 30, 2007 were derived from these sales channels. By the second quarter of 2008, we anticipate distributing products to our company-owned boutiques from our
facility in Obetz, Ohio so that our Hayward, California facility will be solely dedicated to international distribution. A natural disaster or other catastrophic event, such as a fire, flood, severe
storm, break-in, terrorist attack or other comparable event could cause interruptions or delays in our business and loss of inventory and could render us unable to accept or fulfill
customer orders in a timely manner, or at all. Hayward, California is located on a major fault line, increasing our susceptibility to the risk that an earthquake could significantly harm the
operations of our distribution facility. The impact of any of these natural disasters or other catastrophic events on our business may be exacerbated by the fact that we are still in the process of
developing our formal disaster recovery plan, and we do not have a final plan currently in place. In addition, our business interruption insurance may not adequately compensate us for losses that may
occur. In the event that an earthquake, fire, natural disaster or other catastrophic event were to destroy a significant part of either facility or interrupt our operations for an extended period of
time, our net sales would be reduced and our results of operations would be harmed.

Our new distribution facility in Obetz, Ohio may not perform as planned.

We opened a new facility in Obetz, Ohio in 2007 that also distributes products to our premium wholesale, spa and salon, QVC and infomercial and online shopping
customers. In February 2007, we entered into a 10-year lease for an approximately 300,000 square foot facility in Obetz, Ohio where we are transitioning the in-house
fulfillment functions that Datapak currently performs for us, such as packaging and shipping of product to our infomercial and online shopping customers. The facility is expected to expand warehouse
capacity to support growth in premium wholesale sales over the next five years, improve customer service, improve flexibility to offer promotional items and reduce shipping time and costs to our
premium wholesale customers, spas and company-owned boutiques located in the Midwest and the East Coast. However, with respect to infomercial fulfillment, we have traditionally outsourced these
functions and do not have experience managing these operations. Furthermore, if our new facility does not comply with applicable laws and regulations or fails to meet expected deadlines, our ability
to deliver products to meet commercial demand would be significantly impaired.

Our quarterly results of operations may fluctuate due to the timing of customer orders, the number of QVC appearances we make, new boutique openings, as
well as limited seasonality and other factors.

We may experience variability in net sales and net income on a quarterly basis as a result of a variety of factors, including the timing of orders from our
premium wholesale customers, the timing and number of our appearances on QVC, the timing of new boutique openings, seasonality and other factors. We make sales to our premium wholesale customers on a
purchase order basis, and we receive new orders when and as these customers need replenishment product. As a result, their orders typically are not evenly distributed through the course of the year.
In addition, our sales to QVC are largely dependent on the timing and number of our on-air appearances, with our greatest sales generated through appearances where our products are
featured as "Today's Special Value" or "TSV." As such, we expect our quarterly results to continue to fluctuate based on the number of shows in a quarter and whether a particular quarter includes a
TSV or not.

We
opened a total of eighteen new boutiques in 2007 and we plan to open approximately thirty-five new boutiques in 2008. The timing of these boutique openings will impact
both our net sales and our selling, general and administrative expenses. For example, if we were to open a number of new boutiques at the end of a quarter, our results of operations for that quarter
would include limited net sales from the new boutiques but substantially all of the pre-opening expenses associated with such boutiques.

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In
addition, our plans to open a number of new boutiques and expand our retail presence could have the effect of increasing the percentage of sales driven through these sales channels.
While we believe our overall business is not currently subject to significant seasonal fluctuations, we have experienced limited seasonality in our specialty beauty retail and company-owned boutique
channels as a result of increased demand for our products in anticipation of and during the holiday season. To the extent our sales to specialty beauty retailers and through our boutiques increase as
a percentage of our total sales, we may experience increased seasonality.

Our operations may be impaired as a result of disasters, business interruptions or similar events.

A natural disaster such as an earthquake, fire, flood, or severe storm, or a catastrophic event such as a terrorist attack, an epidemic affecting our operating
activities, major facilities, or a computer system failure could cause an interruption or delay in our business and loss of inventory and/or data or render us unable to accept and fulfill customer
orders in a timely manner, or at all. In addition, we are located in areas that are susceptible to an earthquake or other similar event could prevent us from delivering
products in a timely manner. We do not currently have a disaster recovery plan, other than with respect to our information technology systems, and our business interruption insurance may not
adequately compensate us for losses that may occur. In the event that an earthquake, natural disaster, terrorist attack or other catastrophic event were to destroy any part of our facilities or
interrupt our corporate headquarters or any of our distribution facilities operations for any extended period of time, or if harsh weather conditions us from delivering products in a timely manner,
our business, financial condition and operating results could be seriously harmed.

We have recently replaced our core systems which might disrupt our supply chain operations.

We have recently replaced our information technology systems supporting our financial management and reporting, inventory and purchasing management, order
management, warehouse management and forecasting. There are inherent risks associated with replacing our core systems, including supply chain disruptions that may affect our ability to deliver
products to our customers. We believe that other companies have experienced significant delays and cost overruns in implementing similar systems changes, and we may encounter similar problems. We may
not be able to successfully implement these new systems or implement them without supply chain disruptions in the future. Any resulting supply chain disruptions could harm our business, prospects,
financial condition and results of operations.

Our computer and communications hardware and software systems are vulnerable to damage and interruption, which could harm our business.

Our ability to receive and fulfill orders successfully is critical to our success and largely depends upon the efficient and uninterrupted operation of our
computer and communications hardware and software systems. Our primary computer systems and operations are located at a co-location facility in San Francisco, California and our corporate
headquarters also in San Francisco, California and are vulnerable to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches,
catastrophic events and errors in usage by our employees and customers. Systems integration issues are complex, time-consuming and expensive.

We
outsource the hosting of our websitesbareescentuals.com,bareminerals.comand mdformulations.com. In the
event that any of our website service providers experiences any interruption in its operations or ceases operations for any
reason or if we are unable to agree on satisfactory terms for a continued hosting relationship, we would be forced to enter into a relationship with another service provider or take over hosting
responsibilities ourselves. In the event it becomes necessary to switch hosting facilities in the future, we may not be successful in finding an alternative service provider on acceptable terms or in
hosting our websites ourselves. Any significant interruption in the availability or functionality of our website or our sales processing, distribution or communications systems, for any reason, could
seriously harm our business, prospects, financial condition and results of operations.

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We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and are exposed to
future risks of non-compliance.

We were required to furnish a report by our management on our internal control over financial reporting pursuant to the Sarbanes-Oxley Act for the first time in
connection with the Annual Report on Form 10-K for the year ended December 30, 2007. Such report contains, among other matters, an assessment of the effectiveness of our
internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must
include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Such report must also contain a statement that our independent registered
public accounting firm has issued an attestation report on management's assessment of such internal control.

We
completed the evaluation of our internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, for the fiscal year ended
December 30, 2007. Our assessment, testing and evaluation resulted in our conclusion that as of December 30, 2007, our internal control over financial reporting was effective. However,
our controls, nonetheless, may not prove to be adequate for the periods covered by that report and, in any event, we cannot predict the outcome of our testing in future periods. If our internal
controls are ineffective in future periods, our financial results or the market price of our stock could be adversely affected. In any event, we will incur additional expenses and commitment of
management's time in connection with further evaluations, which may adversely affect our future operating results and financial condition.

Our indebtedness could limit our ability to plan for or respond to changes in our business, and we may be unable to generate sufficient cash flow to
satisfy significant debt service obligations or to refinance the obligations on acceptable terms, or at all.

Our consolidated long-term indebtedness as of December 30, 2007 was $264.9 million. As of December 30, 2007, we may incur up to
an additional $24.9 million under our revolving credit facility, subject to compliance with a maximum leverage ratio covenant.

Our
senior secured credit facilities, as amended in March 2007, contain a number of significant covenants, which limit our ability to, among other things, incur additional indebtedness,
make investments, pay dividends, make distributions, or redeem or repurchase capital stock and grant liens on our assets or the assets of our subsidiaries. For example, we are restricted from
incurring additional indebtedness from a third party unless we satisfy the maximum leverage ratio covenant in our credit facility. As of December 30, 2007, we could incur an additional
$47.0 million of indebtedness in compliance with this covenant, as amended. Our senior secured credit facilities also require us to maintain specified financial ratios and satisfy financial
condition tests at the end of each fiscal quarter. Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we may not meet those tests. A breach of any
of these covenants could result in a default under the senior secured credit facilities. If the lenders accelerate amounts owing under our senior secured credit facilities because of a default and we
are unable to pay such amounts, the lenders have the right to foreclose on substantially all of our assets.

In
addition, our substantial indebtedness and the fact that a substantial portion of our cash flow from operations must be used to make principal and interest payments on this
indebtedness could have important consequences, including:



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Our
ability to incur significant future indebtedness, whether to finance capital expenditures, product development, potential acquisitions or for general corporate purposes, will depend
on our ability to generate cash flow. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If our
business does not generate sufficient cash flow from operations or if future borrowings are not available to us under our senior secured credit facilities in amounts sufficient to enable us to fund
our liquidity needs, our financial condition and results of operations may be harmed. If we cannot make scheduled principal and interest payments on our debt obligations in the future, we may need to
refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures or seek additional equity financing. If we are unable to refinance this or any of our
indebtedness on commercially reasonable terms or at all, or to effect any other action relating to our indebtedness on satisfactory terms or at all, our business may be harmed.

Our debt obligations have variable interest rates, which makes us vulnerable to increases in interest rates and could cause our interest expense to
increase and decrease cash available for operations and other purposes.

As of December 30, 2007, we had $264.9 million of consolidated indebtedness that was subject to variable interest rates. Interest rates in the U.S.
recently have been near historic lows, and any increase in these rates would increase our interest expense and reduce our funds available for operations and other purposes. We have entered into an
interest rate swap agreement covering a portion of our variable rate debt intended to hedge our exposure to adverse fluctuations in interest rates. Nevertheless, we may experience material increases
in our interest expense as a result of increases in interest rate levels generally. Based on the $264.9 million of variable interest rate indebtedness outstanding as of December 30,
2007, excluding the impact of our interest rate swap agreement currently in place, a hypothetical 1% increase or decrease in interest rates would result in a change of approximately
$2.6 million change to our annual interest expense.

We had a negative net worth as of December 30, 2007, which may make it more difficult and costly for us to obtain financing in the future.

As of December 30, 2007, we had a negative net worth of $104.5 million. Our negative net worth resulted from the use of borrowings to fund our
repurchase of stock in connection with our June 2004 recapitalization and to fund dividends in connection with our February 2005 recapitalization, October 2005 recapitalization and June 2006
recapitalization transactions. As a result of our negative net worth, we may face greater difficulty and expense in obtaining future financing than we would face if we had a greater net worth, which
may limit our ability to meet our needs for liquidity or otherwise compete effectively in the marketplace.

Our products may cause unexpected and undesirable side effects that could limit their use, require their removal from the market or prevent further
development. In addition, we are vulnerable to claims that our products are not as effective as we claim them to be.

Unexpected and undesirable side effects caused by our products for which we have not provided sufficient label warnings could result in our recall or
discontinuance of sales of our products. Unexpected and undesirable side effects could prevent us from achieving or maintaining market

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acceptance
of the affected products or could substantially increase the costs and expenses of commercializing new products. In addition, consumers or industry analysts may assert claims that our
products are not as effective as we claim them to be. Unexpected and undesirable side effects associated with our products or assertions that our products are not as effective as we claim them to be
also could cause negative publicity regarding our company, brand or products, which could in turn harm our reputation and net sales. We are particularly susceptible to these risks because our
marketing campaign heavily relies on the assertion that our products are "pure", "healthy" and ideal for women who have skin conditions that can be exacerbated by traditional cosmetics.

We may face product liability claims and may be required to recall products, either of which could result in unexpected costs and damage to our
reputation.

Our business exposes us to potential liability risks that arise from the testing, manufacture and sale of our beauty products. Plaintiffs in the past have
received substantial damage awards from other cosmetics companies based upon claims for injuries allegedly caused by the use of their products. We currently maintain general liability insurance with
an annual aggregate coverage limit of $20.0 million. Any claims brought against us may exceed our existing or future insurance policy coverage or limits. Any judgment against us that is in
excess of our policy limits would have to be paid from our cash reserves, which would reduce our capital resources. Further, we may not have sufficient capital resources to pay a judgment, in which
case our creditors could levy against our assets. Any product liability claim or series of claims brought against us could harm our business significantly, particularly if a claim were to result in
adverse publicity or damage awards outside or in excess of our insurance policy limits. In addition, in the past, we have recalled certain of our products, and in the future, it may be necessary for
us to recall products that do not meet approved specifications or because of the side effects resulting from the use of our products, which would result in adverse publicity, potentially significant
costs in connection with the recall and a loss of net sales from such products.

We do not currently own any registered patents on our products. If we are unable to protect our intellectual property rights, our ability to compete
could be harmed.

We regard our trademarks, trade dress, copyrights, trade secrets, know-how and similar intellectual property as critical to our success. Our principal
intellectual property rights include registered trademarks on our name, "Bare Escentuals," as well as our brands "bareMinerals,"
"md formulations," "Bare Escentuals" and "RareMinerals,"
copyrights in our infomercial broadcasts and website content, rights to our domain nameswww.bareescentuals.com, www.bareminerals.comandwww.mdformulations.com, and trade secrets and know-how with respect
to product formulations, product sourcing, sales and marketing and other aspects of our business. As such, we rely on trademark and copyright law, trade secret protection and confidentiality
agreements with our employees, consultants, suppliers, and others to protect our proprietary rights. We have not received patent protection on any of our products, though we have licenses for the
proprietary formulations and ingredients used in some of ourmd formulationsandRareMineralsproducts.
If we are unable to protect or preserve the value of our trademarks, copyrights, trade secrets or other proprietary rights for any reason, our brand and reputation could be impaired and we could lose
customers.

Although
most of our brand names are registered in the United States and in certain foreign countries in which we operate, we may not be successful in asserting trademark or trade name
protection. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. The costs required to protect our
trademarks and trade names may be substantial. In addition, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear.
Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights.

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Other
parties may infringe on our intellectual property rights and may thereby dilute our brands in the marketplace. Any such infringement of our intellectual property rights would also
likely result in a commitment of our time and resources to protect these rights through litigation or otherwise. For example, we currently are pursuing claims in litigation against M/D Skin
Care LLC and its founder Dr. Dennis Gross regarding their use of the trademark "MD Skincare." M/D Skin Care LLC has also filed claims against us in the case. We are also pursuing
claims in litigation against L'Oréal USA, Inc. and L'Oréal S.A. regarding their use of the trademark "Bare Naturale" and for
false advertising of this brand. We have incurred and expect to incur significant legal fees and other expenses in pursuing these claims. In each case, we believe the competing marks infringe our
trademark rights and create confusion in the marketplace. If we receive an adverse judgment in either of these matters or in any other cases we may bring in the future to defend our intellectual
property rights, we may suffer further dilution of our trademarks and other rights, which could harm our ability to compete as well as our business, prospects, financial condition and results of
operations.

Legal proceedings or third-party claims of intellectual property infringement may require us to spend time and money and could prevent us from
developing or commercializing products. We currently sell our md formulations products in sales channels that arguably exceed the permitted field of use.

Our technologies, products or potential products in development may infringe rights under patents, patent applications, trademark, copyright or other intellectual
property rights of third parties in the United States and abroad. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successful, could cause us
to pay substantial damages. Further, if a third party were to bring an intellectual property infringement suit against us, we could be forced to stop or delay development, manufacturing, or sales of
the product that is the subject of the suit.

Our
MD Formulations, Inc. subsidiary acquired rights to themd formulationstrademarks and some of ourmd
formulationsproduct rights from a large specialty pharmaceutical company in 1999. We currently sell ourmd formulationsproducts in sales channels that arguably exceed the permitted field of use specified in the purchase agreement. The agreement provides for the sale to MD Formulations ofmd
formulationsproduct rights for use in a field of use defined as the research, development, manufacture, marketing and sale of alpha hydroxy acid, or AHA, skin care products to
"skin care aestheticians" worldwide and to physicians outside of the United States. For the year ended December 30, 2007, we made approximately 62.1% of our sales ofmd
formulationsproducts to spas and salons, which we require to employ aestheticians and to international distributors, but during the past five years, we also have sold these
products in our premium wholesale channels, through our own boutiques and on our mdformulations.com website. The party from which we purchased themd
formulationsproduct rights is aware of our sales in these channels and has not requested that we discontinue sales in these channels, although it has to date refused our
requests to expand the permitted field of use to explicitly cover all of these sales. However, if it were to challenge our rights to sellmd
formulationsproducts in these distribution channels, we could be required to engage in litigation or negotiation with the objective of obtaining these rights. Any such
litigation would cause us to incur substantial expenses and, if we were unsuccessful, could cause us to lose the right to sell our products in one or more of our existing distribution channels or to
pay damages, either of which could significantly harm our business, prospects, financial condition and results of operations.

As
a result of intellectual property infringement claims, or to avoid potential claims, we may choose to seek, or be required to seek, a license from the third party and would most
likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we were able to obtain a license, the rights may be
nonexclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be prevented from commercializing a product or be forced to cease some aspect of our
business operations if, as a result

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of
actual or threatened intellectual property infringement claims, we are unable to enter into licenses on acceptable terms. This inability to enter into licenses could harm our business
significantly.

In
addition to infringement claims against us, we may become a party to other patent or trademark litigation and other proceedings, including interference proceedings declared by the
United States Patent and Trademark Office, or the USPTO, proceedings before the USPTO's Trademark Trial and Appeal Board and opposition proceedings in the European Patent Office, regarding
intellectual property rights with respect to our products and technology. The cost to us of any intellectual property litigation or other proceeding, even if resolved in our favor, could be
substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings better than us because of their substantially greater financial resources. Uncertainties
resulting from the initiation and continuation of intellectual property litigation or other proceedings could impair our ability to compete in the marketplace. Intellectual property litigation and
other proceedings may also absorb significant management time and resources.

We may be subject to liability for the content that we publish.

As a publisher of infomercial broadcasts and online content, we face potential liability for intellectual property infringement and other similar claims based on
the information and other content contained in our infomercials, website and instructional DVDs and videos. In the past, parties have brought these types of claims and sometimes successfully litigated
them against other online services. If we incur liability for our infomercial or online content, our business, prospects, financial condition and results of operations could suffer.

The regulatory status of our cosmetics or skin care products could change, and we may be required to conduct clinical trials to establish efficacy and
safety or cease to market these products.

The FDA does not have a premarket approval system for cosmetics, and we believe we are permitted to market our cosmetics and have them manufactured without
submitting safety or efficacy data to the FDA. However, the FDA may in the future determine to regulate our cosmetics or the ingredients included in our cosmetics as drugs or biologics. If certain of
ourbareMinerals,RareMineralsor our other products are deemed to be drugs or biologics, rather than
cosmetics, we would be required to conduct clinical trials to demonstrate the safety and efficacy of these products in order to continue to market and sell them. In such event, we may not have
sufficient resources to conduct any required clinical trials, and we may not be able to establish sufficient efficacy or safety data to resume the sale of these products. Any inquiries by the FDA or
any foreign regulatory authorities into the regulatory status of our cosmetics and any related interruption in the marketing and sale of these products could severely damage our brand reputation and
image in the marketplace, as well as our relationships with customers, which would harm our business, prospects, financial condition and results of operations.

Our
foundations and concealers as well as some of ourmd formulationsproducts are considered over-the-counter, or
OTC, drug products by the FDA. The FDA regulates the formulation, manufacturing, packaging, labeling and distribution of OTC drug products pursuant to a "monograph" system that specifies active drug
ingredients and acceptable product claims that are generally recognized as safe and effective for particular uses. If any of these products that are OTC drugs are not in compliance with the applicable
FDA monograph, we would be required to (i) reformulate such product, (ii) cease to make certain use claims relating to such product or (iii) cease to sell such product until we
receive further FDA approval. There can be no assurance that, if more stringent regulations are promulgated, we will be able to comply with such statutes or regulations without incurring substantial
expense or at all. In addition, OTC drug products must be manufactured in accordance with drug good manufacturing practice regulations. Our OTC drug manufacturers are subject to ongoing periodic
unannounced inspection by the FDA and corresponding state agencies to ensure strict

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compliance
with drug good manufacturing practices and other government regulations and corresponding foreign standards. We do not have control over third-party manufacturers' compliance with these
regulations and standards. If the FDA finds a violation of drug good manufacturing practices, it may enjoin the manufacturer's operations, seize products, or criminally prosecute the manufacturer, any
of which could require us to find alternative manufacturers, resulting in additional time and expense.

Regulatory matters governing our industry could decrease our net sales and increase our operating costs.

In both our U.S. and foreign markets, we are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar
constraints. Such laws, regulations and other constraints may exist at the federal, state or local levels in the United States and at analogous levels of government in foreign jurisdictions.

The
formulation, manufacturing, packaging, labeling, distribution, importation, sale and storage of our products are subject to extensive regulation by various federal agencies,
including the FDA, the Federal Trade Commission, or FTC, state attorneys general in the U.S., the Ministry of Health, Labor and Welfare in Japan, as well as by various other federal, state, local and
international regulatory authorities in the countries in which our products are manufactured, distributed or sold. If we or our manufacturers fail to comply with those regulations, we could become
subject to significant penalties or claims, which could harm our results of operations or our ability to conduct our business. In addition, the adoption of new regulations or changes in the
interpretations of existing regulations may result in significant compliance costs or discontinuation of product sales and may impair the marketing of our products, resulting in significant loss of
net sales.

In
addition, our failure to comply with FTC or state regulations, or with regulations in foreign markets that cover our product claims and advertising, including direct claims and
advertising by us, may result
in enforcement actions and imposition of penalties or otherwise harm the distribution and sale of our products.

We may need to raise additional funds to pursue our growth strategy or continue our operations, and we may be unable to raise capital when needed.

From time to time, we may seek additional equity or debt financing to provide for the capital expenditures required to finance working capital requirements, to
increase the number of our boutiques or to make acquisitions. In addition, if our business plans change, if general economic, financial or political conditions in our markets change, or if other
circumstances arise that have a material effect on our cash flow, the anticipated cash needs of our business as well as our conclusions as to the adequacy of our available sources of capital could
change significantly. Any of these events or circumstances could result in significant additional funding needs, requiring us to raise additional capital to meet those needs. We cannot predict the
timing or amount of any such capital requirements at this time. If financing is not available on satisfactory terms or at all, we may be unable to expand our business or to develop new business at the
rate desired and our results of operations may suffer.

30

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Our plans to expand our product offerings and launch new brands or brand extensions may not be successful, and implementation of these plans may divert
our operational, managerial and administrative resources, which could impact our competitive position.

We plan to grow our business by expanding our product offerings and developing new brands or brand extensions, as we did when we launched our RareMineralsbrand and line of products in 2007. These plans involve various risks, including:



The
development and launch of a new product line or brand or brand extension could be delayed or abandoned, could cost more than anticipated and could divert resources from other areas
of our business, any of which could impact our competitive position and reduce our net sales and profitability.

We may make acquisitions and strategic investments, which will involve numerous risks. We may not be able to address these risks without substantial
expense, delay or other operational or financial problems.

Although we have a limited history of making acquisitions or strategic investments, we may acquire or make investments in related businesses or products in the
future. Acquisitions or investments involve various risks, such as:



We are subject to risks related to our international operations.

As we expand our international operations, we will be increasingly susceptible to the following risks associated with international operations:



31

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In
addition, we plan to develop formal and informal marketing and distribution relationships with existing and new local business partners who can provide local expertise and sales and
distribution infrastructure to support our expansion in our target international markets, which will be time-consuming and costly. Several of the risks associated with our international
business may be within the control (in whole or in part) of these local business partners with whom we have established relationships or may be affected by the acts or omissions of these local
business partners. No assurances can be provided that these local business partners will effectively help us in their respective markets or that they will act in compliance with foreign laws and
regulations in providing us with services. The failure of these local business partners to assist us in their local markets and the other risks set forth above could harm our business, prospects,
financial condition and results of operations.

Our common stock has only been publicly traded since September 29, 2006, and the price of our common stock may fluctuate substantially.

Our common stock has only been publicly traded since September 29, 2006, and we expect that the price of our common stock will continue to fluctuate
substantially. From our initial public offering through February 22, 2008, the trading price of our common stock has ranged from a low of $19.25 to a high of $43.22. Many factors could cause
the market price of our common stock to rise and fall, including the following:



In
addition, public announcements by our competitors concerning, among other things, their performance, strategy, accounting practices, or legal problems could cause the market price of
our common stock to decline regardless of our actual operating performance.

Our operating and financial performance in any given period might not meet the guidance that we have provided to the public.

We provide public guidance on our expected operating and financial results for future periods. Although we believe that this guidance provides investors and
analysts with a better understanding of

32

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management's
expectations for the future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties
described in this report and in our other public filings and public statements. Our guidance may not always be accurate. If, in the future, our operating or financial results for a particular period
do not meet our guidance or the expectations of investment analysts or if we reduce our guidance for future periods, the market price of our common stock could significantly decline.

Our current principal stockholders have significant influence over us, and they could delay, deter, or prevent a change of control or other business
combination or otherwise cause us to take action that advances their best interests and not necessarily those of other stockholders.

As of February 19, 2008, affiliates of Berkshire Partners LLC beneficially own approximately 25.2% of our outstanding common stock. In addition, two
of our directors are affiliated with Berkshire Partners LLC. As a result, if these stockholders were to choose to act together, they will have significant influence over our decision to enter
into any corporate transaction and may have the ability to prevent any transaction that requires the approval of stockholders regardless of whether or not other stockholders believe that such
transaction is in their own best interests. Such concentration of voting power could have the effect of delaying, deterring, or preventing a change of control or other business combination that might
otherwise be beneficial to our stockholders. In addition, the significant concentration of share ownership may adversely affect the trading price of our common stock because investors often perceive
disadvantages in owning shares in companies with controlling stockholders.

We do not anticipate paying dividends on our capital stock in the foreseeable future.

We do not anticipate paying any dividends in the foreseeable future. We currently intend to retain our future earnings, if any, to repay existing indebtedness and
to fund the development and growth of our business. In addition, the terms of our senior secured credit facilities currently, and any future debt or credit facility may, restrict our ability to pay
any dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain from your purchase of our common stock for the foreseeable future.

Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change in control, even if an
acquisition would be beneficial to our stockholders, which could cause our stock price to decline and prevent attempts by our stockholders to replace or remove our current management.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may delay or prevent a change in control, discourage
bids at a premium over the market price of our common stock and harm the market price of our common stock and diminish the voting and other rights of the holders of our common stock. These provisions
include:



33

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We
are also subject to provisions of Delaware law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for three years after the
stockholder becomes a 15% stockholder, subject to specified exceptions. Together, these provisions of our certificate of incorporation and bylaws and of Delaware law could make the removal of
management more difficult and may discourage transactions

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

We currently lease a total of approximately 74,000 square feet at a facility in San Francisco, California for our corporate headquarters. The lease for our
corporate headquarters expires in July 2015. We believe that this facility, including additional space that we have the ability to acquire under options in the lease, will provide us with adequate
space for growth for at least the next two years and, if necessary we believe that we will be able to locate and acquire additional space for our headquarters on commercially reasonable terms. We
lease an approximately 69,000 square foot facility in Hayward, California for use as a distribution center to our boutiques and our international distributors. The lease of this facility expires in
July 2010. We also have leased a new facility of approximately 300,000 square feet in Obetz, Ohio in 2007 for ten years and an approximately 28,000 square feet in Basildon, United Kingdom in 2007 for
five years. We believe with these new distribution facilities, we will have adequate space for growth for the next five years, and we believe that we will be able to locate and acquire additional
space for our operations on commercially reasonable terms.

As
of December 30, 2007, we leased approximately 53,000 gross square feet relating to 51 company-owned boutiques. Most of our company-owned boutique leases have original lease
terms of approximately 10 years and provide for a minimum rent plus a percentage rent based upon sales after certain minimum thresholds have been achieved. These leases generally require that
we pay insurance, utilities, real estate taxes and repair and maintenance expenses. Some of the leases also contain early termination options, which can be exercised by us or the landlord under
certain conditions.

ITEM 3.    LEGAL PROCEEDINGS

Bare Escentuals is subject to various claims and legal actions during the ordinary course of our business. We believe that there are currently no claims or legal
actions that would have a material adverse impact on our financial position, operations or potential performance.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of our security holders during the fourth quarter of our fiscal year ended December 30, 2007.

34

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock has been listed on the Nasdaq Global Select Market under the symbol "BARE" since September 29, 2006. Prior to that time, there was no
public market for our stock.

The
following table sets forth for the periods indicated the high and low sale prices per share of our common stock as reported by the Nasdaq Global Select Market:

Fiscal Year 2007

Low

HighFirst Quarter

$
30.50

$
37.89Second Quarter


32.68


43.22Third Quarter


21.21


36.05Fourth Quarter


19.25


28.22


|
|

Fiscal Year 2006

Low

HighThird Quarter (commencing September 29, 2006)

$
26.99

$
29.10Fourth Quarter


26.95


35.41


On
December 30, 2007, the closing sale price of our common stock on the Nasdaq Global Select Market was $24.43. As of February 19, 2008, there were approximately 52
stockholders of record. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders
represented by these record holders.

We
have not repurchased any common stock during the fourth quarter of our fiscal year ended December 30, 2007.

35

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PERFORMANCE GRAPH

The following graph compares our cumulative total stockholder return since the date our common stock began trading on the Nasdaq Global Select Market
(September 29, 2006) with the Nasdaq Global Select Index and the Dow Jones U.S. Personal Products Index. The graph assumes that the value of the investment in our common stock and each index
was $100 on September 29, 2006.

COMPARISON OF 15 MONTH CUMULATIVE TOTAL RETURN*
Among Bare Escentuals, Inc., The NASDAQ Global Select Index
And The Dow Jones US Personal Products Index

GRAPHIC

The
information in the graph and table above is not "soliciting material," is not deemed "filed" with the Securities and Exchange Commission and is not to be incorporated by reference in
any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this annual report, except to the extent
that we specifically incorporate such information by reference.

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DIVIDEND POLICY

On February 18, 2005 in connection with our February 2005 recapitalization, on October 7, 2005 in connection with our October 2005 recapitalization,
and on June 7, 2006 in connection with our June 2006 recapitalization, we paid cash dividends of approximately $122.4 million, $183.5 million and $340.4 million,
respectively, to the holders of our outstanding shares of common stock. These dividend payments were not required to be made pursuant to any agreement and were funded with borrowings under senior
secured credit facilities and senior subordinated notes and in part from our retained earnings and cash from operations. We currently intend to retain all available funds and any future earnings for
use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Provisions in our senior secured credit facilities prevent us and our
operating subsidiary from paying future dividends and making other distributions and transfers. Any future determination related to dividend policy will be made at the discretion of our board of
directors and will depend upon our results of operations, financial condition, capital requirements, contractual restrictions and such other factors as our board of directors deems relevant.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.

|Plan Category                                              |  | Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights |  | Weighted-average
exercise price of
outstanding options,
warrants and rights |      | Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | -------------------------------------------------------------------------------------------------------------------------------------------
|
|Equity compensation plans approved by security holders     |  | 4,714,936                                                                                   |  | $                                                                           | 4.56 |                                                                                                                                            
|Equity compensation plans not approved by security holders |  |                                                                                            |  |                                                                             |     |                                                                                                                                            
|Total                                                      |  | 4,714,936                                                                                   |  | $                                                                           | 4.56 |                                                                                                                                            

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ITEM 6.    SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the accompanying notes and
"Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report. The selected data in this section is not intended to replace the consolidated
financial statements.

|                                                                       |                                          | December 30,
2007 |         | December 31,
2006 |   | January 1,
2006 |         | January 2,
2005(a) |         | December 31,
2003 |  
|---------------------------------------------------------------------- | ---------------------------------------- | ----------------- | ------- | ----------------- | - | --------------- | ------- | ------------------ | ------- | ----------------- | -
|
|Sales, net                                                             |                                          | $                 | 511,000 |                   | $ | 394,525         |         | $                  | 259,295 |                   | $
|Cost of goods sold                                                     |                                          |                   | 147,558 |                   |   | 112,439         |         |                    | 74,511  |                   |  
|                                                                       |                                          |                   |         |                   |   |                 |         |                    |         |                   |  
|Gross profit                                                           |                                          |                   | 363,442 |                   |   | 282,086         |         |                    | 184,784 |                   |  
|Expenses:                                                              |                                          |                   |         |                   |   |                 |         |                    |         |                   |  
|                                                                       | Selling, general and administrative      |                   |         | 180,338           |   |                 | 135,501 |                    |         | 103,270           |  
|                                                                       | Depreciation and amortization            |                   |         | 7,277             |   |                 | 2,327   |                    |         | 1,106             |  
|                                                                       | Stock-based compensation(b)              |                   |         | 6,838             |   |                 | 5,347   |                    |         | 1,370             |  
|                                                                       | Restructuring charges(c)                 |                   |         |                  |   |                 | 114     |                    |         | 643               |  
|                                                                       | Asset impairment charges(d)              |                   |         |                  |   |                 |        |                    |         | 1,055             |  
|                                                                       | Recapitalization fees and expenses(e)    |                   |         |                  |   |                 |        |                    |         |                  |  
|                                                                       |                                          |                   |         |                   |   |                 |         |                    |         |                   |  
|Total operating expenses                                               |                                          |                   | 194,453 |                   |   | 143,289         |         |                    | 107,444 |                   |  
|                                                                       |                                          |                   |         |                   |   |                 |         |                    |         |                   |  
|Operating income                                                       |                                          |                   | 168,989 |                   |   | 138,797         |         |                    | 77,340  |                   |  
|Other income (expense):                                                |                                          |                   |         |                   |   |                 |         |                    |         |                   |  
|                                                                       | Interest expense(e)(f)(g)(h)(j)          |                   |         | (23,619           | ) |                 | (49,246 | )                  |         | (21,503           | )
|                                                                       | Debt extinguishment costs(f)(g)(h)(i)(j) |                   |         |                  |   |                 | (5,868  | )                  |         | (16,535           | )
|                                                                       | Interest income                          |                   |         | 1,706             |   |                 | 1,222   |                    |         | 221               |  
|                                                                       |                                          |                   |         |                   |   |                 |         |                    |         |                   |  
|Income before provision for income taxes                               |                                          |                   | 147,076 |                   |   | 84,905          |         |                    | 39,523  |                   |  
|Provision for income taxes                                             |                                          |                   | 59,008  |                   |   | 34,707          |         |                    | 15,633  |                   |  
|                                                                       |                                          |                   |         |                   |   |                 |         |                    |         |                   |  
|Net income                                                             |                                          | $                 | 88,068  |                   | $ | 50,198          |         | $                  | 23,890  |                   | $
|                                                                       |                                          |                   |         |                   |   |                 |         |                    |         |                   |  
|Deemed dividend attributable to preferred stockholders(k)              |                                          |                   |        |                   |   |                |         |                    |        |                   |  
|                                                                       |                                          |                   |         |                   |   |                 |         |                    |         |                   |  
|Net income (loss) attributable to common stockholders                  |                                          | $                 | 88,068  |                   | $ | 50,198          |         | $                  | 23,890  |                   | $
|                                                                       |                                          |                   |         |                   |   |                 |         |                    |         |                   |  
|Net income (loss) per common share                                     |                                          |                   |         |                   |   |                 |         |                    |         |                   |  
|                                                                       | Basic                                    |                   | $       | 0.98              |   | $               | 0.67    |                    | $       | 0.35              |  
|                                                                       |                                          |                   |         |                   |   |                 |         |                    |         |                   |  
|                                                                       | Diluted                                  |                   | $       | 0.95              |   | $               | 0.65    |                    | $       | 0.34              |  
|                                                                       |                                          |                   |         |                   |   |                 |         |                    |         |                   |  
|Cash dividend per common share                                         |                                          | $                 |        |                   | $ | 4.81            |         | $                  | 4.45    |                   | $
|                                                                       |                                          |                   |         |                   |   |                 |         |                    |         |                   |  
|Weighted average shares used in computing net income (loss) per share: |                                          |                   |         |                   |   |                 |         |                    |         |                   |  
|                                                                       | Basic                                    |                   |         | 90,278            |   |                 | 74,668  |                    |         | 67,676            |  
|                                                                       |                                          |                   |         |                   |   |                 |         |                    |         |                   |  
|                                                                       | Diluted                                  |                   |         | 93,026            |   |                 | 77,208  |                    |         | 69,285            |  
|                                                                       |                                          |                   |         |                   |   |                 |         |                    |         |                   |  

38

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|
|

|                                     |  | As of
|------------------------------------ |  | -----
|
|
|Balance Sheet Data:                  |  |      
|Cash and cash equivalents            |  | $    
|Working capital                      |  |      
|Total assets                         |  |      
|Long-term debt, less current portion |  |      
|Stockholders' equity (deficit)       |  |      

---

39

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40

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section and other parts of this Form 10-K contain forward-looking statements that involve risks and uncertainties.
In some cases, forward-looking statements can be identified by words such as "anticipates," "expects," "believes," "plans," "predicts," and similar terms. These forward-looking statements are based on
assumptions made by management and management's beliefs, including its current expectations, estimates and projections about our industry. Forward-looking statements are not guarantees of future
performance and our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those
discussed in Item 1A "Risk Factors" above. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this
Form 10-K. Unless required by law, we undertake no obligation to update any forward-looking statements, whether as result of new information, future events or
otherwise

Executive Overview

Founded in 1976, Bare Escentuals is one of the fastest growing prestige beauty companies in the U.S. and a leader by sales and consumer awareness in mineral-based
cosmetics. We develop, market and sell branded cosmetics and skin care products under ourbareMinerals, bareVitamins, i.d., RareMineralsand namesake Bare
Escentualsbrands, and professional skin care products under ourmd formulationsbrand.

We
utilize a distinctive marketing strategy and a multi-channel distribution model consisting of infomercials; home shopping television on QVC; premium wholesale, including Sephora, Ulta
and department stores; company-owned boutiques; spas and salons and online shopping. We believe that this strategy provides convenience to our consumers and allows us to reach the broadest possible
spectrum of consumers.

Our
business is comprised of two strategic business units constituting reportable segments that we manage separately based on fundamental differences in their operations:



41

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We
manage our business segments to maximize sales growth and market share. We believe that our multi-channel distribution strategy maximizes convenience for our consumers, reinforces
brand awareness, increases consumer retention rates, and drives corporate cash flow and profitability. Further, we believe that the broad diversification within our segments provides us with expanded
opportunities for growth and reduces our dependence on any single distribution channel. Within individual distribution channels, particularly those in our wholesale segment, financial results are
often affected by the timing of shipments as well as the impact of key promotional events.

Basis of Presentation

We recognize revenue in accordance with the requirements of Staff Accounting Bulletin No. 104Revenue
Recognition, and other applicable revenue recognition guidance and interpretations. The Company records revenue when all four of the following criteria are met:
(i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and
(iv) collectibility is reasonably assured. Revenue is recognized when merchandise is shipped from a warehouse to wholesale customers, infomercial customers and online shopping customers or when
purchased by consumers at company-owned boutiques, each net of estimated returns (except in the case of our consignment sales). For our consignment sales, we recognize sales, net of estimated returns,
upon shipment from our consignment partners to their customers. We recognize postage and handling charges we bill to customers as revenue upon shipment of the related merchandise.

Our
cost of goods sold consists of the costs associated with the sourcing of our products, including the cost of the product and associated manufacturing costs, inbound freight charges,
royalties and internal transfer costs. Additionally, cost of goods sold includes postage and handling costs incurred upon shipment of merchandise. Our gross profit is dependent upon a variety of
factors, including changes in the relative sales mix between our business segments, changes in the mix of products sold and fluctuations in material costs. Our gross margins differ significantly
between product lines and our business segments, with sales in our retail segment generally yielding higher gross margins than our wholesale segment. These factors may cause gross profit and margins
to fluctuate from quarter to quarter. We anticipate that our cost of goods sold will increase in absolute dollars as we increase our total sales but will remain generally consistent with historical
periods on an annual basis as a percentage of net sales depending on the mix of sales among our distribution channels.

Selling,
general and administrative expenses include infomercial production and media costs, advertising costs, rent and other store operating costs and corporate costs such as
management salaries, information technology, professional fees, finance and accounting personnel, human resources personnel and other administrative functions. Selling, general, and administrative
expenses also include all of our distribution center and fulfillment costs, including all warehousing costs associated with our third-party fulfillment provider and receiving and inspection costs that
we do not include in cost of goods sold, which are comprised primarily of headcount related costs at our own distribution centers and at our third-party fulfillment provider. Receiving and inspection
costs and warehousing costs are excluded from our gross margins and, therefore, our gross margins may not be comparable to those of other companies that choose to include certain of these costs in
cost of goods sold. We are unable to provide an estimate of these costs but we believe these costs are not material. Fluctuations in selling, general and administrative expenses result primarily from
changes in media and advertising expenditures; changes in fulfillment costs, which increase proportionately with net sales, particularly infomercial sales; changes in store operating costs, which are
affected by the number of stores opened in a period; and changes in corporate costs such as for headcount and infrastructure to support our operations. We anticipate that our selling, general and
administrative expenses will increase in absolute dollars as we expect to continue to invest in our corporate infrastructure and incur increased expenses to support sales growth.

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Depreciation
and amortization includes charges for the depreciation of property and equipment and the amortization of intangible assets. We anticipate that our depreciation and
amortization expense will increase in absolute dollars as we continue to open new boutiques, invest in information systems and amortize intangible assets in connection with our recent acquisition. We
record our depreciation and amortization as a separate line item in our statement of operations because all such expense relates to selling, general and administrative costs.

Stock-based
compensation includes charges incurred in recognition of compensation expense associated with grants of stock options and stock purchases. On January 3, 2005 we
adopted the fair value recognition and measurement provisions of SFAS No. 123(R),Share-Based Payment(SFAS 123(R)). SFAS 123(R) is
applicable to stock-based awards exchanged for employee services and in certain circumstances for board service by our nonemployee directors. Pursuant to SFAS 123(R), stock-based compensation
cost is measured at the grant date, based on the fair value of the award and is recognized as an expense over the requisite service period. We elected to adopt the modified-prospective-transition
method, as provided by SFAS 123(R). Accordingly, prior period amounts have not been restated. Under this transitional method, we are required to record compensation expense for all awards
granted after the date of adoption using grant-date fair value estimated in accordance with the provisions of SFAS 123(R) and for the unvested portion of previously granted awards
as of January 3, 2005 using the grant-date fair value estimated in accordance with the provisions of SFAS 123. We anticipate that our stock-based compensation expense will
increase in absolute dollars as we continue to grant additional options in the future. We record our stock-based compensation on a separate operating expense line item in our statement of operations
due to the fact that, to date, all of our stock-based awards have been made to employees whose salaries are classified as selling, general and administrative costs. As of December 30, 2007, we
had options to purchase 4,714,936 shares of our common stock outstanding with a weighted average exercise price of $4.56 per share, 752,236 shares of which were exercisable at December 30,
2007.

Interest
expense includes interest costs associated with our credit facilities and the amortization of deferred financing costs associated with these credit facilities. We anticipate
that our interest expense in the future will decrease in absolute terms and as a percentage of net sales as we continue to make scheduled payments of our outstanding indebtedness.

Provision
for income taxes depends on the statutory tax rates in the countries where we sell our products. Historically, we have only been subject to taxation in the United States
because we have either sold to consumers in the United States or sold to distributors in the United States who resold our products here and abroad. However, as a result of our acquisition of
U.K.-based Cosmeceuticals in the second fiscal quarter of 2007, we began to sell our products directly to consumers located outside of the United States, and we became subject to taxation based on the
foreign statutory rates in the countries where those sales took place. Our effective tax rate could fluctuate accordingly. For fiscal 2008, we anticipate that our effective tax rate will be
approximately 40% of our income before provision for income taxes.

Our
fiscal year-end is the Sunday closest to December 31 based on a 52/53-week year. Each fiscal year consists of four 13-week quarters, with an extra week added onto
the fourth quarter every five or six years. The fiscal years ended January 1, 2006, December 31, 2006 and December 30, 2007, each contained 52 weeks.

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Results of Operations

The following table sets forth consolidated statements of operations for the years ended December 30, 2007, December 31, 2006 and January 1,
2006:

|                                         |                                     | Year Ended |        
|---------------------------------------- | ----------------------------------- | ---------- | -------
|
|
|Sales, net                               |                                     | $          | 511,000
|Cost of goods sold                       |                                     |            | 147,558
|                                         |                                     |            |        
|Gross profit                             |                                     |            | 363,442
|Expenses:                                |                                     |            |        
|                                         | Selling, general and administrative |            |        
|                                         | Depreciation and amortization       |            |        
|                                         | Stock-based compensation            |            |        
|                                         | Restructuring charges               |            |        
|                                         | Asset impairment charge             |            |        
|                                         |                                     |            |        
|Total operating expenses                 |                                     |            | 194,453
|                                         |                                     |            |        
|Operating income                         |                                     |            | 168,989
|Other income (expense):                  |                                     |            |        
|Interest expense                         |                                     |            | (23,619
|Debt extinguishment costs                |                                     |            |       
|Interest income                          |                                     |            | 1,706  
|                                         |                                     |            |        
|Income before provision for income taxes |                                     |            | 147,076
|Provision for income taxes               |                                     |            | 59,008 
|                                         |                                     |            |        
|Net income                               |                                     | $          | 88,068 
|                                         |                                     |            |        

Net
sales by business segment and distribution channel and percentage of net sales for the years ended December 30, 2007, December 31, 2006 and January 1, 2006 are
as follows:

|           |                          | December 30,
2007 |         | December 31,
2006 |         | January 1,
2006 |     
|---------- | ------------------------ | ----------------- | ------- | ----------------- | ------- | --------------- | ----
|
|Retail     |                          |                   |         |                   |         |                 |     
|           | Infomercial              |                   | $       | 126,209           |         | 24.7            | %   
|           | Boutiques                |                   |         | 85,620            |         | 16.8            |     
|           |                          |                   |         |                   |         |                 |     
|           |                          | Total retail      |         |                   | 211,829 |                 | 41.5
|           |                          |                   |         |                   |         |                 |     
|Wholesale  |                          |                   |         |                   |         |                 |     
|           | Premium wholesale        |                   |         | 163,835           |         | 32.1            |     
|           | Home shopping television |                   |         | 60,568            |         | 11.8            |     
|           | Spas and salons          |                   |         | 57,026            |         | 11.1            |     
|           | International            |                   |         | 17,742            |         | 3.5             |     
|           |                          |                   |         |                   |         |                 |     
|           |                          | Total wholesale   |         |                   | 299,171 |                 | 58.5
|           |                          |                   |         |                   |         |                 |     
|Sales, net |                          | $                 | 511,000 |                   | 100.0   | %               | $   
|           |                          |                   |         |                   |         |                 |     

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Gross
profit and gross margin by business segment for the years ended December 30, 2007, December 31, 2006 and January 1, 2006 are as follows:

|                          |  | Year Ended |        
|------------------------- |  | ---------- | -------
|
|
|Retail                    |  | $          | 168,854
|Wholesale                 |  |            | 194,588
|                          |  |            |        
|Gross profit/gross margin |  | $          | 363,442
|                          |  |            |        

Year ended December 30, 2007 compared to the year ended December 31, 2006

Sales, net

Net sales for the year ended December 30, 2007 increased 29.5% to $511.0 million from $394.5 million in the year ended December 31,
2006, an increase of $116.5 million. This increase was primarily attributable to continued growth in sales of ourbareMineralsline of cosmetics,
as we continued to broaden our distribution throughout our sales channels both domestically and abroad. The increase in our net sales was realized within both our retail and wholesale segments.

Retail.Net retail sales increased 14.5% to $211.8 million in the year ended
December 30, 2007 from $185.1 million in the year ended December 31, 2006. Net sales from boutiques increased 52.9% to $85.6 million in the year ended December 30,
2007 from $56.0 million in the year ended December 31, 2006 due to a net increase of eighteen boutiques open as of December 30, 2007 compared to December 31, 2006, growth
of our online business, and improved productivity at our existing locations. As of December 30, 2007 and December 31, 2006, we had 51 and 33 open company-owned boutiques, respectively.
Offset against this was a decrease of 2.2% in net sales from infomercials to $126.2 million in the year ended December 30, 2007 from $129.0 million in the year ended
December 31, 2006, due to a decline in the performance of our new infomercial compared to our prior infomercial.

Wholesale.Net wholesale sales increased 42.8% to $299.2 million in the year ended
December 30, 2007 from $209.5 million in the year ended December 31, 2006. Net sales in our premium wholesale channel increased 49.2% to $163.8 million in the year ended
December 30, 2007 from $109.8 million in the year ended December 31, 2006, resulting from strong consumer demand and expansion into additional retail locations at Ulta, Sephora
and department stores. Net sales to our home shopping television customer, grew by 21.7% to $60.6 million in the year ended December 30, 2007 from $49.8 million in the year ended
December 31, 2006 as a result of improved product performance and the inclusion of home shopping television sales in 2007 to the UK and Germany. Net sales to spas and salons increased 70.9% to
$57.0 million in the year ended December 30, 2007 from $33.4 million in the year ended December 31, 2006 largely due to the continued growth in sales of our core bareMineralscosmetics line and the inclusion of sales to spas and salons in the UK. Net sales to our international distributors grew by 7.1% to
$17.7 million in the year ended December 30, 2007 from $16.6 million in the year ended December 31, 2006, primarily as a result of the increased penetration of our bareMineralscosmetics line into this distribution channel partially, offset by the elimination of distributor sales to the UK following our acquisition
of that business in the second fiscal quarter.

Gross profit

Gross profit increased 28.8% to $363.4 million in the year ended December 30, 2007 from $282.1 million in the year ended December 31,
2006. Our retail segment gross profit increased 14.4% to $168.9 million in the year ended December 30, 2007 from $147.7 million in the year ended December 31, 2006, driven
by growth in our boutiques sales channels. Our wholesale segment gross

45

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profit
increased 44.8% to $194.6 million in the year ended December 30, 2007 from $134.4 million in the year ended December 31, 2006, due to increases in sales across all
wholesale distribution channels.

Gross
margin decreased approximately 0.4% to 71.1% from 71.5% in the year ended December 30, 2007. This overall decrease in the year ended December 30, 2007 is primarily
due to wholesale sales comprising a larger percentage of total net sales compared to the year ended December 31, 2006, which have lower gross margins than retail segment sales. In the retail
segment, gross margin remained relatively consistent at 79.7% in the year ended December 30, 2007 compared to 79.8% in the year ended December 31, 2006. Within the wholesale segment,
gross margin increased to 65.0% in the year ended December 30, 2007 from 64.2% in the year ended December 31, 2006, primarily as a result of a change in sales mix between channels and
customers.

Selling, general and administrative expenses

Selling, general and administrative expenses increased 33.1% to $180.3 million in the year ended December 30, 2007 from $135.5 million in the
year ended December 31, 2006. The increase was primarily due to expense associated with a significant increase in investment in our corporate infrastructure of $23.3 million, including
increased headcount costs, headquarters facilities costs, distribution center costs, costs associated with complying with the regulations applicable to a public company and other corporate costs,
corporate costs and infrastructure costs relating to our UK acquisition, as well as increased expenses to support sales growth, including $9.2 million in increased store operating costs,
$4.2 million in payroll and other personnel expenses, $3.6 million in increased media spending and $1.2 million in increased professional fees. As a percentage of net sales,
selling, general and administrative expenses increased 1.0% to 35.3% from 34.3%, primarily due to corporate expenses increasing at a greater rate than net sales.

Depreciation and amortization

Depreciation and amortization expenses increased 212.7% to $7.3 million in the year ended December 30, 2007 from $2.3 million in the year
ended December 31, 2006. This increase was primarily attributable to higher depreciation expense as a result of an increase in depreciable assets as we continue to increase the number of
company-owned boutiques and invest in our corporate infrastructure and $2.2 million of amortization of intangible assets from our UK acquisition.

Stock-based compensation

Stock-based compensation expense increased 27.9% to $6.8 million in the year ended December 30, 2007 from $5.3 million in the year ended
December 31, 2006. This increase resulted primarily from the granting of additional stock options.

Restructuring charges

In the year ended December 31, 2006, we discontinued the use of one of our office floors located at our former corporate facility and recorded a
restructuring charge of $0.1 million.

Operating income

Operating income increased 21.8% to $169.0 million in the year ended December 30, 2007 from $138.8 million in the year ended
December 31, 2006. This increase was largely due to increases in operating income in both our retail and wholesale segments, reflecting sales growth in both of these segments, partially offset
by an increased operating loss in our corporate segment.

Our
retail segment operating income increased 10.8% to $73.3 million in the year ended December 30, 2007 from $66.1 million in the year ended December 31,
2006, which was largely driven

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by
sales growth in our boutiques sales channel. Our increased sales in the retail segment contributed to an increase in gross profit of $21.2 million, which was partially offset by an increase
in operating expenses of $14.1 million. The increase in operating expenses was largely due to increased store operating costs of $9.2 million as a result of an increase in the number of
boutiques open as of December 30, 2007 and $3.6 million in increased media spending.

Our
wholesale segment operating income increased 41.2% to $177.3 million in the year ended December 30, 2007 from $125.6 million in the year ended
December 31, 2006 due to increased sales across all wholesale sales channels. Our increased sales in the wholesale segment contributed to an increase in gross profit of $60.2 million,
partially offset by an increase in operating expenses of $8.4 million.

Our
corporate segment operating loss increased 54.2% to $81.6 million in the year ended December 30, 2007 from $52.9 million in the year ended December 31,
2006. This increase was largely due to the increase in the corporate segment selling, general and administrative expense of $23.3 million, an increase in depreciation and amortization of
$5.0 million and an increase in stock-based compensation of $1.5 million. The increase in corporate selling, general and administrative expense was as a result of the increase in the
investment in our corporate infrastructure to support sales growth and additional expenses associated with being a public company.

Interest expense

Interest expense decreased 52.0% to $23.6 million in the year ended December 30, 2007 from $49.2 million in the year ended
December 31, 2006. The decrease was attributable to decreased debt balances in the year ended December 30, 2007, primarily associated with repayment of outstanding indebtedness,
including repayments from the proceeds of our initial public offering completed on October 4, 2006.

Debt extinguishment costs

Debt extinguishment costs decreased to zero in the year ended December 30, 2007 from $5.9 million in the year ended December 31, 2006. The
charge for the year ended December 31, 2006 related to our June 2006 recapitalization and included $0.9 million related to the write-off of deferred financing fees and
$2.5 million of fees paid directly to the lender under the new debt that were
expensed as debt extinguishment costs. Additionally, the charge also included $2.5 million related to the write-off of our unamortized debt issuance costs from the repayment in full
of our subordinated notes and second-lien term loans and a portion of our first-lien term loans with the net proceeds from our initial public offering.

Interest income

Interest income increased to $1.7 million in the year ended December 30, 2007 from $1.2 million in the year ended December 31, 2006.
The increase was primarily due to an increase in interest rates on our cash balances and higher average cash balances compared with the year ended December 31, 2006.

Provision for income taxes

The provision for income taxes was $59.0 million, or 40.1% of income before provision for income taxes, in the year ended December 30, 2007 compared
to $34.7 million, or 40.9% of income before provision for income taxes, in the year ended December 31, 2006. The increase resulted from higher income before provision for income taxes
offset by a lower effective rate in the year ended December 30, 2007 compared to the year ended December 31, 2006. The decrease in the effective rate is mainly due to the elimination of
the non-deductible interest as a result of our repayment in full of

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our
aggregate principal amount outstanding of $125.0 million of our 15.0% subordinated notes on October 4, 2006.

Year ended December 31, 2006 compared to the year ended January 1, 2006

Sales, net

Net sales for the year ended December 31, 2006 increased 52.2% to $394.5 million from $259.3 million in the year ended January 1,
2006, an increase of $135.2 million. This increase was primarily attributable to continued growth in sales of ourbareMineralsline of cosmetics,
as we continued to broaden our
distribution throughout our sales channels and increase awareness through greater media spending. The increase in our net sales was realized within both our retail and wholesale segments.

Retail.Net retail sales increased 39.7% to $185.1 million in the year ended
December 31, 2006 from $132.5 million in the year ended January 1, 2006. Net sales from infomercials increased 33.1% to $129.0 million in the year ended December 31,
2006 from $97.0 million in the year ended January 1, 2006 as a result of increased media spending and the growth of sales in our continuity program. Net sales from boutiques increased
57.7% to $56.0 million in the year ended December 31, 2006 from $35.5 million in the year ended January 1, 2006 due to improved productivity at our existing locations as
well as a net increase of five boutiques open as of December 31, 2006 compared to January 1, 2006. As of December 31, 2006 and January 1, 2006, we had 33 and 28 open
company-owned boutiques, respectively.

Wholesale.Net wholesale sales increased 65.2% to $209.5 million in the year ended
December 31, 2006 from $126.8 million in the year ended January 1, 2006. Net sales in our premium wholesale channel increased 120.6% to $109.8 million in the year ended
December 31, 2006 from $49.8 million in the year ended January 1, 2006, resulting from strong consumer demand and expansion into additional retail locations at Sephora and Ulta.
Net sales to QVC, our home shopping television customer, grew by 30.9% to $49.8 million in the year ended December 31, 2006 from $38.0 million in the year ended January 1,
2006 as a result of increased on-air sales as well as increased sales of our products through QVC's website, catalogs and continuity programs. Net sales to spas and salons increased 38.5%
to $33.4 million in the year ended December 31, 2006 from $24.1 million in the year ended January 1, 2006 largely due to the continued growth in sales of our core bareMineralscosmetics line in this channel in which our sales historically had been concentrated in sales of ourmd
formulationsproducts. Net sales to our international distributors grew by 11.0% to $16.6 million in the year ended December 31, 2006 from $14.9 million in
the year ended January 1, 2006, primarily as a result of the increased penetration of ourbareMineralscosmetics line into this distribution
channel.

Gross profit

Gross profit increased 52.7% to $282.1 million in the year ended December 31, 2006 from $184.8 million in the year ended January 1,
2006. Our retail segment gross profit increased 44.1% to $147.7 million in the year ended December 31, 2006 from $102.5 million in the year ended January 1, 2006, driven by
growth in our infomercial and boutiques sales channels. Our wholesale segment gross profit increased 63.3% to $134.4 million in the year ended December 31, 2006 from $82.3 million
in the year ended January 1, 2006, due to increases in sales across all wholesale distribution channels.

Gross
margin increased approximately 0.2% to 71.5% from 71.3% in the year ended December 31, 2006. This overall increase in the year ended December 31, 2006 is primarily
due to increases in gross margin in the retail segment offset in part by wholesale segment sales, which have lower gross margins than retail segment sales, comprising a larger percentage of total net
sales compared to the year ended January 1, 2006. In the retail segment, gross margin increased to 79.8% in the year ended December 31, 2006 from 77.3% in the year ended
January 1, 2006, primarily as a result of a change in

48

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the
mix of products sold. Wholesale segment sales increased to 53.1% of total net sales in the year ended December 31, 2006 from 48.9% in the year ended January 1, 2006. Within the
wholesale segment, gross margin decreased to 64.2% in the year ended December 31, 2006 from 64.9% in the year ended January 1, 2006, primarily as a result of a change in sales between
different channels and types of customers as sales to our premium wholesale customers consisted of a greater percentage of total wholesale segment sales.

Selling, general and administrative expenses

Selling, general and administrative expenses increased 31.2% to $135.5 million in the year ended December 31, 2006 from $103.3 million in the
year ended January 1, 2006. The increase was primarily due to a significant increase in investment in our corporate infrastructure of $12.7 million, including increased headcount costs,
headquarters facilities costs, distribution center costs, costs associated with complying with the regulations applicable to a public company and other corporate costs, as well as increased expenses
to support sales growth, including $4.8 million in payroll and other personnel expenses, $4.2 million in increased fulfillment expenses, $4.5 million in increased media spending
and $1.5 million in increased rent expenses. As a percentage of net sales, selling, general and administrative expenses decreased 5.5% to 34.3% from 39.8%. This decrease in the year ended
December 31, 2006 is primarily due to wholesale segment sales, which have lower expenses as a percentage of net sales than retail segment sales, comprising a larger percentage of total net
sales compared to the year ended January 1, 2006. This decrease was partially offset by investments in our corporate infrastructure to support our growth across all distribution channels.

Depreciation and amortization

Depreciation and amortization expenses increased 110.4% to $2.3 million in the year ended December 31, 2006 from $1.1 million in the year
ended January 1, 2006. This increase was primarily attributable to higher depreciation expense as a result of an increase in depreciable assets as we continue to increase the number of
company-owned boutiques and invest in corporate infrastructure.

Stock-based compensation

Stock-based compensation expense increased 290.3% to $5.3 million in the year ended December 31, 2006 from $1.4 million in the year ended
January 1, 2006. This increase resulted from the additional granting of stock options with higher fair values and the impact of option modifications (as to exercise price and term) in
connection with the February 2005, October 2005 and June 2006 recapitalizations.

Restructuring charges

Restructuring charges decreased 82.3% to $0.1 million in the year ended December 31, 2006 from $0.6 million in the year ended
January 1, 2006. In the year ended December 31, 2006, the charges resulted from the discontinued use of one of our office floors located at our former corporate facility and in the year
ended January 1, 2006, the charges resulted from exit activities to relocate both our corporate headquarters and distribution center facilities, which primarily reflects the sum of the future
lease payments due for these facilities, net of estimated sublease income.

Asset impairment charge

During the year ended January 1, 2006, we abandoned a contract with a software vendor and recorded an impairment charge of $1.1 million. The costs
associated with the termination of the software vendor contract relate primarily to the cost of the software license arrangement and related fees that were accounted for as construction in progress,
as the software had not been placed into service.

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Operating income

Operating income increased 79.5% to $138.8 million in the year ended December 31, 2006 from $77.3 million in the year ended January 1,
2006. This increase was largely due to increases in operating income in both our retail and wholesale segments, reflecting growth across all sales channels, partially offset by an increased operating
loss in our corporate segment.

Our
retail segment operating income increased 59.5% to $66.1 million in the year ended December 31, 2006 from $41.5 million in the year ended January 1, 2006,
which was largely driven by growth in both of our retail sales channels. Our increased sales in the retail segment contributed to an increase in gross profit of $45.2 million, which was
partially offset by an increase in operating expenses of $20.5 million. The increase in operating expenses was largely due to increased store operating costs of $8.0 million as a result
of an increase in the number of boutiques open as of December 31, 2006, $4.8 million of increased fulfillment costs due to increased sales and $4.5 million in increased media
spending.

Our
wholesale segment operating income increased 72.3% to $125.6 million in the year ended December 31, 2006 from $72.9 million in the year ended January 1,
2006 due to increased sales across all wholesale sales channels. Our increased sales in the wholesale segment contributed to an increase in gross profit of $52.1 million and a decrease in
operating expenses of $0.6 million.

Our
corporate segment operating loss increased 43.1% to $52.9 million in the year ended December 31, 2006 from $37.0 million in the year ended January 1,
2006. This increase was largely due to the increase in the corporate segment selling, general and administrative expense of $12.7 million, an increase in depreciation and amortization of
$0.8 million and an increase in stock-based compensation of $4.0 million, offset in part by a decrease in restructuring charges of $0.5 million and a decrease in asset impairment
charges of $1.1 million. The increase in corporate selling, general and administrative expense was as a result of the increase in the investment in our corporate infrastructure.

Interest expense

Interest expense increased 129.0% to $49.2 million in the year ended December 31, 2006 from $21.5 million in the year ended January 1,
2006. The increase was attributable to increased average debt balances during the year ended December 31, 2006, compared to the year ended January 1, 2006, primarily associated with our
October 2005 and June 2006 recapitalizations, partially offset by the decrease in indebtedness after we repaid $372.5 million of indebtedness with the net proceeds from our initial public
offering.

Debt extinguishment costs

Debt extinguishment costs decreased to $5.9 million in the year ended December 31, 2006 from $16.5 million in the year ended
January 1, 2006. The charge for the year ended December 31, 2006 related to our June 2006 recapitalization and included $0.9 million related to the write-off of
deferred financing fees and $2.5 million of fees paid directly to the lender under the new debt that were expensed as debt extinguishment costs. Additionally, the charge also included
$2.5 million related to the write-off of our unamortized debt issuance costs from the repayment in full of our subordinated notes and second-lien term loans and a
portion of our first-lien term loans with the net proceeds from our initial public offering. The charge for the year ended January 1, 2006 related to the February 2005 and October
2005 recapitalizations and included $8.3 million related to the write-off of deferred financing fees and a prepayment penalty of $2.7 million for our prior credit facilities
and $5.5 million of fees paid directly to the lender under the debt incurred in the February 2005 and October 2005 recapitalizations that was expensed as debt extinguishment costs.

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Interest income

Interest income increased to $1.2 million in the year ended December 31, 2006 from $0.2 million in the year ended January 1, 2006. The
increase was primarily due to an increase in interest rates on our cash balances and higher average cash balances compared with the year ended January 1, 2006.

Provision for income taxes

The provision for income taxes was $34.7 million, or 40.9% of income before provision for income taxes, in the year ended December 31, 2006 compared
to $15.6 million, or 39.6% of income before provision for income taxes, in the year ended January 1, 2006. The increase resulted from higher income before provision for income taxes and
a higher effective rate in the year ended December 31, 2006 compared to the year ended January 1, 2006. The increase in the effective rate was mainly due to an increase in the
non-deductible portion of our interest expense in the year ended December 31, 2006, related to the subordinated notes payable that were outstanding from June to October 2006.

Seasonality

Because our products are largely purchased for individual use and are consumable in nature, we are not subject to significant seasonal variances in sales.
However, fluctuations in sales and operating income in any fiscal quarter may be affected by the timing of wholesale shipments, home shopping television appearances and other promotional events. While
we believe our overall business is not currently subject to significant seasonal fluctuations, we have experienced limited seasonality in our premium wholesale and company-owned boutique channels as a
result of increased demand for our products in anticipation of and during the holiday season. To the extent our sales to specialty beauty retailers and through our boutiques increase as a percentage
of our net sales, we may experience increased seasonality.

Liquidity and Capital Resources

Our primary liquidity and capital resource needs are to service our debt, finance working capital needs and fund ongoing capital expenditures. Through
December 30, 2007, we have financed our operations through cash flows from operations, sales of common and preferred shares, borrowings under our credit facilities and issuances of senior
subordinated notes.

Our
operations provided us cash of $97.4 million in the year ended December 30, 2007. At December 30, 2007, we had working capital of $84.2 million, including
cash and cash equivalents of $32.1 million, as compared to working capital of $66.3 million, including $20.9 million in cash and cash equivalents, as of December 31, 2006.
The $11.2 million increase in cash and cash equivalents resulted from cash provided by operations of $97.4 million, including net income for the year ended December 30, 2007 of
$88.1 million, partially offset by investment activities of $44.7 million related primarily to capital expenditures and our acquisition of U.K.-based Cosmeceuticals and cash used in
financing activities of $41.4 million. The $17.9 million increase in working capital was primarily driven by increases in cash and cash equivalents, accounts receivable, prepaid expenses
and other current assets and deferred tax asset, partially offset by an increase in accrued liabilities and income taxes payable.

Net
cash used in investment activities was $44.7 million in the year ended December 30, 2007, primarily attributable to our acquisition of U.K. based Cosmeceuticals, the
opening of eighteen company-owned boutiques, and our continued investment in our corporate infrastructure. Net cash used in investment activities was $13.6 million in the year ended
December 31, 2006, primarily attributable to the opening of seven company-owned boutiques and investment in our corporate infrastructure Our future capital expenditures will depend on the
timing and rate of expansion of our

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business,
information technology investments, new store openings, store renovations and international expansion opportunities.

Net
cash used in financing activities was $41.4 million in the year ended December 30, 2007, which consisted of repayments of $74.3 million on our
first-lien term loan, partially offset by proceeds, net of transaction costs, of $21.1 million from our follow-on underwritten public offerings of common stock and an
excess tax benefit of $10.0 million relating to stock option exercises. During the year ended December 30, 2007, the peak borrowings under our senior secured credit facilities were
$339.3 million. We used cash of $13.8 million for financing activities in the year ended December 31, 2006, which included i) borrowings of $331.6 million offset by
the payment of debt issuance costs of $4.2 million and dividends of $340.4 million related to the June 2006 recapitalization; ii) proceeds, net of transaction costs, of $373.8
from our initial public offering of common stock, offset by repayments of $382.2 million of senior term loans and subordinated notes payable and iii) proceeds of $1.6 million from
the sale of common stock to one of our directors and the issuance of common stock upon the exercise of stock options and iv) proceeds of $7.0 million relating to excess tax benefits from
equity transactions. During the year ended December 31, 2006, the peak borrowings under our senior secured credit facilities were $713.8 million.

In
connection with our June 2006 recapitalization, we amended our senior secured credit facilities and increased our term loan borrowings under these credit facilities by an additional
$206.6 million and increased the amount available under our revolving loan facility to $25.0 million. The revolving facility also provides for the issuance of letters of credit.
Allocation to the revolving facility of such letters of credit reduces the amount available under the facility. Also as part of our June 2006 recapitalization, we issued 15.0% senior subordinated
notes in the aggregate principal amount of $125.0 million, which notes were set to mature on June 7, 2014. We used the proceeds of the additional term loans and the note issuance to pay
a dividend in the aggregate amount of $340.4 million to the holders of our common stock and pay transaction costs in connection with this recapitalization.

In
October 2006, we used the net proceeds of our initial public offering of common stock of $373.8 million to repay all outstanding principal and interest owed on the subordinated
notes and second-lien term loan and a portion of the outstanding principal on the first-lien term loan and to buy out the management agreements with Berkshire
Partners LLC and JH Partners, LLC.

In
December 2006, we amended our senior secured credit facilities to eliminate the requirement that the net proceeds from the issuance of equity securities by us or any of our
subsidiaries be applied to prepay loans under the credit agreement. The amendment also reduced the interest rate margins applicable to LIBOR loans and base rate loans, provided for a further reduction
in the interest rate margins if we achieve a specified consolidated leverage ratio and specified debt rating, and amended some of the financial covenants.

On
March 23, 2007, we amended our senior secured credit facilities to permit acquisitions of up to $30.0 million in any one fiscal year and up to $60.0 million in
the aggregate and investments in foreign subsidiaries to $25.0 million.

Our
revolving credit facility of $25.0 million, of which approximately $0.1 million in letters of credit is outstanding as of December 30, 2007, and our
first-lien term loan of $264.9 million as of December 30, 2007, bear interest at a rate equal to, at our option, either LIBOR or the lender's base rate, plus an applicable
variable margin based on our consolidated total leverage ratio. The current applicable interest margin for the revolving credit facility and first-lien term loan is 2.25% for LIBOR loans
and 1.25% for base rate loans based on our current Moody's rating. As of December 30, 2007, interest on the first-lien term loan was accruing at 7.46% (without giving effect to the
interest rate swap agreement discussed below).

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Borrowings
under our revolving credit facility and the first-lien term loan are secured by substantially all of our assets, including, but not limited to, all accounts
receivable, inventory, property and equipment, and intangibles. The terms of the senior secured credit facilities require us to comply with financial covenants, including maintaining a leverage ratio,
entering into interest rate swap or similar agreements with respect to 40% of the principal amounts outstanding under our senior secured credit facilities as of October 2, 2007. The secured
credit facility also contains nonfinancial covenants that restrict some of our activities, including its ability to dispose of assets, incur additional debt, pay dividends, create liens, make
investments, and engage in specified transactions with affiliates. As of December 30, 2007, we satisfied our financial and nonfinancial covenants.

In
August 2007, we entered into a two-year interest rate swap agreement under our senior secured credit facilities. The interest rate swap has an initial notional amount of
$200 million declining to $100 million after one year under which, on a net settlement basis, we will make monthly fixed rate payments at the rate of 5.03% and the counterparty makes
monthly floating rate payments based upon one-month LIBOR. As a result of the interest rate swap, we have fixed for a two-year period the interest rate subject to market-based
interest rate risk on $200 million of borrowings for the first year and $100 million for the second year under its First Lien Credit Agreement. Our obligations under the interest rate
swap as to the scheduled payments are guaranteed and secured on the same basis as is its obligations under the First Lien Credit Agreement. The fair value of the interest rate swap as of
December 30, 2007 was $2.5 million, which was recorded in
other liabilities in the consolidated balance sheet, with the related $2.5 million unrealized loss recorded as a component of comprehensive loss, net of a $1.0 million tax benefit.

The
terms of our senior secured credit facilities require us to comply with financial covenants, including a maximum leverage ratio covenant. We are required to maintain a maximum
leverage ratio (consolidated total debt to Adjusted EBITDA) of not greater than 4.5 to 1.0. As of December 30, 2007, our leverage ratio was 1.27 to 1.0. If we fail to comply with any of the
financial covenants, the lenders may declare an event of default under the secured credit facility. An event of default resulting from a breach of a financial covenant may result, at the option of
lenders holding a majority of the loans, in an acceleration of repayment of the principal and interest outstanding and a termination of the revolving credit facility. The secured credit facility also
contains non-financial covenants that restrict some of our activities, including our ability to dispose of assets, incur additional debt, pay dividends, create liens, make investments and
engage in specified transactions with affiliates. The secured credit facility also contains customary events of default, including defaults based on events of bankruptcy and insolvency, nonpayment of
principal, interest or fees when due, subject to specified grace periods, breach of specified covenants, change in control and material inaccuracy of representations and warranties. We have been in
compliance with all financial ratio and other covenants under our credit facilities during all reported periods and we were in compliance with these covenants as of December 30, 2007.

Subject
to specified exceptions, including for investment of proceeds in the case of asset sale proceeds and for permitted equity contributions for capital expenditures, we are required
to prepay outstanding loans under our amended senior secured credit facilities with the net proceeds of certain asset dispositions, condemnation settlements and insurance settlements from casualty
losses, issuances of certain debt and, if our consolidated leverage ratio is 2.25 to 1.0 or greater, a portion of excess cash flow.

On
February 16, 2007, we filed a Registration Statement on Form S-1 (File No. 333-140763) with the Securities and Exchange Commission for a
follow-on underwritten public offering. As amended, the Registration Statement provided for the sale of 12.0 million shares of our common stock, consisting of 0.6 million
shares sold by us and 11.4 million shares by selling stockholders. In addition, the selling stockholders granted the underwriters the right to purchase up to an additional 1.8 million
shares to cover over-allotments. The over-allotment option was exercised on March 19, 2007 by the underwriters.

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The
follow-on underwritten public offering closed on March 19, 2007. We received approximately $18.1 million in net proceeds from this offering.

On
April 3, 2007, we completed our acquisition of U.K.-based Cosmeceuticals Limited ("Cosmeceuticals"), which distributes our Bare Escentuals' bareMinerals,md
formulationsandMD Fortebrands
primarily to spas and salons and QVC U.K. The acquired entity has been renamed Bare Escentuals UK Ltd. The consideration for the purchase was cash of $23.1 million, comprised of
$22.4 million in cash consideration and $0.7 million of transaction costs. Our consolidated financial statements include the operating results of the business acquired from the date of
acquisition.

On
May 14, 2007, we filed a Registration Statement on Form S-1 (File No. 333-142935) with the Securities and Exchange Commission for a
follow-on underwritten public offering. As amended, the Registration Statement provided for the sale of 8.0 million shares of our common stock, consisting of 0.1 million
shares sold by us and 7.9 million shares by selling stockholders. The follow-on underwritten public offering closed on June 19, 2007. We received approximately
$3.0 million in net proceeds from this offering.

Liquidity sources, requirements and contractual cash requirement and commitments

We believe that cash flow from operations, cash on hand and amounts available under our revolving credit facility will provide adequate funds for our foreseeable
working capital needs and planned capital expenditures. As part of our business strategy, we intend to invest in making improvements to our system. We opened eighteen boutiques in 2007 and we plan to
open approximately thirty-five new boutiques in 2008, which will require additional capital expenditures. Additionally, we also plan to continue to invest in our corporate infrastructure
facilities. We also intend to acquire or invest in businesses or products complementary to our own. We anticipate that our capital expenditures in the year ending December 28, 2008 will be
approximately $25.0 million. There can be no assurance that any such capital will be available on acceptable terms or at all. Our ability to fund our working capital needs, planned capital
expenditures and scheduled debt payments, as well as to comply with all of the financial covenants under our debt agreements, depends on our future operating performance and cash flow, which in turn
are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.

Contractual commitments

We lease retail stores, warehouses, corporate offices and certain equipment under noncancelable operating leases with various expiration dates through March 2018.
Portions of these payments are denominated in foreign currencies and were translated in the tables below based on their respective U.S. dollar exchange rates as of December 30, 2007. These
future payments are subject to foreign

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currency
exchange rate risk. As of December 30, 2007, the scheduled maturities of our long-term contractual obligations were as follows:

|                                                                      |       | Payments Due by Period
|--------------------------------------------------------------------- | ----- | ----------------------
|
|
|Operating leases, net of sublease income                              |       | $                     
|Principal payments on long-term debt, including the current portion   |       |                       
|Interest payments on long-term debt, including the current portion(1) |       |                       
|Minimum royalties under licensing arrangements                        |       |                       
|                                                                      |       |                       
|                                                                      | Total |                       
|                                                                      |       |                       

---

We
are also party to a sublicense agreement for use of certain patents associated with certain of our mineral-based skin care products. The agreement requires that we pay a quarterly
royalty of 4.0% of the net sales of these skin care products up to the date of the last to expire licensed patent rights. This sublicense also requires minimum annual royalty payments of approximately
$0.6 million for 2007 and thereafter. The minimum annual royalty payments have not been included in the schedule of long-term contractual obligations above as we can terminate the
agreement at any time with six months written notice.

We
adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48") on January 1, 2007. As of December 30, 2007, we had
approximately $4.7 million of total unrecognized tax benefits. Due to the expiration of various statutes of limitation, it is reasonably possible that the Company's gross unrecognized tax
benefits balance may change within the next twelve months by a range of zero to $0.6 million. As of December 30, 2007, the total amount of net unrecognized tax benefits that, if
recognized, would affect the effective tax rate was $1.7 million.

Off-balance-sheet arrangements

We do not have any off-balance-sheet financing or unconsolidated special purpose entities.

Effects of inflation

Our monetary assets, consisting primarily of cash and receivables, are not significantly affected by inflation because they are short-term in nature.
Our non-monetary assets, consisting primarily of inventory, intangible assets, goodwill and prepaid expenses and other assets, are not currently significantly affected by inflation. We
believe that replacement costs of equipment, furniture and

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leasehold
improvements will not materially affect our operations. However, the rate of inflation affects our cost of goods sold and expenses, such as those for employee compensation, which may not be
readily recoverable in the price of the products offered by us. In addition, an inflationary environment could materially increase the interest rates on our debt.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions.
Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from estimates in amounts that may be material to the financial
statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is
made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated
financial statements. We believe the following critical accounting policies reflect our more significant estimates and the assumptions used in the preparation of our consolidated financial statements.

Revenue recognition

Our revenue recognition policy is consistent with the requirements of Staff Accounting Bulletin No. 104Revenue
Recognition, and other applicable revenue recognition guidance and interpretations. We record revenue when all four of the following criteria are met: (i) persuasive
evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is
reasonably assured.

We
recognize sales when merchandise is shipped from a warehouse directly to wholesale customers (except in the case of consignment sales, including those to QVC and certain
distributors), infomercial
customers and online shopping customers, or when purchased by consumers at company-owned boutiques, each net of estimated returns. For our consignment sales to QVC and certain distributors, we
recognize sales, net of estimated returns, upon their shipments to the customer. Postage and handling charges billed to customers are also recognized as revenue upon shipment of the related
merchandise. State and local taxes are presented on a net basis as we consider ourselves a pass-through conduit for collecting and remitting state and local sales taxes. Shipping terms are FOB
shipping point, and title passes to the customer at the time and place of shipment or purchase by customers at retail locations. For consignment sales to QVC and certain distributors, title passes to
QVC and certain distributors concurrent with their shipments to its customers.

Sales
are reported on a net sales basis, which is computed by deducting from gross sales the amount of actual product returns received, discounts and an amount established for
anticipated product returns. Our sales return accrual is a subjective critical estimate that has a direct impact on reported net sales. This accrual is calculated based on a history of actual returns,
estimated future returns and any significant future known or anticipated events. Consideration of these factors results in an accrual for anticipated sales returns. Our standard terms for retail
sales, including infomercial sales and sales at company-owned boutiques, limit returns to approximately 30 to 60 days after the sale of the merchandise. For our wholesale segment, as is
customary in the beauty industry, we allow returns from our wholesale customers if properly requested and approved. As a percentage of gross sales, returns were 4.9%, 4.8% and 6.7% in the years ended
December 30, 2007, December 31, 2006 and January 1, 2006, respectively.

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Allowance for doubtful accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to pay their invoices to us in full. We regularly
review the adequacy of our accounts receivable allowance after considering the size of the accounts receivable balance, each customer's expected ability to pay, aging of accounts receivable balances
and our collection history with each customer. We make estimates and judgments about the inability of customers to pay the amount they owe us, which could change significantly if their financial
condition changes or the economy in general deteriorates.

Inventories

Inventories consist of finished goods and raw materials and are stated at the lower of cost or market. Cost is determined on a weighted-average basis. We
regularly monitor inventory quantities on hand and
record write-downs for excess and obsolete inventories and shrinkage based primarily on our estimated forecast of product demand and production requirements. This methodology is significantly affected
by our sales forecast. If actual demand were to be substantially lower than estimated, additional write-downs for excess or obsolete inventories may be required.

Valuation of long-lived assets

We review our long-lived assets, including equipment and leasehold improvements and purchased intangible assets, for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. Determining if such events or changes in circumstances have occurred is subjective and requires
the exercise of judgment. If we determine such events have occurred, we then determine whether such assets are recoverable based on estimated future undiscounted net cash flows. If future undiscounted
net cash flows are less than the carrying value of such asset, we write down that asset to its fair value.

We
make estimates and judgments about future undiscounted cash flows and fair value. Although our cash flow forecasts are based on assumptions that are consistent with our plans, there
is significant exercise of judgment involved in determining the cash flows attributable to a long-lived asset over its estimated remaining useful life. Our estimates of anticipated future
cash flows could be reduced significantly in the future. As a result, the carrying amount of our long-lived assets could be reduced through impairment charges in the future. Additionally,
changes in estimated future cash flows could result in a shortening of estimated useful lives for long-lived assets including intangibles.

Goodwill and Intangible Assets

Goodwill and other purchased intangible assets have been recorded as a result of our acquisitions. Goodwill and indefinite-lived intangibles are not amortized,
but rather are subject to an annual impairment test. Other intangible assets are amortized over their estimated useful lives of three years.

We
are required to perform an annual impairment test of goodwill and indefinite-lived intangible assets. Should certain events or indicators of impairment occur between annual impairment
tests, we perform the impairment test of goodwill and indefinite-lived intangible assets at that date. In testing for a potential impairment of goodwill, we: (1) allocate goodwill to our
various reporting units to which the acquired goodwill relates; (2) estimate the fair value of our reporting units; and (3) determine the carrying value (book value) of those reporting
units, as some of the assets and liabilities related to those reporting units are not held by those reporting units but by corporate. If the carrying value of a reporting unit is in excess of its fair
value, an impairment may exist, and we must perform the second step of comparing the implied fair value of the goodwill to its carrying value to determine the impairment charge, if any.

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The
process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. In estimating the fair value of a
reporting unit for the purposes of our annual or periodic analyses, we make estimates and judgments about the future cash flows of that reporting unit. In addition, we make certain judgments about
allocating shared assets to the estimated balance sheets of our reporting units. We also consider our market capitalization on the date we perform the analysis. Changes in judgment on these
assumptions and estimates could result in a goodwill impairment charge.

Stock-based compensation

Effective January 3, 2005, we adopted SFAS 123(R) using the modified-prospective approach, which requires us to measure compensation cost for all
outstanding unvested share-based awards at fair value and recognize compensation over the requisite service period for awards expected to vest. Our calculation of stock-based compensation requires us
to make a number of complex and subjective estimates and assumptions, including the fair value of our common stock, future forfeitures, stock price volatility, expected life of the options and related
tax effects. Prior to our initial public offering, our Board of Directors determined the estimated fair value of our common stock on the date of grant based on a number of factors, most significantly
the use of periodic contemporaneous valuations performed by a third-party valuation firm. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results
differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider several factors when estimating expected forfeitures, such as types
of awards. Actual results may differ substantially from these estimates. Expected volatility of the stock is based on companies of similar growth and maturity and our peer group in the industry in
which we do business because we do not have sufficient historical volatility data for our own stock. The expected term of options granted represents the period of time that options granted are
expected to be outstanding. In the future, as we gain historical data for volatility in our own stock and the actual term employees hold our options, expected volatility and expected term may change
which could substantially change the grant-date fair value of future awards of stock options and, ultimately, the expense we record.

Derivative financial instruments

We account for derivative financial instruments in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Certain Hedging Activities,"
(as amended by SFAS No. 138), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 also requires the
recognition of all derivative instruments as either assets or liabilities on the balance sheet and that they be measured at fair value.

Income taxes

Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and
their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. In evaluating our ability to recover our deferred tax assets, we consider all available
positive and negative evidence including our past results of operations and our forecast of future taxable income in the jurisdictions in which we have operations. We record a valuation allowance to
reduce deferred tax assets to the amount that is expected to be realized on a more-likely-than-not basis. Deferred tax expense results from the change in the net
deferred tax asset or liability between periods.

Effective
January 1, 2007, the we adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes. In
connection with the adoption of FIN 48, we changed our accounting policy and

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now
recognize accrued interest and penalties related to income tax matters in income tax expense. These amounts were previously classified in selling, general and administrative expenses.

We
are subject to routine audits by federal and state tax authorities that may result in additional tax liabilities. Several factors drive the calculation of our tax liabilities
including, (i) the expiration of various statutes of limitations, (ii) changes in tax law and regulations, (iii) issuance of tax rulings, and (iv) settlements with tax
authorities. Changes in any of these factors may result in adjustments in our liabilities, which would impact our reported financial results.

New accounting standards

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. Statement 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Statement 157 also applies under other accounting pronouncements that require or permit fair
value measurements, but does not require any new fair value measurements. The provisions of Statement 157 are effective for fiscal years beginning after November 15, 2007. We will adopt
Statement 157 during our fiscal year ending December 28, 2008. We are currently in the process of determining the impact, if any, of adopting the provisions of Statement 157 on our financial
position or results of operations.

In
February 2007, the FASB issued SFAS No. 159,Fair Value Option for Financial Assets and Financial Liabilities.Statement 159
permits entities to choose to measure many financial instruments, and certain other items, at fair value. Statement 159 also establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The provisions of Statement 159 are effective for fiscal years beginning after
November 15, 2007. We will adopt Statement 159 during our fiscal year ending December 28, 2008. We are currently in the process of determining the impact, if any, of adopting the
provisions of Statement 159 but it is not expected to have a material impact on our financial position or results of operations.

In
December 2007, the SEC issued Staff Accounting Bulletin No. 110 ("SAB 110"). SAB 110 amends and replaces Question 6 of Section D.2 of Topic 14,
"Share-Based Payment," of the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14 expresses the views of the staff regarding the use of the "simplified" method in developing
an estimate of the expected term of "plain vanilla" share options and allows usage of the "simplified" method for share option grants prior to December 31, 2007. SAB 110 allows public
companies which do not have historically sufficient experience to provide a reasonable estimate to continue to use the "simplified" method for estimating the expected term of "plain vanilla" share
option grants after December 31, 2007. We are required to adopt SAB 110 on January 1, 2008. We will continue to use the "simplified" method until we have enough historical
experience to provide a reasonable estimate of expected term in accordance with SAB 110.

In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),Business Combinations.Statement 141-R will
significantly change the accounting for future business combinations after adoption. Statement 141-R establishes principles and requirements for how the acquirer of a business recognizes
and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non controlling interest in the acquired business. Statement 141-R also provides
guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. Statement 141-R is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15,
2008. Earlier adoption is prohibited. We will adopt Statement 141-R beginning in our fiscal year ending January 3, 2010, as required. We are currently evaluating the impact
Statement 141-R will have on our financial position or results of operations, when it becomes effective.

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Selected Quarterly Results of Operations

The following selected quarterly data should be read in conjunction with the Consolidated Financial Statements and Notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in this Annual Report on Form 10-K. This information has been derived from our unaudited consolidated financial statements that, in
our opinion, reflect all recurring adjustments necessary to fairly present our financial information when read in conjunction with our Consolidated Financial Statements and Notes. We use a
13- to 14-week fiscal quarter ending on the last Sunday of the quarter. The results of operations for any quarter are not necessarily indicative of the results to be expected
for any future period. The sum of quarterly earnings per share may differ from the full-year amounts due to rounding, or in the case of diluted earnings per share, because securities that
are anti-dilutive in certain quarters may not be anti-dilutive on a full-year basis.

Quarterly Consolidated Statements of Operations for 2007

|                                       |                                     | April 1,
2007            |         | July 1,
2007 |        | September 30,
2007 |        | December 30,
2007 |        
|-------------------------------------- | ----------------------------------- | ------------------------ | ------- | ------------ | ------ | ------------------ | ------ | ----------------- | -------
|
|Sales, net                             |                                     | $                        | 115,613 |              | $      | 124,144            |        | $                 | 126,635
|Cost of goods sold                     |                                     |                          | 33,450  |              |        | 37,578             |        |                   | 35,956 
|                                       |                                     |                          |         |              |        |                    |        |                   |        
|Gross profit                           |                                     |                          | 82,163  |              |        | 86,566             |        |                   | 90,679 
|Expenses:                              |                                     |                          |         |              |        |                    |        |                   |        
|                                       | Selling, general and administrative |                          |         | 39,185       |        |                    | 43,536 |                   |        
|                                       | Depreciation and amortization       |                          |         | 940          |        |                    | 1,860  |                   |        
|                                       | Stock-based compensation            |                          |         | 1,611        |        |                    | 1,779  |                   |        
|                                       |                                     |                          |         |              |        |                    |        |                   |        
|                                       |                                     | Total operating expenses |         |              | 41,736 |                    |        | 47,175            |        
|                                       |                                     |                          |         |              |        |                    |        |                   |        
|Operating income                       |                                     |                          | 40,427  |              |        | 39,391             |        |                   | 39,308 
|Other income (expense):                |                                     |                          |         |              |        |                    |        |                   |        
|                                       | Interest expense                    |                          |         | (6,811       | )      |                    | (6,274 | )                 |        
|                                       | Interest income                     |                          |         | 341          |        |                    | 487    |                   |        
|                                       |                                     |                          |         |              |        |                    |        |                   |        
|Income before provision for income tax |                                     |                          | 33,957  |              |        | 33,604             |        |                   | 34,054 
|Provision for income taxes             |                                     |                          | 13,552  |              |        | 13,389             |        |                   | 13,579 
|                                       |                                     |                          |         |              |        |                    |        |                   |        
|Net income                             |                                     | $                        | 20,405  |              | $      | 20,215             |        | $                 | 20,475 
|                                       |                                     |                          |         |              |        |                    |        |                   |        
|Net income per common share:           |                                     |                          |         |              |        |                    |        |                   |        
|                                       | Basic                               |                          | $       | 0.23         |        | $                  | 0.22   |                   | $      
|                                       |                                     |                          |         |              |        |                    |        |                   |        
|                                       | Diluted                             |                          | $       | 0.22         |        | $                  | 0.22   |                   | $      
|                                       |                                     |                          |         |              |        |                    |        |                   |        

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Quarterly Consolidated Statements of Operations for 2006

|                                       |                                     | April 2,
2006            |        | July 2,
2006 |        | October 1,
2006 |         | December 31,
2006 |       
|-------------------------------------- | ----------------------------------- | ------------------------ | ------ | ------------ | ------ | --------------- | ------- | ----------------- | ------
|
|Sales, net                             |                                     | $                        | 89,915 |              | $      | 96,185          |         | $                 | 97,947
|Cost of goods sold                     |                                     |                          | 25,196 |              |        | 26,937          |         |                   | 26,890
|                                       |                                     |                          |        |              |        |                 |         |                   |       
|Gross profit                           |                                     |                          | 64,719 |              |        | 69,248          |         |                   | 71,057
|Expenses:                              |                                     |                          |        |              |        |                 |         |                   |       
|                                       | Selling, general and administrative |                          |        | 29,684       |        |                 | 33,172  |                   |       
|                                       | Depreciation and amortization       |                          |        | 465          |        |                 | 506     |                   |       
|                                       | Stock-based compensation            |                          |        | 944          |        |                 | 1,523   |                   |       
|                                       | Restructuring charges               |                          |        |             |        |                 |        |                   |       
|                                       |                                     |                          |        |              |        |                 |         |                   |       
|                                       |                                     | Total operating expenses |        |              | 31,093 |                 |         | 35,201            |       
|                                       |                                     |                          |        |              |        |                 |         |                   |       
|Operating income                       |                                     |                          | 33,626 |              |        | 34,047          |         |                   | 34,559
|Other income (expense):                |                                     |                          |        |              |        |                 |         |                   |       
|                                       | Interest expense                    |                          |        | (8,983       | )      |                 | (12,887 | )                 |       
|                                       | Debt extinguishment costs           |                          |        |             |        |                 | (3,391  | )                 |       
|                                       | Interest income                     |                          |        | 286          |        |                 | 345     |                   |       
|                                       |                                     |                          |        |              |        |                 |         |                   |       
|Income before provision for income tax |                                     |                          | 24,929 |              |        | 18,114          |         |                   | 15,184
|Provision for income taxes             |                                     |                          | 10,395 |              |        | 7,640           |         |                   | 6,304 
|                                       |                                     |                          |        |              |        |                 |         |                   |       
|Net income                             |                                     | $                        | 14,534 |              | $      | 10,474          |         | $                 | 8,880 
|                                       |                                     |                          |        |              |        |                 |         |                   |       
|Net income per common share:           |                                     |                          |        |              |        |                 |         |                   |       
|                                       | Basic                               |                          | $      | 0.21         |        | $               | 0.15    |                   | $     
|                                       |                                     |                          |        |              |        |                 |         |                   |       
|                                       | Diluted                             |                          | $      | 0.20         |        | $               | 0.15    |                   | $     
|                                       |                                     |                          |        |              |        |                 |         |                   |       

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate sensitivity

We are exposed to interest rate risks primarily through borrowings under our credit facilities. We have reduced our exposure to interest rate fluctuations by
entering into an interest rate swap agreement covering a portion of our variable rate debt. In August 2007, we entered into a two-year interest rate swap transaction under our senior
secured credit facilities. The interest rate swap has an initial notional amount of $200 million declining to $100 million after one year under which, on a net settlement basis, we will
make monthly fixed rate payments at the rate of 5.03% and the counterparty makes monthly floating rate payments based upon one-month U.S.D. LIBOR. Our weighted average borrowings
outstanding during the year ended December 30, 2007 were $304.3 million and the annual effective interest rate for the period was 7.7%, after giving effect to the interest swap
agreement. A hypothetical 1% increase or decrease in interest rates would have resulted in a $3.0 million change to our interest expense in the year ended December 30, 2007, excluding
the effect of the interest rate swap.

Foreign currency risk

Most of our sales, expenses, assets, liabilities and cash holdings are currently denominated in U.S. dollars but a portion of the net revenues we receive from
sales is denominated in currencies other than the U.S. dollar. Additionally, portions of our costs of goods sold and other operating expenses are incurred by our foreign operations and denominated in
local currencies. While fluctuations in the value

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of
these net revenues, costs and expenses as measured in U.S. dollars have not materially affected our results of operations historically, we cannot assure you that adverse currency exchange rate
fluctuations will not have a material impact in the future. In addition, our balance sheet reflects non-U.S. dollar denominated assets and liabilities which can be adversely affected by
fluctuations in currency exchange rates. We do not hedge against foreign currency risks, and we currently believe that our foreign currency exchange risk is immaterial.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|Reports of Independent Registered Public Accounting Firm                                                                                          |  | 64
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|Consolidated Balance Sheets at December 30, 2007 and December 31, 2006                                                                            |  | 66
|Consolidated Statements of Operations for the years ended December 30, 2007, December 31, 2006 and January 1, 2006                                |  | 67
|Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 30, 2007, December 31, 2006 and January 1, 2006 |  | 68
|Consolidated Statements of Cash Flows for the years ended December 30, 2007, December 31, 2006 and January 1, 2006                                |  | 69
|Notes to Consolidated Financial Statements                                                                                                        |  | 70

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Stockholders
Bare Escentuals, Inc.

We
have audited the accompanying consolidated balance sheets of Bare Escentuals, Inc. as of December 30, 2007 and December 31, 2006, and the related consolidated
statements of operations, changes in stockholders' equity (deficit), and cash flows for each of the three fiscal years in the period ended December 30, 2007. These consolidated financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our 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 audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes 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. We believe that our
audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bare Escentuals, Inc. at
December 30, 2007 and December 31, 2006, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended December 30,
2007, in conformity with U.S. generally accepted accounting principles.

As
described in Note 2, effective January 1, 2007, the Company changed its method of accounting for uncertain tax positions upon adoption of Financial Accounting Standards
Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Bare Escentuals, Inc.'s internal control over financial
reporting as of December 30, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 27, 2008 expressed an unqualified opinion thereon.



San
Francisco, California
February 27, 2008

64

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Stockholders
Bare Escentuals, Inc.

We
have audited Bare Escentuals, Inc.'s internal control over financial reporting as of December 30, 2007, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Bare Escentuals, Inc.'s management is responsible
for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting which is contained in Part I,
Item 9A of this Annual Report on Form 10-K under the heading "Management's Report on Internal Control Over Financial Reporting". Our responsibility is to express an opinion
on the company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.

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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.

In
our opinion, Bare Escentuals, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 30, 2007, based on the COSO
criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 30, 2007
and December 31, 2006, and the related consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows for each of the three fiscal years in the period ended
December 30, 2007 of Bare Escentuals, Inc. and our report dated February 27, 2008 expressed an unqualified opinion thereon.



San
Francisco, California
February 27, 2008

65

---





BARE ESCENTUALS, INC.        CONSOLIDATED BALANCE SHEETS        (in thousands, except per share data)

|                                                     |                                                                                                                                                                                                                | December 30,
2007 |          | December 31,
2006 |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | -------- | ----------------- | -
|ASSETS                                               |                                                                                                                                                                                                                |                   |          |                   |  
|Current assets:                                      |                                                                                                                                                                                                                |                   |          |                   |  
|                                                     | Cash and cash equivalents                                                                                                                                                                                      |                   | $        | 32,117            |  
|                                                     | Inventories                                                                                                                                                                                                    |                   |          | 59,643            |  
|                                                     | Accounts receivable, net of allowances of $7,638 and $3,427 at December 30, 2007 and December 31, 2006, respectively                                                                                           |                   |          | 43,369            |  
|                                                     | Prepaid expenses and other current assets                                                                                                                                                                      |                   |          | 9,393             |  
|                                                     | Deferred tax assets                                                                                                                                                                                            |                   |          | 7,410             |  
|                                                     |                                                                                                                                                                                                                |                   |          |                   |  
|Total current assets                                 |                                                                                                                                                                                                                |                   | 151,932  |                   |  
|Property and equipment, net                          |                                                                                                                                                                                                                |                   | 43,876   |                   |  
|Goodwill                                             |                                                                                                                                                                                                                |                   | 15,409   |                   |  
|Intangible assets, net                               |                                                                                                                                                                                                                |                   | 9,908    |                   |  
|Deferred tax assets                                  |                                                                                                                                                                                                                |                   |         |                   |  
|Other assets                                         |                                                                                                                                                                                                                |                   | 2,780    |                   |  
|                                                     |                                                                                                                                                                                                                |                   |          |                   |  
|Total assets                                         |                                                                                                                                                                                                                | $                 | 223,905  |                   | $
|                                                     |                                                                                                                                                                                                                |                   |          |                   |  
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)       |                                                                                                                                                                                                                |                   |          |                   |  
|Current liabilities:                                 |                                                                                                                                                                                                                |                   |          |                   |  
|                                                     | Current portion of long-term debt                                                                                                                                                                              |                   | $        | 17,901            |  
|                                                     | Accounts payable                                                                                                                                                                                               |                   |          | 22,041            |  
|                                                     | Accrued liabilities                                                                                                                                                                                            |                   |          | 25,141            |  
|                                                     | Accrued restructuring charges                                                                                                                                                                                  |                   |          |                  |  
|                                                     | Income taxes payable                                                                                                                                                                                           |                   |          | 2,648             |  
|                                                     |                                                                                                                                                                                                                |                   |          |                   |  
|Total current liabilities                            |                                                                                                                                                                                                                |                   | 67,731   |                   |  
|Long-term debt, less current portion                 |                                                                                                                                                                                                                |                   | 247,032  |                   |  
|Other liabilities                                    |                                                                                                                                                                                                                |                   | 13,629   |                   |  
|Commitments and contingencies (Note 11)              |                                                                                                                                                                                                                |                   |          |                   |  
|Stockholders' equity (deficit):                      |                                                                                                                                                                                                                |                   |          |                   |  
|                                                     | Preferred stock; $0.001 par value; 10,000 shares authorized at December 30, 2007 and December 31, 2006; zero shares issued and outstanding at December 30, 2007 and December 31, 2006                          |                   |          |                  |  
|                                                     | Common stock; $0.001 par value; 200,000 shares authorized at December 30, 2007 and December 31, 2006; 91,159 and 89,316 shares issued and outstanding at December 30, 2007 and December 31, 2006,
respectively |                   |          | 91                |  
|                                                     | Additional paid-in capital                                                                                                                                                                                     |                   |          | 416,524           |  
|                                                     | Accumulated other comprehensive loss                                                                                                                                                                           |                   |          | (1,544            | )
|                                                     | Accumulated deficit                                                                                                                                                                                            |                   |          | (519,558          | )
|                                                     |                                                                                                                                                                                                                |                   |          |                   |  
|Total stockholders' equity (deficit)                 |                                                                                                                                                                                                                |                   | (104,487 | )                 |  
|                                                     |                                                                                                                                                                                                                |                   |          |                   |  
|Total liabilities and stockholders' equity (deficit) |                                                                                                                                                                                                                | $                 | 223,905  |                   | $
|                                                     |                                                                                                                                                                                                                |                   |          |                   |  

See
accompanying notes.

66

---



BARE ESCENTUALS, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS        (in thousands, except per share data)

|                                                        |                                                                                | Year ended |        
|------------------------------------------------------- | ------------------------------------------------------------------------------ | ---------- | -------
|
|Sales, net                                              |                                                                                | $          | 511,000
|Cost of goods sold                                      |                                                                                |            | 147,558
|                                                        |                                                                                |            |        
|Gross profit                                            |                                                                                |            | 363,442
|Expenses:                                               |                                                                                |            |        
|                                                        | Selling, general and administrative                                            |            |        
|                                                        | Depreciation and amortization, relating to selling, general and administrative |            |        
|                                                        | Stock-based compensation, relating to selling, general and administrative      |            |        
|                                                        | Restructuring charges                                                          |            |        
|                                                        | Asset impairment charge                                                        |            |        
|                                                        |                                                                                |            |        
|Operating income                                        |                                                                                |            | 168,989
|Interest expense                                        |                                                                                |            | (23,619
|Debt extinguishment costs                               |                                                                                |            |       
|Interest income                                         |                                                                                |            | 1,706  
|                                                        |                                                                                |            |        
|Income before provision for income taxes                |                                                                                |            | 147,076
|Provision for income taxes                              |                                                                                |            | 59,008 
|                                                        |                                                                                |            |        
|Net income                                              |                                                                                | $          | 88,068 
|                                                        |                                                                                |            |        
|Net income per share:                                   |                                                                                |            |        
|                                                        | Basic                                                                          |            | $      
|                                                        |                                                                                |            |        
|                                                        | Diluted                                                                        |            | $      
|                                                        |                                                                                |            |        
|Cash dividend per common share                          |                                                                                | $          |       
|                                                        |                                                                                |            |        
|Weighted-average shares used in per share calculations: |                                                                                |            |        
|                                                        | Basic                                                                          |            |        
|                                                        |                                                                                |            |        
|                                                        | Diluted                                                                        |            |        
|                                                        |                                                                                |            |        

See
accompanying notes.

67

---





BARE ESCENTUALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)

|                                                                                      |                                                      |        |   |   |    |   |   |         |   | Accumulated
Other
Comprehensive
Income
(Loss) |        |   |   |        |       
|------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------ | - | - | -- | - | - | ------- | - | --------------------------------------------- | ------ | - | - | ------ | ------
|
|
|
|Balance at January 2, 2005                                                            |                                                      | 62,019 |   | $ | 62 |   | $ | 89,535  |   | $                                             | (1,109 | ) | $ |       |       
|Reversal of deferred stock-based compensation upon adoption of FAS 123(R)             |                                                      |       |   |   |   |   |   | (1,082  | ) |                                               | 1,082  |   |   |       |       
|Common stock options exercised                                                        |                                                      | 6,981  |   |   | 7  |   |   | 985     |   |                                               |       |   |   |       |       
|Tax benefit related to stock option exercises and disqualifying disposition of shares |                                                      |       |   |   |   |   |   | 1,027   |   |                                               |       |   |   |       |       
|Stock-based compensation                                                              |                                                      |       |   |   |   |   |   | 1,343   |   |                                               | 27     |   |   |       |       
|Cash dividends paid in connection with the recapitalization transactions              |                                                      |       |   |   |   |   |   | (90,316 | ) |                                               |       |   |   |       |       
|Shares issued in lieu of transaction fees                                             |                                                      | 109    |   |   |   |   |   | 395     |   |                                               |       |   |   |       |       
|Net income and comprehensive income                                                   |                                                      |       |   |   |   |   |   |        |   |                                               |       |   |   |       |       
|                                                                                      |                                                      |        |   |   |    |   |   |         |   |                                               |        |   |   |        |       
|Balance at January 1, 2006                                                            |                                                      | 69,109 |   |   | 69 |   |   | 1,887   |   |                                               |       |   |   |       |       
|Common stock options exercised                                                        |                                                      | 1,680  |   |   | 2  |   |   | 1,307   |   |                                               |       |   |   |       |       
|Tax benefit related to stock option exercises                                         |                                                      |       |   |   |   |   |   | 6,973   |   |                                               |       |   |   |       |       
|Stock-based compensation                                                              |                                                      |       |   |   |   |   |   | 5,347   |   |                                               |       |   |   |       |       
|Issuance of common stock to director                                                  |                                                      | 36     |   |   |   |   |   | 300     |   |                                               |       |   |   |       |       
|Cash dividends paid in connection with the June 2006 Recapitalization                 |                                                      |       |   |   |   |   |   | (12,943 | ) |                                               |       |   |   |       |       
|Shares issued in lieu of transaction fees                                             |                                                      | 204    |   |   |   |   |   | 2,442   |   |                                               |       |   |   |       |       
|Common stock repurchased                                                              |                                                      | (113   | ) |   |   |   |   | (998    | ) |                                               |       |   |   |       |       
|Issuance of common stock in initial public offering, net of issuance costs of $2,697  |                                                      | 18,400 |   |   | 18 |   |   | 373,748 |   |                                               |       |   |   |       |       
|Net income and comprehensive income                                                   |                                                      |       |   |   |   |   |   |        |   |                                               |       |   |   |       |       
|                                                                                      |                                                      |        |   |   |    |   |   |         |   |                                               |        |   |   |        |       
|Balance at December 31, 2006                                                          |                                                      | 89,316 |   |   | 89 |   |   | 378,063 |   |                                               |       |   |   |       |       
|Cumulative effect on accumulated deficit related to the adoption of FIN 48            |                                                      |       |   |   |   |   |   |        |   |                                               |       |   |   |       |       
|Common stock options exercised                                                        |                                                      | 1,168  |   |   | 1  |   |   | 1,814   |   |                                               |       |   |   |       |       
|Tax benefit related to stock option exercises and disqualifying disposition of shares |                                                      |       |   |   |   |   |   | 8,727   |   |                                               |       |   |   |       |       
|Stock-based compensation                                                              |                                                      |       |   |   |   |   |   | 6,838   |   |                                               |       |   |   |       |       
|Issuance of common stock, net of issuance costs                                       |                                                      | 675    |   |   | 1  |   |   | 21,082  |   |                                               |       |   |   |       |       
|Comprehensive income:                                                                 |                                                      |        |   |   |    |   |   |         |   |                                               |        |   |   |        |       
|                                                                                      | Foreign currency translation adjustments, net of tax |        |  |   |    |  |   |         |  |                                               |        |  |   |        | (19   
|                                                                                      | Unrealized loss on interest rate swap, net of tax    |        |  |   |    |  |   |         |  |                                               |        |  |   |        | (1,525
|                                                                                      | Net income                                           |        |  |   |    |  |   |         |  |                                               |        |  |   |        |       
|                                                                                      |                                                      |        |   |   |    |   |   |         |   |                                               |        |   |   |        |       
|                                                                                      | Total comprehensive income, net of tax               |        |   |   |    |   |   |         |   |                                               |        |   |   |        |       
|                                                                                      |                                                      |        |   |   |    |   |   |         |   |                                               |        |   |   |        |       
|Balance at December 30, 2007                                                          |                                                      | 91,159 |   | $ | 91 |   | $ | 416,524 |   | $                                             |       |   | $ | (1,544 | )     
|                                                                                      |                                                      |        |   |   |    |   |   |         |   |                                               |        |   |   |        |       

See accompanying notes.

68

---



BARE ESCENTUALS, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        (in thousands)

|                                                                                                        |                                                                                        | Year ended                                |        
|------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ----------------------------------------- | -------
|
|Operating activities                                                                                    |                                                                                        |                                           |        
|Net income                                                                                              |                                                                                        | $                                         | 88,068 
|Adjustments to reconcile net income to net cash provided by operating activities:                       |                                                                                        |                                           |        
|                                                                                                        | Depreciation of property and equipment                                                 |                                           |        
|                                                                                                        | Amortization of intangible assets                                                      |                                           |        
|                                                                                                        | Amortization of debt issuance costs                                                    |                                           |        
|                                                                                                        | Debt extinguishment costs                                                              |                                           |        
|                                                                                                        | Stock-based compensation                                                               |                                           |        
|                                                                                                        | Asset impairment                                                                       |                                           |        
|                                                                                                        | Excess tax benefit from stock option exercises and disqualifying disposition of shares |                                           |        
|                                                                                                        | Deferred income tax provision (benefit)                                                |                                           |        
|                                                                                                        | Other                                                                                  |                                           |        
|                                                                                                        | Changes in assets and liabilities, net of acquired business:                           |                                           |        
|                                                                                                        |                                                                                        | Inventories                               |        
|                                                                                                        |                                                                                        | Accounts receivable                       |        
|                                                                                                        |                                                                                        | Income taxes                              |        
|                                                                                                        |                                                                                        | Prepaid expenses and other current assets |        
|                                                                                                        |                                                                                        | Other assets                              |        
|                                                                                                        |                                                                                        | Accounts payable and accrued liabilities  |        
|                                                                                                        |                                                                                        | Other liabilities                         |        
|                                                                                                        |                                                                                        |                                           |        
|Net cash provided by operating activities                                                               |                                                                                        |                                           | 97,375 
|Investing activities                                                                                    |                                                                                        |                                           |        
|Purchase of property and equipment                                                                      |                                                                                        |                                           | (25,986
|Acquisition of business, net of $1,847 cash and cash equivalents acquired                               |                                                                                        |                                           | (18,694
|                                                                                                        |                                                                                        |                                           |        
|Net cash used in investing activities                                                                   |                                                                                        |                                           | (44,680
|Financing activities                                                                                    |                                                                                        |                                           |        
|Proceeds from issuance of Senior Term Loans and First and Second Lien Credit Loans                      |                                                                                        |                                           |       
|Repayments on Senior Term Loans and First and Second Lien Credit Loans                                  |                                                                                        |                                           | (74,330
|Proceeds from issuance of Subordinated Notes Payable                                                    |                                                                                        |                                           |       
|Repayments on Subordinated Notes Payable                                                                |                                                                                        |                                           |       
|Payments for debt issuance costs                                                                        |                                                                                        |                                           |       
|Proceeds from issuance of common stock in initial public offering                                       |                                                                                        |                                           |       
|Payment of transaction costs in connection with the issuance of common stock in initial public offering |                                                                                        |                                           |       
|Proceeds from issuance of common stock in public offerings                                              |                                                                                        |                                           | 21,083 
|Dividend paid in connection with the Recapitalization transactions                                      |                                                                                        |                                           |       
|Excess tax benefit from stock option exercises and disqualifying disposition of shares                  |                                                                                        |                                           | 9,998  
|Exercise of stock options                                                                               |                                                                                        |                                           | 1,815  
|Common stock repurchased                                                                                |                                                                                        |                                           |       
|Proceeds from issuance of common stock to directors                                                     |                                                                                        |                                           |       
|                                                                                                        |                                                                                        |                                           |        
|Net cash used in financing activities                                                                   |                                                                                        |                                           | (41,434
|Effect of foreign exchange rate changes on cash                                                         |                                                                                        |                                           | (19    
|                                                                                                        |                                                                                        |                                           |        
|Net increase in cash and cash equivalents                                                               |                                                                                        |                                           | 11,242 
|Cash and cash equivalents, beginning of period                                                          |                                                                                        |                                           | 20,875 
|                                                                                                        |                                                                                        |                                           |        
|Cash and cash equivalents, end of period                                                                |                                                                                        | $                                         | 32,117 
|                                                                                                        |                                                                                        |                                           |        
|Supplemental disclosure of cash flow information                                                        |                                                                                        |                                           |        
|Cash paid for interest                                                                                  |                                                                                        | $                                         | 23,818 
|                                                                                                        |                                                                                        |                                           |        
|Cash paid for income taxes                                                                              |                                                                                        | $                                         | 47,019 
|                                                                                                        |                                                                                        |                                           |        
|Supplemental disclosure of noncash financing activities                                                 |                                                                                        |                                           |        
|Construction allowance received in connection with corporate office lease                               |                                                                                        | $                                         |       
|                                                                                                        |                                                                                        |                                           |        
|Shares issued in lieu of transaction fees                                                               |                                                                                        | $                                         |       
|                                                                                                        |                                                                                        |                                           |        

See accompanying notes.

69

---



BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business and Basis of Presentation

Business

Bare Escentuals, Inc. together with its subsidiaries ("Bare Escentuals" or the "Company") develops, markets, and sells branded cosmetics, skin care and
body care products under thebareMinerals, i.d., RareMineralsand namesakeBare Escentualsbrands, and
professional skin care products under themd formulationsbrand. ThebareMineralscosmetics,
particularly the core foundation products which are mineral-based, offer a highly differentiated, healthy alternative to conventional cosmetics. The Company uses a multi-channel distribution model
consisting of infomercials; home shopping television on QVC; premium wholesale, including Sephora, Ulta and department stores; company-owned boutiques; spas and salons and online shopping. The Company
also sells products internationally in the UK, Japan, France, and Germany as well as in smaller international markets via distributors.

Basis of Presentation

The Company was originally incorporated in Delaware on March 9, 2004 under the name STB Beauty, Inc. On February 24, 2006, the Company
changed its name to Bare Escentuals, Inc. The Company completed an initial public offering of its common stock on October 4, 2006.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.

Fiscal Year

The Company's fiscal year ends on the Sunday closest to December 31, based on a 52/53-week year. The fiscal years ended December 30,
2007, December 31, 2006, and January 1, 2006, each contained 52 weeks.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses for the
periods presented. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements.

Cash and Cash Equivalents

Cash equivalents are considered to be highly liquid investments with maturities of three months or less at the time of the purchase. Cash equivalents also include
third-party credit card receivables because such amounts generally convert to cash within three days with little or no default risk.

70

---



BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

Supply and Fulfillment Concentration Risks

All of the Company's products are contract manufactured or supplied by third parties. The Company has long-term contracts with several of its
suppliers. The terms of these contracts have various expiration dates through June 15, 2011. The fact that the Company does not have long-term contracts with all of its third-party
manufacturers means that those manufacturers could cease manufacturing the Company's products at any time and for any reason.

Additionally,
the Company depends on one third party for the fulfillment of its infomercial sales, including inventory management, call center operation, website hosting and packing and
shipping of product to customers. The Company's contract with this service provider expired on December 31, 2007. In December 2007, the Company entered into a new contract with this service
provider to continue the fulfillment of its infomercial sales on a month-to-month basis. The contract can be terminated by either party at any time by providing thirty days'
prior written notice.

Concentration of Credit Risk and Credit Risk Evaluation

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are held by or invested in various domestic financial institutions with high credit standing. Management believes that these financial institutions are
financially sound and, accordingly, minimal credit risk exists with respect to these balances.

For
the years ended December 30, 2007, December 31, 2006, and January 1, 2006, approximately 47%, 50%, 54%, respectively, of the Company's sales were generated
through credit card purchases. The Company uses third parties to collect its credit card receivables and, as a consequence, believes that its credit risks related to these channels of distribution are
limited. The Company performs ongoing credit evaluations of its wholesale customers not paying by credit card and acquires credit insurance for certain international distributor customers. Generally,
the Company does not require collateral. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection using specific
identification of doubtful accounts and an aging of receivables analysis based on invoice due dates. Actual collection losses may differ from management's estimates, and such differences could be
material to the Company's consolidated financial position, results of operations, and cash flows. Uncollectible receivables are written off against the allowance for doubtful accounts when all efforts
to collect them have been exhausted, and recoveries are recognized when they are received. Generally, accounts receivable are past due after 30 days of an invoice date unless special payment
terms are provided.

The
table below sets forth the percentage of consolidated accounts receivable, net for customers who represented 10% or more of consolidated accounts receivable:

December 30,
2007

December 31,
2006

January 1,
2006Customer A

15
%
11
%
14
%Customer B

17
%
23
%
28
%Customer C

42
%
31
%
33
%


71

---



BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

The
table below sets forth the percentage of consolidated sales, net for customers who represented 10% or more of consolidated net sales, which are included in the wholesale segment:

Year endedDecember 30,
2007

December 31,
2006

January 1,
2006Customer A

12
%
13
%
15
%Customer B

13
%
13
%
Customer C

16
%
14
%



As
of December 30, 2007 and December 31, 2006, the Company had no off-balance sheet concentrations of credit risk.

Fair Value of Financial Instruments

Financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, long-term debt, and interest rate swap
agreements. Interest rate swap agreements are recorded at fair value. The estimated fair value of cash, cash equivalents, accounts receivable, and accounts payable approximates their carrying value
due to the short period of time to their maturities. At December 30, 2007, all of the Company's outstanding debt is variable-rate debt. The estimated fair value of the Company's
variable-rate debt approximates its carrying value, since the rate of interest on the variable-rate debt is determined at a margin over LIBOR or the lenders' base rate plus an
applicable margin based on a grid in which the pricing depends on the Company's consolidated total leverage ratio, and such rates are revised frequently, based upon current LIBOR or the lenders' base
rate. The fair value of the interest rate swap agreements are based on quotes from brokers using market prices for those or similar instruments.

Inventories

Inventories consist of finished goods and raw materials and are stated at the lower of cost or market. Cost is determined on a weighted-average basis. The Company
regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based primarily on the Company's estimated forecast of product demand and production
requirements. Such write-downs establish a new cost basis of accounting for the related inventory. Actual inventory losses may differ from management's estimates, and such differences could be
material to the Company's consolidated financial position, results of operations, and cash flows.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Furniture and equipment, including computers and software, are
depreciated using the straight-line method over the estimated useful lives of the various assets, which are generally three to seven years. Fixtures and leasehold improvements are
amortized using the straight-line method over the lesser of the lease term, which ranges from five to ten years, or the estimated useful lives of the assets. For leases with renewal
periods at the Company's option, the Company generally uses the original lease term, excluding renewal option periods, to determine estimated useful lives.

72

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of

The Company periodically evaluates whether changes have occurred that would require revision of the remaining useful life of equipment and improvements and
purchased intangible assets or render them not recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted sum of expected future operating cash flows during their
holding period to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment
charge to be recorded is calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future
cash flows.

During
the year ended January 1, 2006, the Company abandoned a contract with a software vendor and recognized an impairment charge of $1,055,000. The costs associated with the
termination of the contract relate primarily to the cost of the software license arrangement and other capitalized costs that were accounted for as development in progress, as the software had not yet
been placed in service. As of January 1, 2006, there were no remaining amounts to be paid under the contract.

Goodwill and Intangible Assets

Goodwill and other purchased intangible assets have been recorded as a result of the Company's acquisitions. Goodwill and indefinite-lived intangibles are not
amortized, but rather are subject to an
annual impairment test. Other intangible assets are amortized over their estimated useful lives of three years.

The
Company is required to perform an annual impairment test of goodwill and indefinite-lived intangible assets. Should certain events or indicators of impairment occur between annual
impairment tests, the Company performs the impairment test of goodwill and indefinite-lived intangible assets at that date. In testing for a potential impairment of goodwill, the Company:
(1) allocates goodwill to its various reporting units to which the acquired goodwill relates; (2) estimates the fair value of its reporting units; and (3) determine the carrying
value (book value) of those reporting units, as some of the assets and liabilities related to those reporting units are not held by those reporting units but by corporate. If the carrying value of a
reporting unit is in excess of its fair value, an impairment may exist, and the Company must perform the second step of comparing the implied fair value of the goodwill to its carrying value to
determine the impairment charge, if any. Through December 30, 2007, no impairment charge has been required.

Debt Issuance Costs

Debt issuance costs are capitalized and amortized over the terms of the underlying debt instruments using the effective-interest method. Debt issuance costs paid
directly to lending institutions are recorded as a debt discount, while debt issuance costs paid to third parties are recorded as other assets.

Amortization
of loan costs for the years ended December 30, 2007, December 31, 2006 and January 1, 2006, totaled $277,000, $291,000, and $430,000, respectively, and
is included in interest expense in the consolidated statements of operations.

73

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

Stock-Based Compensation

Effective January 3, 2005, the Company adopted the fair value recognition and measurement provisions of Statement of Financial Accounting Standards
No. 123(R),Share-Based Payment("Statement 123(R)"). Statement 123(R) is applicable for stock-based awards exchanged for employee services and
in certain circumstances for non-employee directors. Pursuant to Statement 123(R), stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is
recognized as expense over the requisite service period for awards expected to vest. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ
from
the Company's estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers several factors when estimating expected forfeitures, such
as types of awards. Actual results may differ substantially from these estimates. The Company elected to adopt the modified-prospective-transition method, as provided by Statement 123(R). Accordingly,
prior period amounts were not restated. Under this transitional method, the Company was required to record compensation expense in the consolidated statement of operations for all awards granted after
the date of adoption using grant-date fair value estimated in accordance with the provisions of Statement 123(R), and for the unvested portion of previously granted awards as of
January 3, 2005 using the grant-date fair value estimated in accordance with the provisions of Statement 123. Upon adoption of Statement 123(R), the Company reversed $1,082,000 of
previously recognized deferred compensation related to employee stock option grants.

The
Company's share-based compensation plans are described in Note 15. The compensation cost charged to operations under these plans pursuant to Statement 123(R) was $6,838,000,
$5,169,000 and $1,343,000 for the years ended December 30, 2007, December 31, 2006 and January 1, 2006, respectively. The Company records stock-based compensation on a separate
operating expense line item in its statement of operations due to the fact that, to date, all of its stock-based awards have been made to employees whose salaries are classified as selling, general
and administrative expenses.

The
weighted-average fair value of the stock options granted for the years ended December 30, 2007, December 31, 2006, and January 1, 2006 was approximately $30.02,
$8.33, and $2.41, respectively.

The
Company estimates the grant-date fair value of stock options using a Black-Scholes valuation model using the weighted-average assumptions noted in the following table:

Year endedDecember 30,
2007

December 31,
2006

January 1,
2006Expected dividend rate

0.00
%
0.00
%
0.00
%Expected volatility

45
%
50
%
54
%Risk-free interest rate

3.4
%
5.0
%
4.1
%Expected lives (years)

4.75 to 6.5

6.5

6.5


The
Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions. Expected volatility of the stock is based on companies of similar growth and maturity and the Company's peer group in the
industry in which the Company does business because the Company does not have sufficient historical volatility data for its own stock. The expected term of options represents the period of time that
options granted are

74

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

expected
to be outstanding. To date, the Company has elected to use the shortcut approach in accordance with Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 107, Share-Based Payment,
 to develop the estimate of the expected term. The risk-free rate is based on U.S. Treasury zero-coupon
issues with a remaining term equal to the expected term of the options used in the Black-Scholes valuation model. In the future, as the Company gains historical data for volatility in its own stock
and the actual term over which employees hold its options, expected volatility and expected term may change, which could substantially change the grant-date fair value of future awards of
stock options and, ultimately, the expense the Company records.

Foreign Currency Translation

The assets and liabilities of foreign subsidiaries, where the local currency is the functional currency, are translated from their respective functional
currencies into U.S. dollars at the rates in effect at the balance sheet date, with resulting foreign currency translation adjustments recorded as other comprehensive income (loss) in the accompanying
consolidated statements of changes in stockholders' equity (deficit) and comprehensive income (loss). Revenue and expense amounts are translated at average rates during the period.

Derivative Financial Instruments

The Company accounts for derivative financial instruments in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Certain Hedging Activities, (as amended by SFAS No. 138) ("SFAS No. 133"), which establishes
accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 also requires the
recognition of all derivative instruments as either assets or liabilities on the balance sheet and that they be measured at fair value.

The
Company formally documents relationships between hedging instruments and associated hedged items. This documentation includes: identification of the specific asset or liability being
hedged; the nature of the risk being hedged; the hedge objective; and the method of assessing hedging effectiveness. Hedge effectiveness is formally assessed, both at hedge inception and on an ongoing
basis, to determine whether the derivatives used in hedging transactions are highly effective in offsetting changes in anticipated cash flow of hedged items. When an anticipated transaction is no
longer likely to occur, the corresponding derivative instrument is ineffective as a hedge, and changes in fair value of the instrument are recognized in net income.

The
Company is exposed to interest rate risks primarily through borrowings under its senior secured credit facilities. Interest on all of the Company's borrowings under its senior
secured credit facilities is based upon variable interest rates. As of December 30, 2007, the Company had borrowings of $264.9 million outstanding under its senior secured credit
facilities which bear interest at a rate equal to, at the Company's option, either LIBOR or the lenders' base rate, plus an applicable margin varying based on the Company's consolidated total leverage
ratio. As of December 30, 2007, the interest rate on the First Lien Term Loan was accruing at 7.46% (without giving effect to the interest rate swap agreement discussed below). At all times
after October 2, 2007, the Company is required under its senior secured credit facilities to enter into interest rate swap or similar agreements with respect to at least 40% of the outstanding
principal amount of all loans under its senior loan facilities,

75

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

unless
the Company satisfies specified coverage ratio tests. As of December 30, 2007, the Company satisfied these tests.

In
August 2007, the Company entered into a two-year interest rate swap agreement under the Company's senior secured credit facilities. The interest rate swap was designated
as a cash flow hedge of future interest payments of LIBOR and has an initial notional amount of $200 million declining to $100 million after one year under which, on a net settlement
basis, the Company will make monthly fixed rate payments, excluding a margin of 2.25%, at the rate of 5.03% and the counterparty makes monthly floating rate payments based upon one-month
U.S.D. LIBOR. As a result of the interest rate swap, the Company has fixed for a two-year period the interest rate subject to market based interest rate risk on $200 million of
borrowings for the first year and $100 million of borrowings for the second year under its First Lien Credit Agreement. The Company's obligations under the interest rate swap as to the
scheduled payments are guaranteed and secured on
the same basis as is its obligations under the First Lien Credit Agreement. The fair value of the interest rate swap as of December 30, 2007 was $2,541,000 which was recorded in other
liabilities in the consolidated balance sheet, with the related $2,541,000 unrealized loss recorded as a component of accumulated other comprehensive income (loss), net of a $1,016,000 tax benefit. No
ineffective portion was recorded to earnings during the year ended December 30, 2007.

Revenue Recognition

The Company's revenue recognition policy is consistent with the requirements of Staff Accounting Bulletin No. 104,Revenue
Recognition, and other applicable revenue recognition guidance and interpretations. The Company records revenue when all four of the following criteria are met:
(i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and
(iv) collectibility is reasonably assured.

The
Company recognizes sales when merchandise is shipped from a warehouse directly to wholesale customers (except in the case of a consignment sale), infomercial customers, and online
shopping customers or when purchased by customers at Company-owned boutiques, each net of estimated returns. For consignment sales, which include sales to QVC and a Japanese distributor, the Company
recognizes sales, net of expected returns from consignees, upon the consignee's shipment to the customer. Postage and handling charges billed to customers are also recognized as sales upon shipment of
the related merchandise. State and local sales taxes are presented on a net basis as the Company considers itself a pass-through conduit for collecting and remitting state and local sales taxes.
Shipping terms are FOB shipping point, and title passes to the customer at the time and place of shipment or purchase by customers at retail locations. For consignment sales, title passes to the
consignee concurrent with the consignee's shipment to the customer. The customer has no cancellation privileges after shipment or upon purchase at retail locations, other than customary rights of
return that are accounted for in accordance with Statement 48,Revenue Recognition When Right of Return Exists.The Company's standard terms for retail
sales, including infomercial sales and sales at Company-owned boutiques, limit returns to approximately 30 to 60 days after the sale of the merchandise. For wholesale sales, as is customary in
the cosmetics industry, the Company allows returns from wholesale customers if properly requested and approved. The Company regularly evaluates returns and accrues for expected future returns that
relate to sales prior to the balance sheet date utilizing a combination of historical and current trends. Deferred revenue reflects amounts received from customers related to merchandise to be shipped
in future periods.

76

---



BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

Consideration Given to Customers

The Company provides consideration to certain retail customers which includes discounts and consideration to certain wholesale customers which includes
cooperative advertising, free products, royalties, fixtures and shared employee costs. In accordance with the provisions of EITF 01-9,Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products), these costs are recorded as a reduction of net sales in the accompanying
consolidated statements of operations, unless the Company determines it has received an identifiable benefit and can reasonably estimate the fair value of that benefit, in which case the costs would
be recorded as expenses. During the years ended December 30, 2007, December 31, 2006 and January 1, 2006, the Company recorded a reduction of sales of $9,087,000, $5,724,000 and
$2,864,000, respectively. During the years ended December 30, 2007, December 31, 2006 and January 1, 2006, the Company recorded a charge to cost of goods sold totaling $3,761,000,
$1,212,000 and $490,000, respectively. During the years ended December 30, 2007, December 31, 2006 and January 1, 2006, the Company recorded a charge to selling, general and
administrative expenses totaling $449,000, $206,000 and $0, respectively.

Shipping and Fulfillment Costs

Freight costs incurred related to shipment of merchandise from the Company's distribution facilities to customers are recorded in cost of goods sold. Third-party
fulfillment costs relating to warehousing, storage, and order processing are included in selling, general and administrative expenses and totaled $18,792,000, $19,437,000 and $15,294,000 for the years
ended December 30, 2007, December 31, 2006, and January 1, 2006, respectively.

Pre-Opening Costs

Costs incurred in connection with the start-up and promotion of new Company-owned boutiques are expensed as incurred.

Operating Leases

The Company leases retail boutiques, distribution facilities, certain office equipment and office space under operating leases. Most lease agreements contain rent
holidays, rent escalation clauses, contingent rent provisions and/or tenant improvement allowances. For purposes of recognizing incentives and minimum rental expenses on a straight-line
basis over the original terms of the leases,
the Company uses the date of initial possession to begin amortization, which is generally when the Company enters the space and begins to make improvements in preparation of intended use. The Company
does not assume renewals in its determination of the lease term unless the renewals are deemed by management to be reasonably assured at lease inception.

For
tenant improvement allowances recorded as assets, the Company also records a deferred rent liability in the consolidated balance sheets and amortizes the deferred rent over the terms
of the leases as reductions to rent expense in the consolidated statements of income. For scheduled rent escalation clauses and rent holidays during the lease terms or for rental payments commencing
at a date other than the date of initial occupancy, the Company records minimum rental expenses on a straight-line basis over the terms of the leases.

77

---



BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

Certain
leases provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. The Company records a rent liability in the consolidated
balance sheets and the corresponding rent expense when management determines that achieving the specified levels during the fiscal year is probable.

Research and Development

Research and development costs are charged to operations as incurred and are recorded as selling, general and administrative expenses. Major components of
research and development expenses consist of product formulation, testing, regulatory analysis, and compliance. Such costs totaled $431,000, $663,000 and $2,490,000 for the years ended
December 30, 2007, December 31, 2006, and January 1, 2006, respectively.

Advertising Costs

The Company purchases commercial airtime on various television stations throughout the United States in order to air its direct-response program, or
"infomercial." The Company expenses costs associated with purchasing airtime as incurred. During the years ended December 30, 2007, December 31, 2006, and January 1, 2006, the
Company incurred direct broadcast media costs of $31,723,000, $28,161,000 and $23,695,000, respectively.

The
Company expenses production costs associated with advertising as incurred, except for production costs for its infomercials, which are capitalized and amortized over their expected
period of future benefit. The capitalized production costs for each infomercial are amortized over a twelve-month period following the first airing of the infomercial. At December 30, 2007 and
December 31, 2006, unamortized production costs totaling $270,000 and $217,000, respectively, were reported as assets in the accompanying consolidated balance sheets. During the years ended
December 30, 2007, December 31, 2006 and January 1, 2006, the Company recorded amortization expense relating to infomercial production costs of $730,000, $448,000 and $390,000,
respectively.

Other
advertising costs such as media placements and public relations are expensed as incurred. Marketing brochures are accounted for as prepaid assets and are expensed based on usage,
or at such time that they are no longer expected to be used, in which case their cost is expensed at that time. During the years ended December 30, 2007, December 31, 2006 and
January 1, 2006, the Company incurred other advertising costs of $4,736,000, $3,759,000 and $3,112,000, respectively. All advertising and other related costs are recorded as selling, general
and administrative expenses.

Income Taxes

Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and
their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount
that is expected to be realized on a more-likely-than-not basis. Deferred tax expense results from changes in net deferred tax assets or liabilities between
periods.

Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes("FIN 48") (Note 13). In connection with the adoption of FIN 48, the

78

---



BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

Company
changed its accounting policy and now recognizes accrued interest and penalties related to income tax matters in income tax expense. These amounts were previously classified in selling,
general and administrative expenses.

Earnings per Share

A calculation of earnings per share, as reported, is as follows (in thousands, except per share data):

Year endedDecember 30,
2007

December 31,
2006

January 1,
2006Numerator:Net income attributable to common stockholders, as reported

$
88,068

$
50,198

$
23,890Denominator:Weighted average common shares used in per share calculationsbasic


90,278


74,668


67,676Add: Common stock equivalents from exercise of stock options


2,748


2,540


1,609Weighted-average common shares used in per share calculationsdiluted


93,026


77,208


69,285Net income per share:Basic, as reported

$
0.98

$
0.67

$
0.35Diluted, as reported

$
0.95

$
0.65

$
0.34


Options
to purchase 176,181, 41,063 and zero shares of common stock in the years ended December 30, 2007, December 31, 2006 and January 1, 2006, respectively, were
not included in the computation of net income per share attributable to common stockholdersdiluted, as reported because their impact was anti-dilutive.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive loss was $1,544,000 for the year ended December 30,
2007. There was no other comprehensive income (loss) for the year ended December 31, 2006.

Reclassifications

Certain reclassifications of prior year amounts have been made to conform to the current year presentation.

79

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. Statement 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Statement 157 also applies under other accounting pronouncements that require or permit fair
value measurements, but does not require any new fair value measurements. The provisions of Statement 157 are effective for fiscal years beginning after November 15, 2007. The Company will
adopt Statement 157 during its fiscal year ending December 28, 2008. The Company is currently in the process of determining the impact, if any, of adopting the provisions of Statement 157 on
its financial position or results of operations.

In
February 2007, the FASB issued SFAS No. 159,Fair Value Option for Financial Assets and Financial Liabilities.Statement 159
permits entities to choose to measure many financial instruments, and certain other items, at fair value. Statement 159 also establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The provisions of Statement 159 are effective for fiscal years beginning after
November 15, 2007. The Company will adopt Statement 159 during its fiscal year ending December 28, 2008. The Company is currently in the process of determining the impact, if any, of
adopting the provisions of Statement 159 but it is not expected to have a material impact on the Company's financial position or results of operations.

In
December 2007, the SEC issued Staff Accounting Bulletin No. 110 ("SAB 110"). SAB 110 amends and replaces Question 6 of Section D.2 of Topic 14,
"Share-Based Payment," of the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14 expresses the views of the staff regarding the use of the "simplified" method in developing
an estimate of the expected term of "plain vanilla" share options and allows usage of the "simplified" method for share option grants prior to December 31, 2007. SAB 110 allows public
companies which do not have historically sufficient experience to provide a reasonable estimate to continue to use the "simplified" method for estimating the expected term of "plain vanilla" share
option grants after December 31, 2007. The Company is required to adopt SAB 110 on January 1, 2008. The Company will continue to use the "simplified" method until it has enough
historical experience to provide a reasonable estimate of expected term in accordance with SAB 110.

In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),Business Combinations.Statement 141-R will
significantly change the accounting for future business combinations after adoption. Statement 141-R establishes principles and requirements for how the acquirer of a business recognizes
and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non controlling interest in the acquired business. Statement 141-R also provides
guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. Statement 141-R is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15,
2008. Earlier adoption is prohibited. The Company will adopt Statement 141-R beginning in its fiscal year ending January 3, 2010, as required. The Company is currently evaluating
the impact Statement 141-R will have on its financial position or results of operations, when it becomes effective.

80

---



BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Acquisition

On April 3, 2007, the Company completed its acquisition of U.K.-based Cosmeceuticals Limited ("Cosmeceuticals"), which distributes Bare Escentuals' bareMinerals,md formulationsandMD Fortebrands
primarily to spas and salons and QVC U.K. The acquired entity has been renamed Bare Escentuals UK Ltd. The Company's primary reason for the acquisition was to reacquire its distribution rights
and to expand its market share. The Company accounted for its pre-existing relationship with Cosmeceuticals in accordance with EITF 04-1, Accounting for Preexisting Relationships between the Parties to a Business
Combination.The consideration for the purchase was cash of
$23.1 million, comprised of $22.4 million in cash consideration and $0.7 million of transaction costs. The Company's consolidated financial statements include the operating
results of the business acquired from the date of acquisition.

The
total purchase price of $23.1 million was allocated as follows: $12.6 million to goodwill included in the corporate segment (not deductible for income tax purposes),
$8.9 million to identifiable intangible assets comprised of customer relationships of $8.0 million and $0.9 million for non-compete agreements, $4.4 million to
net tangible assets acquired, and $2.8 million to deferred tax liability. The estimated useful economic lives of the identifiable intangible assets acquired are three years. The significant
factor that resulted in recognition of goodwill was that the purchase price was based on the ability to expand in trade areas beyond the acquired distribution rights at an accelerated rate.

As
of December 30, 2007, approximately $2.5 million of the purchase price was unpaid and is included in accrued liabilities. The purchase price was subsequently paid in
full in January 2008.

4. Inventories

Inventories consisted of the following (in thousands):

December 30,
2007

December 31,
2006Raw materials and components

$
3,007

$
2,737Finished goods


56,636


59,269$
59,643

$
62,006


81

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Property and Equipment, Net

Property and equipment, net, consisted of the following (in thousands):

December 30,
2007

December 31,
2006Furniture and equipment

$
8,719

$
4,234Computers and software


13,890


4,732Leasehold improvements


28,291


13,89150,900


22,857Accumulated depreciation and amortization


(9,369
)

(5,170
)41,531


17,687Construction-in-progress


2,345


3,424Property and equipment, net

$
43,876

$
21,111


6. Intangible Assets, Net

Intangible assets, net, consisted of the following (in thousands):

December 30,
2007

December 31,
2006Customer relationships

$
8,000

$
Trademarks


3,233


3,233Domestic customer base


939


939International distributor base


820


820Non-compete agreements


900


13,892


4,992Accumulated amortization


(3,984
)

(1,759
)Intangible assets, net

$
9,908

$
3,233


The
aggregate amortization expense of $2,225,000, $0 and $0 for the years ended December 30, 2007, December 31, 2006 and January 1, 2006, respectively, is included
in depreciation and amortization in the accompanying consolidated statements of operations.

Estimated
amortization expense as of December 30, 2007 to be recognized in future periods is as follows (in thousands):

Year ending:December 28, 2008

$
2,967January 3, 2010


2,967January 2, 2011


741$
6,675


82

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Other Assets

Other assets consisted of the following (in thousands):

December 30,
2007

December 31,
2006Debt issuance costs, net of accumulated amortization of $338 and $61 at December 30, 2007 and December 31, 2006, respectively

$
780

$
1,057Other assets


2,000


775$
2,780

$
1,832


8. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

December 30,
2007

December 31,
2006Employee compensation and benefits

$
9,394

$
7,437Purchase price for acquisition (Note 3)


2,526


Gift certificates and customer liabilities


2,500


1,975Interest


971


1,438Sales taxes and local business taxes


2,434


1,339Royalties


2,146


1,192Other


5,170


2,742$
25,141

$
16,123


9. Revolving Lines of Credit

In conjunction with the February 2005 Recapitalization (Note 10), the Company established a revolving credit facility of up to $15,000,000 (the
"Revolver"), the proceeds of which were to provide financing for working capital and other general corporate purposes of the Company and its subsidiaries. The Revolver has a term of six years expiring
on February 18, 2011.

In
connection with the June 2006 Recapitalization, the Company increased the Revolver to up to $25,000,000, the proceeds of which are to be used to provide financing for working capital
and other general corporate purposes of the Company and its subsidiaries. In December 2006, the terms of the Revolver were further amended to eliminate the requirement that the net proceeds from the
issuance of equity securities by the Company or any of its subsidiaries be applied to prepay loans under the credit agreement. The amendment also reduced the interest rate margins applicable to LIBOR
loans and base rate loans, provided for a further reduction in the interest rate margins if a specified consolidated leverage ratio and specified debt rating are achieved, and amended some of the
financial covenants. At December 30, 2007, $24,900,000 was available and $100,000 was utilized to support outstanding letters of credit.

Amounts
available under the Revolver are based on eligible collateral that includes certain accounts receivable and inventory and may be used for working capital and capital expenditure
needs, as well as the issuance of documentary and standby letters of credit.

83

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Revolving Lines of Credit (Continued)

Borrowings
under the Revolver, as amended, bear interest at a rate equal to, at the Company's option, either a margin over LIBOR or the lenders' base rate, plus an applicable margin
based on a grid in which the pricing depends on the Company's consolidated total leverage ratio (2.25% plus LIBOR or 1.25% plus lenders' base rate; actual rate of 7.46% at December 30, 2007 and
7.85% at December 31, 2006). The Company is also required to pay commitment fees of 0.5% per annum on any unused portions of the facility.

10. Long-Term Debt

Long-term debt consisted of the following (in thousands):

December 30,
2007

December 31,
2006First Lien Term Loans

$
264,933

$
339,263Less current portion


(17,901
)

(17,624
)Total long-term debt, net of current portion

$
247,032

$
321,639


First and Second Lien Credit Loans

On February 18, 2005, the Company entered into a credit agreement (the "First Lien Credit Agreement") pursuant to which the lenders named therein agreed to
extend certain credit facilities to the Company in an aggregate principal amount of up to $170,000,000 comprising (i) first lien term loans of $155,000,000 (the "First Lien Term Loans"), the
proceeds of which were used together with the proceeds of the Second Lien Term Loans (defined below) and the February 2005 Subordinated Notes to refinance all debt then outstanding (the "February 2005
Refinancing"), to pay a dividend to holders of Bare Escentuals common stock in the aggregate amount of $122,431,000 (the "February 2005 Dividend," and together with the February 2005 Refinancing, the
"February 2005 Recapitalization") and to pay transaction costs in connection with the February 2005 Recapitalization (the "February 2005 Recapitalization Financing Requirements") and (ii) a
revolving credit facility of up to $15,000,000, the proceeds of which are to be used to provide financing for working capital and other general corporate purposes of the Company and its subsidiaries.

On
February 18, 2005, the Company also entered into a Term Loan Agreement (the "Second Lien Credit Agreement") pursuant to which the lenders named therein agreed to extend second
lien term loans to the Company in an aggregate principal amount of $54,500,000 (the "Second Lien Term Loans"), the proceeds of which were used together with the proceeds of the First Lien Term Loans
and the February 2005 Subordinated Notes for the February 2005 Recapitalization Financing Requirements.

On
October 7, 2005, the Company agreed with the lenders under the senior secured credit facilities to restructure the then-existing credit facilities to increase the
Company's borrowings by an additional aggregate principal amount of $187,500,000, comprised of additional First Lien Term Loans of $96,000,000 and additional Second Lien Term Loans of $91,500,000, the
proceeds of which were used together to pay a dividend to holders of Bare Escentuals common stock in the aggregate amount of $183,473,000 (the "October 2005 Dividend," and together with the
add-on credit facilities, the "October 2005 Recapitalization") and to pay transaction costs in connection with the October 2005 Recapitalization (the "October 2005 Recapitalization
Financing Requirements").

84

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Long-Term Debt (Continued)

On
June 7, 2006, the Company agreed with the lenders under the senior secured credit facilities to restructure the credit facilities to increase the Company's borrowings by an
additional aggregate principal amount of $331,583,000, comprised of additional First Lien Term Loans of $118,583,000 and additional Second Lien Term Loans of $88,000,000, the proceeds of which were
used together with the June 2006 Subordinated Notes of $125,000,000, to pay a dividend to holders of the Company's common stock in the aggregate amount of $340,427,000 (the "June 2006 Dividend," and
together with the additional credit facilities, the "June 2006 Recapitalization") and to pay transaction costs in connection with the June 2006 Recapitalization (collectively, the "June 2006
Recapitalization Financing Requirements"). The maturity dates of the First Lien Term Loans and Second Lien Term Loans were not adjusted.

On
October 4, 2006, the Company used a portion of the net proceeds received from its initial public offering to repay in full the Second Lien Term Loans and the June 2006
Subordinated Notes and to repay a portion of the First Lien Term Loans. In connection with these debt repayments, the Company wrote-off related unamortized debt issuance costs of
$2,477,000, which includes $56,000 of fees paid directly to the lender.

On
December 20, 2006, the Company amended its First Lien Credit Agreement to eliminate the requirement that the net proceeds from the issuance of equity securities of the Company
or any of its subsidiaries be applied to prepay loans under the credit agreement. The amendment also reduced the interest rate margins if the Company achieves a specified consolidated leverage ratio
and specified debt rating, and eliminated the minimum cash interest ratio financial covenant and amended some of the other financial covenants. The maturity date of the First Lien Term Loan was not
adjusted.

On
March 23, 2007, the Company further amended its First Lien Credit Agreement to permit the ability to make acquisitions of up to $30,000,000 in any one fiscal year and up to
$60,000,000 in the aggregate as well as to permit additional investments in foreign subsidiaries of up to $25,000,000.

As
of December 30, 2007, $264,933,000 was outstanding on the First Lien Term Loans. The First Lien Term Loans have a term of seven years expiring on February 18, 2012. The
First Lien Term Loans bear interest at a rate equal to, at the Company's option, either LIBOR or the lenders' base rate, plus an applicable margin varying based on the Company's consolidated total
leverage ratio. As of December 30, 2007 and December 31, 2006, the interest rates on the First Lien Term Loans were accruing at 7.46% and 7.85%, respectively (without giving effect to
the interest rate swap agreement).

The
Company accounted for the modifications of its debt in connection with the February 2005, October 2005, June 2006 Recapitalizations and the December 2006 and March 2007 amendments as
nontroubled debt transactions in accordance with EITF 96-19. Pursuant to EITF 96-19, the Company is required to account for these modifications as debt
extinguishments if it is determined that the terms changed substantially. An indication of the existence of substantially different terms is whether the cash flows have changed by more than 10%. In
calculating the present value of cash flows, the Company determined that the cash flows changed by more than 10% for the February 2005, October 2005 and June 2006 Recapitalizations. Since the terms
of the old and new notes were determined to be substantially different, the new debt instruments were recorded at fair value.

In
February 2005, in connection with the Company's refinancing of its then outstanding debt, the Company paid a prepayment penalty of $2,700,000, wrote off the remaining unamortized
discount and debt issuance costs of $5,463,000 relating to the early extinguishment of the Company's previously

85

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Long-Term Debt (Continued)

outstanding
debt, and expensed as debt extinguishment costs $2,395,000 of fees paid directly to the lender related to the new debt in accordance with the provisions of EITF 96-19,
resulting in a charge of $10,558,000 in connection with this debt extinguishment. Additionally, the Company capitalized $3,135,000 of third-party costs related to the new credit agreements.

In
October 2005, in connection with the Company's amendment of its credit facilities, the Company wrote off the remaining unamortized debt issuance costs of $2,812,000 and expensed as
debt extinguishment costs $3,165,000 of fees paid directly to the lender, as the amendment was determined to cause the credit facilities to be substantially different in accordance with the provisions
of EITF 96-19. Additionally, the Company capitalized $937,000 of third-party costs related to the new credit agreements, including $314,000, which was capitalized in fiscal 2006
upon finalization of cost estimates.

In
June 2006, in connection with the Company's amendment of its credit facilities, the Company wrote off the remaining unamortized debt issuance costs of $867,000 and expensed as debt
extinguishment costs $2,524,000 of fees paid directly to the existing lenders, as the amendment was determined to cause the credit facilities to be substantially different in accordance with the
provisions of EITF 96-19. Additionally, the Company capitalized $2,411,000 of third-party costs related to the new credit agreements and capitalized $1,315,000 of costs related to
new lenders as a debt discount.

Borrowings
under the Revolver (Note 9) and the First Lien Term Loans are secured by substantially all of the Company's assets, including, but not limited to, all accounts
receivable, inventory, property and equipment, and intangibles. The terms of the senior secured credit facilities require the Company to comply with financial covenants, including maintaining a
leverage ratio, entering into interest rate swap or similar agreements with respect to 40% of the principal amounts outstanding under the Company's senior secured credit facilities as of
October 2, 2007. The secured credit facility also contains nonfinancial covenants that restrict some of the Company's activities, including its ability to dispose of assets, incur additional
debt, pay dividends, create liens, make investments and engage in specified transactions with affiliates. As of December 30, 2007, the Company satisfied its financial and nonfinancial
covenants.

Subordinated Notes Payable

On June 7, 2006, in connection with the June 2006 Recapitalization, the Company entered into a Note Purchase Agreement pursuant to which the lenders named
therein agreed to purchase $125,000,000 of 15.0% Senior Subordinated Notes due June 7, 2014 (the "June 2006 Subordinated Notes"). The June 2006 Subordinated Notes are unsecured and subordinated
in priority of payment to the Company's obligations under the First and Second Lien Credit Agreements. On October 4, 2006, the Company used a portion of the net proceeds received from its
initial public offering to repay in full the June 2006 Subordinated Notes.

86

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Long-Term Debt (Continued)

Scheduled Maturities of Long-Term Debt

At December 30, 2007, future scheduled principal payments on long-term debt were as follows (in thousands):

Year ending:December 28, 2008

$
17,901January 3, 2010


14,321January 2, 2011


14,321January 1, 2012


164,688December 30, 2012


53,702$
264,933


11. Commitments and Contingencies

Lease Commitments

The Company leases retail boutiques, distribution facilities, office space and certain office equipment under noncancelable operating leases with various
expiration dates through January 2019. Additionally, the Company subleases certain real property to third parties. Portions of these payments are denominated in foreign currencies and were translated
in the tables below based on their respective U.S. dollar exchange rates as of December 30, 2007. These future payments are subject to foreign currency exchange rate risk. The future minimum
annual payments and anticipated sublease income under such leases in effect at December 30, 2007, were as follows (in thousands):

Minimum
Rental
Payments

Sublease
Rental
Income

Net
Minimum
Lease
PaymentsYear ending:December 28, 2008

$
7,943

$
30

$
7,913January 3, 2010


9,353


30


9,323January 2, 2011


8,996


30


8,966January 1, 2012


8,733


30


8,703December 30, 2012


8,838


1


8,837Thereafter


32,635





32,635$
76,498

$
121

$
76,377


Many
of the Company's retail boutique leases require additional contingent rents when certain sales volumes are reached. Total rent expense was $12,906,000, $8,245,000 and $5,449,000 for
the years ended December 30, 2007, December 31, 2006, and January 1, 2006, respectively, which included $2,028,000, $1,585,000 and $990,000 of contingent rents, respectively.
Several leases entered into by the Company include options that may extend the lease term beyond the initial commitment period, subject to terms agreed to at lease inceptions.

87

---



BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Commitments and Contingencies (Continued)

As
of December 30, 2007, under the terms of its corporate office lease, the Company issued an irrevocable standby letter of credit of $100,000 to the lessor for the term of the
lease.

Royalty Agreements

The Company is a party to a license agreement (the "License") for use of certain patents associated with some of the skin care products sold by the Company. The
License requires that the Company pay a quarterly royalty of 4% of the net sales of certain skin care products for an indefinite period of time. The License also requires minimum annual royalty
payments of $600,000 from the Company. The Company can terminate the agreement at any time with six months written notice. The Company's royalty expense under the License for the years ended
December 30, 2007, December 31, 2006, and January 1, 2006, was $600,000, $600,000 and $501,000, respectively.

The
Company has obtained a worldwide exclusive right to license, develop, commercialize, and distribute certain licensed ingredients to be used in products to be sold by the Company.
This agreement requires the Company to make payments upon achievement of certain product milestones. In addition, this agreement requires the Company to pay a royalty of 3.5% of the net sales upon
successful launch of the first product, subject to certain minimum annual royalty amounts. The Company launched commercial sales of the products containing the licensed ingredients during the year
ended December 31, 2006. The minimum royalty amount was $400,000 for 2007; the minimum will increase to $500,000 for 2008 after which time the Company may renegotiate the minimum royalties or
other compensation within 120 days after the second anniversary of the commercial launch. The Company's expense under this agreement was $876,000, $644,000 and $1,750,000 for the years ended
December 30, 2007, December 31, 2006 and January 1, 2006, respectively.

Contingencies

The Company is involved in various legal and administrative proceedings and claims arising in the ordinary course of its business. The ultimate resolution of such
claims would not, in the opinion of management, have a material effect on the Company's financial position or results of operation.

12. Related-Party Transactions

On June 10, 2004, the Company entered into a Management Agreement ("Berkshire Agreement") with Berkshire Partners LLC ("Berkshire"). Under the
Berkshire Agreement, the Company engaged Berkshire to provide management advisory services in connection with the general business operations of the Company. In compensation for such services, the
Company agreed to pay a management fee in an amount of $300,000 per annum for the term of the agreement. The Berkshire Agreement was to expire on June 10, 2009. However, upon completion of the
Company's initial public offering on October 4, 2006, the Company paid $900,000 as consideration for the early termination of the Berkshire Agreement. Total management fees plus expenses
recognized under the Berkshire Agreement were $1,234,000 and $427,000 for the years ended December 31, 2006 and January 1, 2006, respectively, recorded as selling, general and
administrative expenses in the accompanying consolidated statements of operations.

On
June 10, 2004, the Company also entered into a Management Agreement ("JHP Agreement") with JH Partners, LLC ("JHP"). Under the JHP Agreement, the Company engaged JHP to
provide

88

---



BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. Related-Party Transactions (Continued)

management
advisory services in connection with the general business operations of the Company. In compensation for such services, the Company agreed to pay a management fee in an amount of $300,000
per annum for the term of the JHP Agreement. The JHP Agreement was to expire on June 10, 2009. However, upon completion of the Company's initial public offering on October 4, 2006, the
Company paid $900,000 as consideration for the early termination of the JHP Agreement. Total management fees plus expenses recognized under this Agreement were $1,238,000 and $362,000 for the years
ended December 31, 2006 and January 1, 2006, respectively, recorded as selling, general and administrative expenses in the accompanying consolidated statements of operations.

In
connection with the February 2005 Recapitalization, the Company paid to Berkshire and JHP approximately $2,395,000 in total relating to transactional fees and expenses.

In
connection with the October 2005 Recapitalization, the Company issued 54,732 shares of common stock valued at $6.48 per share to each of Berkshire and JHP relating to transactional
fees and expenses. This amount was capitalized as debt issuance costs.

In
connection with the June 2006 Recapitalization, the Company issued 102,022 shares of common stock valued at $10.43 per share to each of Berkshire and JHP relating to transactional
fees and expenses. This amount was capitalized as debt issuance costs.

The
holders of the Senior Term Loans and the Subordinated Notes Payable issued prior to the February 2005 Refinancing were also stockholders of the Company. Fees paid to these lenders in
connection with the June 2004 Recapitalization totaled $3,240,000 and were reflected as a discount of the related debt. In connection with the February 2005 Recapitalization, the Company paid a
prepayment penalty of $2,700,000 that was reflected as debt extinguishment costs in the year ended January 1, 2006.

The
holders of the Senior Term Loans issued in connection with the February 2005 and October 2005 Recapitalizations were also stockholders of the Company. Fees paid to these lenders in
connection with the February 2005 and October 2005 Recapitalizations totaled $2,395,000 and $3,165,000, respectively, and were reflected as debt extinguishment costs in the year ended
January 1, 2006.

The
holders of the Senior Term Loans issued in connection with June 2006 Recapitalization were also stockholders of the Company. Fees paid to these lenders in connection with the June
2006 Recapitalization totaled $2,524,000 and were reflected as debt extinguishment costs in the year ended December 31, 2006.

FH
Capital Partners LLC is 34%-owned by an affiliate of John C. Hansen, a member of the board of directors who beneficially owns approximately 5.5% of the Company's outstanding
common stock as of December 30, 2007. Officers appointed by the 66% owner of FH Capital Partners LLC control its day-to-day operations. Decisions of the members are made by majority vote of the
members, except for certain investments, borrowings and affiliate transactions that require approval of all members. In December 2001 and May 2002, when FH Capital Partners LLC was 50% owned by an
affiliate of Mr. Hansen, the Company entered into agreements with FH Capital Partners LLC to rent certain computer hardware, software, and licenses under operating lease agreements. During the
year ended December 30, 2007, the Company purchased the equipment under these lease agreements. Rental expense of $16,900, $27,500 and $33,000 was recognized relating to these arrangements
during the years ended December 30, 2007, December 31, 2006 and January 1, 2006, respectively, and has been

89

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. Related-Party Transactions (Continued)

recorded
as selling, general and administrative expenses in the accompanying consolidated statements of operations.

13. Income Taxes

The provision for income taxes consisted of the following (in thousands):

|                           |         | Year ended |       
|-------------------------- | ------- | ---------- | ------
|
|Current:                   |         |            |       
|                           | Federal |            | $     
|                           | State   |            |       
|                           |         |            |       
|                           |         |            | 57,979
|Deferred:                  |         |            |       
|                           | Federal |            |       
|                           | State   |            |       
|                           |         |            |       
|                           |         |            | 1,029 
|                           |         |            |       
|Provision for income taxes |         | $          | 59,008
|                           |         |            |       

A
net tax benefit of $8,727,000, $6,973,000 and $1,027,000 related to the exercise of nonqualified stock options was credited to additional paid-in capital and decreased the
amount of taxes payable during the years ended December 30, 2007, December 31, 2006 and January 1, 2006, respectively.

Income
before provision for income taxes consists of the following (in thousands):

|      |               | Year ended
|----- | ------------- | ----------
|
|      | United States |           
|      | International |           
|      |               |           
|Total |               | $         
|      |               |           

90

---



BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Income Taxes (Continued)

The
difference between the Company's effective income tax rate and the United States federal income tax rate is summarized as follows:

|                                                                           |  | Year ended |  
|-------------------------------------------------------------------------- |  | ---------- | -
|
|Statutory federal rate                                                     |  | 35.0       | %
|State income taxes, net of federal benefit                                 |  | 5.0        |  
|Foreign income at other than U.S. rates                                    |  | (0.1       | )
|Nondeductible interest in connection with the June 2006 Subordinated Notes |  |           |  
|Other                                                                      |  | 0.2        |  
|                                                                           |  |            |  
|Effective tax rate                                                         |  | 40.1       | %
|                                                                           |  |            |  

Significant
components of deferred tax assets and liabilities consisted of the following (in thousands):

December 30,
2007

December 31,
2006Inventory

$
3,225

$
4,164Accruals and allowances


3,661


2,295Deferred rent


1,106


641Stock-based compensation


1,454


1,325Capitalized loan costs


982


1,253Interest rate swap


1,016


Other


177


513Total deferred tax assets


11,621


10,191Trademarks and other intangible assets


(3,526
)

(1,384
)Deferred income





(858
)Basis difference in fixed assets


(564
)

(268
)Prepaid expenses


(676
)

(763
)Total deferred tax liabilities


(4,766
)

(3,273
)Net deferred tax assets

$
6,855

$
6,918


The
deferred tax assets and liabilities presented above are classified in the accompanying consolidated balance sheets as follows (in thousands):

December 30,
2007

December 31,
2006Net current deferred tax assets

$
7,410

$
5,826Net noncurrent deferred tax assets





1,092Net noncurrent deferred tax liabilities (included in other liabilities)


(555
)

Net deferred tax assets

$
6,855

$
6,918


91

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Income Taxes (Continued)

In
June 2006, the Financial Accounting Standards Board ("FASB") issued FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with
SFAS 109,Accounting for Income Taxes. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and
disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return.

The
Company adopted FIN 48 on January 1, 2007. As a result of the adoption of FIN 48, the changes to the Company's reserve for uncertain tax positions was accounted
for as a $952,000 cumulative effect adjustment to increase the beginning balance of accumulated deficit on the Company's balance sheet. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows (in thousands):

Balance at January 1, 2007

$
3,905Additions based on tax positions related to the current year


934Additions based on tax positions related to the prior year


649Settlements


Reduction for lapse of statute of limitations


(760
)Balance at December 30, 2007

$
4,728


As
of December 30, 2007, the total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1,690,000. The Company accrues interest
related to unrecognized tax benefits in its provision for income taxes. As of December 30, 2007, the Company had approximately $463,000 of accrued interest, net of tax, related to uncertain tax
positions.

Included
in the balance of unrecognized tax benefits at December 30, 2007 and January 1, 2007 are tax positions of $2,725,000 and $1,946,000, respectively, for which the
ultimate recognition is highly certain but for which there is uncertainty about the timing of such recognition. Because of the impact of deferred income tax accounting, other than for interest and
penalties, these items would not affect the effective income tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. Due to the expiration of various statutes
of limitation, it is reasonably possible that the Company's gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $634,000.

The
Company files income tax returns in the United States and in various state, local and foreign jurisdictions. The tax years subsequent to 2002 remain open to examination by the major
taxing jurisdictions in the United States. In 2007, the U.S. Internal Revenue Service completed its audit of the Company's U.S. federal income tax returns for 2004, which resulted in no changes to
reported tax for that year. In addition, a state audit was carried out for the years 2004 to 2006, which resulted in no changes to reported tax for those years. The outcome of these audits had no
impact to the amounts recorded in the financial statements.

14. Stockholders' Equity

Preferred Stock

In October 2006, upon completion of the Company's initial public offering, the Company adopted an Amended and Restated Certificate of Incorporation providing for
the authorization of 10,000,000

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Stockholders' Equity (Continued)

shares
of undesignated preferred stock. The board of directors has the authority to issue undesignated preferred stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof.

At
December 30, 2007, there were no shares of preferred stock issued or outstanding.

Common Stock

At December 30, 2007, the Company had authorized and outstanding 200,000,000 and 91,158,390 shares of common stock, respectively. Each share of common
stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the board of directors, subject to the
preferential rights of any preferred stock outstanding. At December 30, 2007, no shares of common stock were subject to repurchase by the Company pursuant to the Company's Stockholders
Agreement dated June 10, 2004, as amended to date. Prior to the Company's initial public offering, holders of the Company's common stock and options to purchase shares of common stock were
parties to the Stockholders Agreement. The Stockholders Agreement addressed various corporate governance matters, including composition of the board of directors and required before the Company may
take certain enumerated actions.

In
September 2006, the Company's Board of Directors and stockholders approved a 1.5-for-one split of its common stock and a change in the par value of its common
stock from $0.01 to $0.001, which were effected on September 12, 2006. All common stock, common stock equivalents, options and warrants to purchase common stock, and per share amounts in the
consolidated financial statements have been adjusted retroactively to reflect the stock split and change in par value.

In
October 2006, the Company completed an initial public offering of 18.4 million shares of its common stock at a price of $22.00 per share. The Company received approximately
$373.8 million in net proceeds from the offering, of which $372.5 million was used to repay all outstanding principal and interest owed on the June 2006 Subordinated Notes and the Second
Lien Term Loan and a portion of the outstanding principal on the First Lien Term Loan.

On
March 19, 2007, the Company completed a follow-on underwritten public offering pursuant to which the Company sold 575,000 shares and selling stockholders sold an
additional 13,225,000 shares, which includes 1,800,000 shares sold pursuant to the exercise of the underwriters' over-allotment option. The Company received net proceeds of approximately
$18.1 million, after deducting underwriting discounts and commissions and estimated offering expenses.

On
June 19, 2007, the Company completed a follow-on underwritten public offering pursuant to which the Company sold 100,000 shares and selling stockholders sold an
additional 7,900,000 shares. The Company received net proceeds of approximately $3.0 million, after deducting underwriting discounts and commissions and estimated offering expenses.

Prior
to the initial public offering, the Stockholders Agreement provided for a board of up to nine members, two of whom were to be nominated by stockholders affiliated with Berkshire,
two of whom were to be nominated by stockholders affiliated with JHP, one of whom was nominated by the management stockholders, and the balance of whom were outside directors nominated by the other
five directors. The Stockholders Agreement obligated the Company's stockholders to vote their shares in favor of the nominees selected in this manner. The supermajority vote requirements in the
Stockholders Agreement specified that the Company could not amend or repeal its certificate of

93

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Stockholders' Equity (Continued)

incorporation
or bylaws, amend or modify the Stockholders Agreement, increase the number of members of the board, enter into or materially modify any transaction or arrangement with any affiliate of
JHP or Berkshire or give effect to any other matter required to be submitted to the stockholders of the Company for approval without the approval of a majority of the JHP stockholders and a majority
of the Berkshire stockholders. The provisions of the Stockholders Agreement relating to the nomination and election of directors and supermajority vote requirements terminated upon completion of the
Company's initial public offering on October 4, 2006.

On
June 6, 2006, one of the Company's directors purchased 35,601 fully vested shares of common stock at $8.43, representing a discount to the deemed fair value of $13.43 of the
Company's common stock at that date based on a contemporaneous valuation obtained from a third-party valuation firm. In connection with this share purchase, the Company recorded stock-based
compensation expense of $178,000 during the year ended December 31, 2006.

Common Stock Reserved for Future Issuance

The Company has reserved shares of common stock for issuance in connection with the following:

December 30,
2007

December 31,
2006Stock options outstanding

4,714,936

6,375,543Stock options available for grant

4,934,757

4,441,9479,649,693

10,817,490


Warrants

At December 30, 2007 and December 31, 2006, there were no outstanding warrants to purchase shares of the Company's stock.

15. Stock-Based Employee Compensation Plans

2004 Equity Incentive Plan

On June 10, 2004, the Board of Directors adopted the 2004 Equity Incentive Plan (the "2004 Plan"). The Company reserved a total of 11,564,718 shares for
new grants under the 2004 Plan. The 2004 Plan provides for the issuance of non-qualified stock options for common stock to employees, directors, consultants, and other associates. The
options generally vest at a rate of 20% per year from the date of grant and have a maximum term of ten years. To date, the Company has granted both traditional time-vesting stock options
and performance vesting stock options. The estimated per share fair value of the Company's common stock at the date of grant was determined by the Board of Directors based on contemporaneous
valuations from a third-party valuation firm obtained in February 2005, October 2005, January 2006, April 2006 and June 2006.

In
conjunction with the adoption of the 2006 Equity Incentive Plan in September 2006, no additional options were permitted to be granted under the 2004 Plan. In addition, any outstanding
options cancelled under the 2004 Plan subsequent to the effectiveness of the 2006 Equity Incentive Plan on September 28, 2006, will become available to grant under the 2006 Equity Incentive
Plan.

94

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. Stock-Based Employee Compensation Plans (Continued)

A summary of activity under the 2004 Plan is set forth below. All exercise prices have been adjusted to reflect the impact of the exercise price modifications in
connection with the February 2005, October 2005 and June 2006 Recapitalizations, described below.

|                             |                                                       |           |            | Options Outstanding
|---------------------------- | ----------------------------------------------------- | --------- | ---------- | -------------------
|
|Balance at January 2, 2005   |                                                       | 4,717,316 |            | 6,847,402          
|                             | Granted                                               |           | (1,856,063 | )                  
|                             | Exercised                                             |           |           |                    
|                             | Canceled                                              |           | 1,532,730  |                    
|                             |                                                       |           |            |                    
|Balance at January 1, 2006   |                                                       | 4,393,983 |            | 6,441,440          
|                             | Granted                                               |           | (2,089,386 | )                  
|                             | Exercised                                             |           |           |                    
|                             | Canceled                                              |           | 639,829    |                    
|                             | Rolled over to 2006 Plan                              |           | (106,197   | )                  
|                             | Cancellation of remaining options available for grant |           | (2,838,229 | )                  
|                             |                                                       |           |            |                    
|Balance at December 31, 2006 |                                                       |          |            | 6,211,293          
|Exercised                    |                                                       |          |            | (1,167,797         
|Canceled                     |                                                       | 679,360   |            | (679,360           
|Rolled over to 2006 Plan     |                                                       | (679,360  | )          |                   
|                             |                                                       |           |            |                    
|Balance at December 30, 2007 |                                                       |          |            | 4,364,136          
|                             |                                                       |           |            |                    

At
December 30, 2007 and December 31, 2006, total outstanding options vested under the 2004 Plan were 733,386 and 267,141, at a weighted-average exercise price of $2.64 and
$1.11, respectively.

On
February 17, 2005, the Company's Board of Directors declared a cash dividend of $1.79 per common share on February 17, 2005 and paid it to stockholders of record on
February 18, 2005. In addition, the Company's Board of Directors approved the modification of the exercise price of all options outstanding at the date of the February 2005 Recapitalization.
The Company engaged a third-party valuation firm to perform a contemporaneous valuation of the Company's common stock immediately before and after the February 2005 Recapitalization, which resulted in
decreasing the fair value of the Company's common stock from $2.45 to $1.37 per share. All option exercise prices were adjusted by the same percentage decrease as the decrease in the fair value per
common share. At the modification date, the Company completed a comparison of the fair value of the modified award with the fair value of the original award immediately before the modification in
accordance with the provision of Statement 123(R). The modification resulted in an increase in the fair value of the outstanding options by $1,304,000, which is being recognized as incremental stock
compensation expense over the remaining vesting period of the awards.

On
October 7, 2005, the Company's Board of Directors declared a cash dividend of $2.66 per common share on October 5, 2005 and paid it to stockholders of record on
October 7, 2005. In addition, the Company's Board of Directors approved the modification of the exercise price of all options outstanding at the date of the October 2005 Recapitalization. The
Company engaged a

95

---



BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. Stock-Based Employee Compensation Plans (Continued)

third-party
valuation firm to perform a contemporaneous valuation of the Company immediately before and after the October 2005 Recapitalization, which resulted in decreasing the fair value
of the Company's common stock from $5.23 to $3.61 per share. All option exercise prices were adjusted by the same percentage decrease as the decrease in the fair value per common share. At the
modification date, the Company completed a comparison of the fair value of the modified award with the fair value of the original award immediately before the modification in accordance with the
provision of Statement 123(R). The modification resulted in an increase in the fair value of the outstanding options by $1,450,000, which is being recognized as incremental stock compensation expense
over the remaining vesting period of the awards.

On
May 30, 2006, Company's Board of Directors declared a cash dividend of $4.81 per common share to stockholders of record on June 7, 2006, payable on June 7, 2006.
In addition, the Company's Board of Directors approved the modification of the exercise price of all options outstanding at the date of the June 2006 Recapitalization. The Company engaged a
third-party valuation firm to perform a contemporaneous valuation of the Company immediately before and after the June 2006 Recapitalization, which resulted in decreasing the fair value of the
Company's common stock from $13.43 to $8.87 per share. All option exercise prices were adjusted by the same percentage decrease as the decrease in the fair value per common share. At the modification
date, the Company completed a comparison of the fair value of the modified award with the fair value of the original award immediately before the modification in accordance with the provision of
Statement 123(R). The modification resulted in an increase in the fair value of the outstanding options by $2,224,000, which is being recognized as incremental stock compensation expense over the
remaining vesting period of the awards.

Under
the 2004 Plan, the Company granted traditional time-vesting options as well as performance vesting stock options. The traditional time-vesting stock options
represent option grants that are earned at the time of grant but only become exercisable with the passage of time and as long as the employee remains with the Company. The performance vesting stock
options represent option grants that are earned only upon attainment of certain pre-established annual operating performance measures and the employee's remaining with the Company for a
specified period of time. On May 31, 2006, the Company's Board of Directors approved the elimination of the performance components of the vesting terms of the performance-vesting options such
that the options would effectively become time-vesting options. Because vesting of the performance awards was considered probable before and after the modification, no additional
compensation expense resulted from the modification.

In
connection with options granted in 2004, the Company recorded deferred stock-based compensation of $1,112,000, representing the difference between the exercise price and the deemed
fair value of the Company's common stock at the date of grant based on a valuation obtained in February 2005 from a third-party valuation firm. The Company ceased amortization of this deferred
stock-based
compensation on January 3, 2005, upon adoption of Statement 123(R) under the modified prospective transaction method.

In
September 2004, the Company granted a consultant options to purchase 90,000 shares of common stock at $1.79 per share. The fair value of the award of $1.52 per share or $136,000 and
was recognized as selling, general and administrative expense over the consultant's service period of five months. The Company recorded deferred stock-based compensation related to this grant of
$136,000,

96

---



BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. Stock-Based Employee Compensation Plans (Continued)

based
on the fair value of the Company's option at the date of grant. Amortization of deferred stock-based compensation related to this grant was $27,000 during the year ended January 1, 2006.

2006 Equity Incentive Plan

On September 12, 2006, the stockholders of the Company approved the 2006 Equity Incentive Award Plan (the "2006 Plan") for executives, directors, employees
and consultants of the Company. The 2006 Plan became effective on September 28, 2006. A total of 4,500,000 shares of the Company's common stock were initially reserved for issuance under the
2006 Plan. To the extent outstanding awards under the 2004 Plan expire or are canceled without having been exercised in full or are repurchased or forfeited following the effective date of the 2006
Plan, the shares of common stock subject to such awards will be available for future issuance under the 2006 Plan. Awards are generally granted with an exercise price equal to the market price of the
Company's common stock at the date of grant. Those awards generally vest over a period of four or five years from the date of grant and have a maximum term of ten years.

A
summary of activity under the 2006 Plan is set forth below:

|                                          |                            |           |          | Options Outstanding
|----------------------------------------- | -------------------------- | --------- | -------- | -------------------
|
|Balance at September 28, 2006 (inception) |                            | 4,500,000 |          |                   
|                                          | Rolled over from 2004 Plan |           | 106,197  |                    
|                                          | Granted                    |           | (164,250 | )                  
|                                          |                            |           |          |                    
|Balance at December 31, 2006              |                            | 4,441,947 |          | 164,250            
|Rolled over from 2004 Plan                |                            | 679,360   |          |                   
|Granted                                   |                            | (262,650  | )        | 262,650            
|Canceled                                  |                            | 76,100    |          | (76,100            
|                                          |                            |           |          |                    
|Balance at December 30, 2007              |                            | 4,934,757 |          | 350,800            
|                                          |                            |           |          |                    

At
December 30, 2007, total outstanding options vested under the 2006 Plan were 18,850 at a weighted-average exercise price of $28.23. At December 31, 2006, there were no
outstanding options vested under the 2006 Plan.

97

---



BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. Stock-Based Employee Compensation Plans (Continued)

Additional
information under the 2004 Plan and the 2006 Plan regarding options outstanding as of December 30, 2007 is as follows:

|             |  | Outstanding |  | Exercisable
|------------ |  | ----------- |  | -----------
|
|$0.46        |  | 2,459,456   |  | 6.67       
|$0.64-8.87   |  | 1,904,680   |  | 8.15       
|$19.75-22.00 |  | 109,325     |  | 7.75       
|$26.32-35.10 |  | 145,475     |  | 8.79       
|$35.36-40.43 |  | 96,000      |  | 9.17       
|             |  |             |  |            
|             |  | 4,714,936   |  |            
|             |  |             |  |            

A summary of the Company's outstanding nonvested options under the 2004 Plan and the 2006 Plan are as follows:

Number of
Shares

Weighted-
Average
Grant Date
Fair ValueNonvested at January 1, 2006

6,139,565

$
1.88Modification of the exercise price of 5,420,578 options in connection with the June 2006 Recapitalization




0.41Granted

2,253,636


8.33Vested

(1,644,970
)

1.78Forfeited

(639,829
)

2.97Nonvested at December 31, 2006

6,108,402

$
4.54Granted

262,650


14.90Vested

(1,653,792
)

3.66Forfeited

(754,560
)

9.72Nonvested at December 30, 2007

3,962,700

$
4.60


As
of December 30, 2007, pursuant to Statement 123(R), there was $20,058,000 of total unrecognized compensation cost related to nonvested awards. As of December 30, 2007,
this cost is expected to be recognized over a weighted-average period of 2.39 years. The total fair value of options vested during the years ended December 30, 2007, December 31,
2006 and January 1, 2006 were $6,059,000, $2,931,000 and $1,270,000, respectively.

The
total cash received from employees as a result of employee stock option exercises under all plans for the years ended December 30, 2007, December 31, 2006 and
January 1, 2006 were $1,815,000, $1,309,000 and $992,000, respectively. In connection with these exercises, the tax benefits realized by the Company for the years ended December 30,
2007, December 31, 2006 and January 1, 2006 were $9,998,000, $6,973,000 and $1,193,000, respectively. The total intrinsic value of options exercised for the years ended
December 30, 2007, December 31, 2006 and January 1, 2006 were $28,610,000, $19,333,000 and $18,079,000, respectively.

98

---



BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. Long-Term Employee Related Benefits

In the year ended January 1, 2006, the Company adopted a non-qualified deferred compensation plan for certain executives. As of
December 30, 2007 and December 31, 2006, plan liabilities totaled $1,518,000 and $645,000, respectively, which is associated with funds held in an irrevocable grantor's trust ("Rabbi
Trust"). The deferred compensation plan obligations are payable in cash upon retirement, termination of employment, and/or certain other times in a lump-sum distribution or in
installments, as elected by the participant in accordance with the plan.

The
obligations of the Company under the Rabbi Trust consist of the Company's unsecured contractual commitment to deliver, at a future date, any of the following: (i) deferred
compensation credited to an account under the Rabbi Trust, (ii) additional amounts, if any, that the Company may, from time to time, credit to the Rabbi Trust, and (iii) notional
earnings on the foregoing amounts. The Rabbi Trust assets are subject to the claims of the Company's creditors in the event of the Company's insolvency. The assets of the Rabbi Trust and the Company's
liability to the Plan participants are reflected in "Other assets" and "Long-term employee benefits," respectively, on the Company's consolidated balance sheet. The securities that
comprise the assets of the Rabbi Trust are designated as trading securities under Statement 115,Accounting for Certain Investments in Debt and Equity
Securities.Expenses accrued under the plan are included in selling, general and administrative expenses.

17. Defined Contribution Plan

On January 1, 2006, the Company adopted a defined contribution plan (the "Plan") in the United States pursuant to Section 401(k) of the Internal
Revenue Code (the "Code"). All eligible full- and part-time employees of the Company who meet certain age and service requirements may participate in the Plan. Participants may
contribute up to the maximum allowable under the Code. The Plan also allows for discretionary contributions by the Company. In the
years ended December 30, 2007 and December 31, 2006, the Company made matching contributions to the 401(k) plan equal to 50% of each participating employee's contribution, up to 6% of
the employee's salary. Such discretionary contributions vest ratably over five years, as long at the participant remains employed with the Company. Matching contributions aggregated $340,000, $168,000
and $4,000 for the years ended December 30, 2007, December 31, 2006 and January 1, 2006, respectively, recorded as selling, general and administrative expenses in the accompanying
statements of operations.

18. Segment and Geographic Information

Operating segments are defined as components of an enterprise engaging in business activities about where separate financial information is available that is
evaluated regularly by the Chief Operating Decision Maker ("CODM") in deciding how to allocate resources and assessing performance. The Company's Chief Executive Officer has been identified as the
CODM as defined by Statement 131,Disclosures about Segments of an Enterprise and Related Information.

The
Company has determined that it operates in two business segments: Retail with sales to end users, and Wholesale with sales to resellers. These reportable segments are strategic
business units that are managed separately based on the fundamental differences in their operations. The Retail segment consists of sales directly to end users through Company-owned boutiques and
infomercials. The Wholesale segment consists of sales to resellers, home shopping television, specialty beauty retailers, spas and salons, and international distributors. The following table presents
certain financial information for each segment. Operating income is the gross margin of the segment less direct

99

---



BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. Segment and Geographic Information (Continued)

expenses
of the segment. Some direct expenses, such as media and advertising spend, do impact the performance of the other segment, but these expenses are recorded in the segment they directly relate
to and are not allocated out to each segment. The Corporate column includes unallocated selling, general and administrative expenses, depreciation and amortization, stock-based compensation expenses,
restructuring charges and asset impairment charges. Corporate selling, general and administrative expenses include headquarters facilities costs, distribution center costs, product development costs,
corporate headcount costs and other corporate costs, including information technology, finance, accounting, legal and human resources costs. These items, while often times related to the operations of
a segment, are not considered by segment operating management and the Chief Operating Decision Maker in assessing segment performance.

|                                         |                                     | Retail |         | Wholesale |   | Corporate |        | Total |        
|---------------------------------------- | ----------------------------------- | ------ | ------- | --------- | - | --------- | ------ | ----- | -------
|Year ended December 30, 2007             |                                     |        |         |           |   |           |        |       |        
|Sales, net                               |                                     | $      | 211,829 |           | $ | 299,171   |        | $     |       
|Cost of goods sold                       |                                     |        | 42,975  |           |   | 104,583   |        |       |       
|                                         |                                     |        |         |           |   |           |        |       |        
|Gross profit                             |                                     |        | 168,854 |           |   | 194,588   |        |       |       
|Operating expenses:                      |                                     |        |         |           |   |           |        |       |        
|                                         | Selling, general and administrative |        |         | 94,008    |   |           | 17,124 |       |        
|                                         | Depreciation and amortization       |        |         | 1,573     |   |           | 184    |       |        
|                                         | Stock-based compensation            |        |         |          |   |           |       |       |        
|                                         |                                     |        |         |           |   |           |        |       |        
|Total expenses                           |                                     |        | 95,581  |           |   | 17,308    |        |       | 81,564 
|                                         |                                     |        |         |           |   |           |        |       |        
|Operating income (loss)                  |                                     |        | 73,273  |           |   | 177,280   |        |       | (81,564
|Interest expense                         |                                     |        |         |           |   |           |        |       |        
|Interest income                          |                                     |        |         |           |   |           |        |       |        
|                                         |                                     |        |         |           |   |           |        |       |        
|Income before provision for income taxes |                                     |        |         |           |   |           |        |       |        
|Provision for income taxes               |                                     |        |         |           |   |           |        |       |        
|                                         |                                     |        |         |           |   |           |        |       |        
|Net income                               |                                     |        |         |           |   |           |        |       |        
|                                         |                                     |        |         |           |   |           |        |       |        

100

---



BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. Segment and Geographic Information (Continued)

|
|

|                                         |                                     | Retail |         | Wholesale |   | Corporate |       | Total |        
|---------------------------------------- | ----------------------------------- | ------ | ------- | --------- | - | --------- | ----- | ----- | -------
|Year ended December 31, 2006             |                                     |        |         |           |   |           |       |       |        
|Sales, net                               |                                     | $      | 185,057 |           | $ | 209,468   |       | $     |       
|Cost of goods sold                       |                                     |        | 37,395  |           |   | 75,044    |       |       |       
|                                         |                                     |        |         |           |   |           |       |       |        
|Gross profit                             |                                     |        | 147,662 |           |   | 134,424   |       |       |       
|Operating expenses:                      |                                     |        |         |           |   |           |       |       |        
|                                         | Selling, general and administrative |        |         | 80,691    |   |           | 8,861 |       |        
|                                         | Depreciation and amortization       |        |         | 832       |   |           | 4     |       |        
|                                         | Stock-based compensation            |        |         |          |   |           |      |       |        
|                                         | Restructuring charges               |        |         |          |   |           |      |       |        
|                                         |                                     |        |         |           |   |           |       |       |        
|Total expenses                           |                                     |        | 81,523  |           |   | 8,865     |       |       | 52,901 
|                                         |                                     |        |         |           |   |           |       |       |        
|Operating income (loss)                  |                                     |        | 66,139  |           |   | 125,559   |       |       | (52,901
|Interest expense                         |                                     |        |         |           |   |           |       |       |        
|Debt extinguishment costs                |                                     |        |         |           |   |           |       |       |        
|Interest income                          |                                     |        |         |           |   |           |       |       |        
|                                         |                                     |        |         |           |   |           |       |       |        
|Income before provision for income taxes |                                     |        |         |           |   |           |       |       |        
|Provision for income taxes               |                                     |        |         |           |   |           |       |       |        
|                                         |                                     |        |         |           |   |           |       |       |        
|Net income                               |                                     |        |         |           |   |           |       |       |        
|                                         |                                     |        |         |           |   |           |       |       |        

|
|

|                                         |                                     | Retail |         | Wholesale |   | Corporate |       | Total |        
|---------------------------------------- | ----------------------------------- | ------ | ------- | --------- | - | --------- | ----- | ----- | -------
|Year ended January 1, 2006               |                                     |        |         |           |   |           |       |       |        
|Sales, net                               |                                     | $      | 132,496 |           | $ | 126,799   |       | $     |       
|Cost of goods sold                       |                                     |        | 30,018  |           |   | 44,493    |       |       |       
|                                         |                                     |        |         |           |   |           |       |       |        
|Gross profit                             |                                     |        | 102,478 |           |   | 82,306    |       |       |       
|Operating expenses:                      |                                     |        |         |           |   |           |       |       |        
|                                         | Selling, general and administrative |        |         | 60,566    |   |           | 9,452 |       |        
|                                         | Depreciation and amortization       |        |         | 450       |   |           |      |       |        
|                                         | Stock-based compensation            |        |         |          |   |           |      |       |        
|                                         | Restructuring charges               |        |         |          |   |           |      |       |        
|                                         | Asset impairment charge             |        |         |          |   |           |      |       |        
|                                         |                                     |        |         |           |   |           |       |       |        
|Total expenses                           |                                     |        | 61,016  |           |   | 9,452     |       |       | 36,976 
|                                         |                                     |        |         |           |   |           |       |       |        
|Operating income (loss)                  |                                     |        | 41,462  |           |   | 72,854    |       |       | (36,976
|Interest expense                         |                                     |        |         |           |   |           |       |       |        
|Debt extinguishment costs                |                                     |        |         |           |   |           |       |       |        
|Interest income                          |                                     |        |         |           |   |           |       |       |        
|                                         |                                     |        |         |           |   |           |       |       |        
|Income before provision for income taxes |                                     |        |         |           |   |           |       |       |        
|Provision for income taxes               |                                     |        |         |           |   |           |       |       |        
|                                         |                                     |        |         |           |   |           |       |       |        
|Net income                               |                                     |        |         |           |   |           |       |       |        
|                                         |                                     |        |         |           |   |           |       |       |        

101

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. Segment and Geographic Information (Continued)

The
Company's long-lived assets, excluding goodwill and intangibles, by segment were as follows (in thousands):

December 30,
2007

December 31,
2006Retail

$
17,327

$
8,398Wholesale


925


138Corporate


26,201


12,715$
44,453

$
21,251


Long-lived
assets allocated to the retail segment consist of fixed assets and deposits for retail stores. Long-lived assets allocated to the wholesale segment
consist of fixed assets located at our wholesale customer. Long-lived assets in the corporate segment consist of fixed assets, tooling costs and deposits related to the Company's corporate
offices and distribution centers.

The
Company's long-lived assets, excluding goodwill and intangibles, by geographic area were as follows (in thousands):

December 30,
2007

December 31,
2006United States

$
42,191

$
21,251International


2,262


$
44,453

$
21,251


No
individual geographical area outside of the United States accounted for more than 10% of net sales in any of the periods presented. The Company's sales by geographic area were as
follows (in thousands):

Year endedDecember 30,
2007

December 31,
2006

January 1,
2006United States

$
470,883

$
377,964

$
244,372International


40,117


16,561


14,923Sales, net

$
511,000

$
394,525

$
259,295


19. Restructuring Costs

As a result of the Company's growth and a change in strategy to improve its operations, the Company relocated both the corporate and distribution center
facilities during the year ended January 1, 2006. Related to these relocations, the Company exited two facilities that had operating lease commitments through 2007. These exit costs were
accounted for in accordance with Statement 146,Accounting for Costs Associated with Exit or Disposal Activities.

Costs
primarily represent closure and relocation costs of the Company's corporate headquarters and distribution center. Closure costs include payments required under lease contracts
after the

102

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BARE ESCENTUALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

19. Restructuring Costs (Continued)

properties
were abandoned, less any applicable estimated sublease income during the period after abandonment. To determine the closure costs, certain estimates were made related to the (1) time
period over which the relevant building would remain vacant, (2) sublease terms, and (3) sublease rates, including common area charges. During the year ended December 31, 2006,
the Company discontinued the use of one of its office floors located at its former corporate facility and recorded additional restructuring costs of $114,000. As of December 31, 2006, the
remaining $172,000 of lease termination costs, net of estimated sublease income, was paid on various dates through July 2007.

The
following tables set forth the exit activities through December 30, 2007 (in thousands):

Accrual balance at January 2, 2005

$
Cost incurred and charged to expense


643Non-cash charges


(98
)Cash paid


(121
)Accrual balance at January 1, 2006

$
424Cost incurred and charged to expense


114Cash paid


(366
)Accrual balance at December 31, 2006

$
172Cash paid


(172
)Accrual balance at December 30, 2007

$



20. Valuation and Qualifying Accounts

|Description                                                                 |  | Balance at
beginning
of period |       | Charged
against
sales |   | Charged
against
expenses |  | Deductions |     | Balance at
end of
period
|--------------------------------------------------------------------------- |  | ------------------------------ | ----- | --------------------- | - | ------------------------ |  | ---------- | --- | ------------------------
|Year ended December 30, 2007:                                               |  |                                |       |                       |   |                          |  |            |     |                         
|Allowance for doubtful accounts and returns recorded in accounts receivable |  | $                              | 3,427 |                       | $ | 20,185                   |  | $          | 827 |                         
|Allowance for returns recorded in accrued liabilities                       |  |                                | 1,380 |                       |   | 13,607                   |  |            |    |                         
|Year ended December 31, 2006:                                               |  |                                |       |                       |   |                          |  |            |     |                         
|Allowance for doubtful accounts and returns recorded in accounts receivable |  | $                              | 2,225 |                       | $ | 8,388                    |  | $          | 57  |                         
|Allowance for returns recorded in accrued liabilities                       |  |                                | 1,557 |                       |   | 11,921                   |  |            |    |                         
|Year ended January 1, 2006:                                                 |  |                                |       |                       |   |                          |  |            |     |                         
|Allowance for doubtful accounts and returns recorded in accounts receivable |  | $                              | 650   |                       | $ | 7,962                    |  | $          | 126 |                         
|Allowance for returns recorded in accrued liabilities                       |  |                                | 354   |                       |   | 11,913                   |  |            |    |                         

---

103

---





ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

There
were no changes in or disagreements with accountants on accounting and financial disclosure during the last two fiscal years.

ITEM 9A.    CONTROLS AND PROCEDURES



Based on our management's evaluation (with the participation of our chief executive officer and chief financial officer), as of December 30, 2007, the end
of the period covered by this report, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) were effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules
and forms and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required
disclosure.



Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act
Rule 13a-15(f). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over
financial reporting was effective as of December 30, 2007. The effectiveness of our internal control over financial reporting as of December 30, 2007 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their report which is included in Item 8 of this Annual Report on Form 10-K.



We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase
efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and
migrating processes.

There
has been no change in internal controls over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
internal controls over financial reporting.

ITEM 9B.    OTHER INFORMATION

We have no information to report pursuant to Item 9B.

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item will be included in our definitive Proxy Statement for the 2008 Annual Meeting of Stockholders to be held on May 15,
2008 (2008 Proxy Statement), which will be filed within 120 days of the end of our fiscal year ended December 30, 2007 and is incorporated herein by reference.

Certain
documents relating to the registrant's corporate governance, including the Code of Business and Ethics, which is applicable to the registrant's directors, officers and employees,
and the charters of the Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee of the registrant's Board of Directors, are available on the registrant's website at http://www.bareescentuals.com.

ITEM 11.    EXECUTIVE COMPENSATION

Information relating to the registrant's executive officer and director compensation will be in the 2008 Proxy Statement and is incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information relating to security ownership of certain beneficial owners of the registrant's common stock and information relating to the security ownership of the
registrant's management will be in the 2008 Proxy Statement and is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions will be in the 2008 Proxy Statement and is incorporated herein by reference.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding principal accountant fees and services will be in the 2008 Proxy Statement and is incorporated herein by reference.

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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)   The
following documents are filed as part of this Annual Report on Form 10-K:



The consolidated financial statements required to be filed in the Annual Report on Form 10-K are listed in Item 8 hereof. Schedules not
set forth in Item 8 have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.



The documents set forth below are filed herewith or incorporated by reference to the location indicated.

|Exhibit
Number |  | Exhibit Title                                                                                                                        
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|3.2(1)         |  | Amended and Restated Certificate of Incorporation.                                                                                   
|3.4(2)         |  | Amended and Restated Bylaws.                                                                                                         
|4.1(3)         |  | Form of Common Stock Certificate.                                                                                                    
|4.2(4)         |  | Stockholders Agreement among the Registrant and certain investors set forth therein, dated June 10, 2004.                            
|4.3(4)         |  | First Amendment to the Stockholders Agreement among the Registrant and certain investors set forth therein, dated December 21, 2004. 
|4.4(4)         |  | Second Amendment to the Stockholders Agreement among the Registrant and certain investors set forth therein, dated June 28, 2006.    
|4.5            |  | Third Amendment to the Stockholders Agreement among the Registrant and certain investors set forth therein, dated September 11, 2007.
|10.1#(5)       |  | 2004 Equity Incentive Plan.                                                                                                          
|10.2#(4)       |  | First Amendment to 2004 Equity Incentive Plan.                                                                                       
|10.3#(4)       |  | Second Amendment to 2004 Equity Incentive Plan.                                                                                      
|10.4#(4)       |  | 2004 Equity Incentive Plan Form of Time Stock Option Certificate.                                                                    
|10.5#(4)       |  | 2004 Equity Incentive Plan Form of Performance Stock Option Certificate.                                                             
|10.6#(5)       |  | 2006 Equity Incentive Award Plan.                                                                                                    
|10.7#(4)       |  | Deferred Compensation Plan.                                                                                                          
|10.8#(4)       |  | Employment Agreement with Leslie A. Blodgett, dated May 3, 2004.                                                                     
|10.9#(4)       |  | First Amendment to Employment Agreement with Leslie A. Blodgett, dated August 2, 2005.                                               
|10.10#(4)      |  | Second Amendment to Employment Agreement with Leslie A. Blodgett effective as of May 31, 2006.                                       
|10.11#(4)      |  | Employment Offer Letter to Diane M. Miles, dated April 3, 2006.                                                                      
|10.12#(4)      |  | Employment Offer Letter to Myles B. McCormick, dated December 8, 2004.                                                               

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|10.13(4) |  | Amended and Restated Agreement between Dolphin Acquisition Corp. and QVC, Inc. dated December 31, 1998.                                                   
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|10.14(4)  |  | First Amendment to Amended and Restated Agreement between Dolphin Acquisition Corp., d/b/a Bare Escentuals, and QVC, Inc. dated January 29, 1999.         
|10.15(4)  |  | Second Amendment to Amended and Restated Agreement between Dolphin Acquisition Corp., d/b/a Bare Escentuals, and QVC, Inc. dated February 9, 1999.        
|10.16(4) |  | License and Supply Agreement between Registrant and BioKool LLC dated September 12, 2005.                                                                 
|10.17(4) |  | First Addendum to License and Supply Agreement between Registrant and BioKool LLC effective as of December 29, 2005.                                      
|10.18(4) |  | Master Services Agreement between Registrant and Datapak Services Corporation dated January 3, 2006.                                                      
|10.19#(4) |  | Form of Indemnification Agreement.                                                                                                                        
|10.20(4)  |  | Credit Agreement among MD Beauty, Inc., Registrant, BNP Paribas, and certain lenders dated February 18, 2005.                                             
|10.21(4)  |  | First Amendment to Credit Agreement among MD Beauty, Inc., Registrant, BNP Paribas and certain lenders dated July 21, 2005.                               
|10.22(4)  |  | Second Amendment to Credit Agreement among MD Beauty, Inc., Registrant, BNP Paribas and certain lenders dated October 7, 2005.                            
|10.23(4)  |  | Third Amendment to Credit Agreement among MD Beauty, Inc., Registrant, BNP Paribas and certain lenders dated March 17, 2006.                              
|10.24(4)  |  | Fourth Amendment to Credit Agreement among MD Beauty, Inc., Registrant, BNP Paribas and certain lenders dated June 7, 2006.                               
|10.25(4)  |  | Security Agreement in connection with the Credit Agreement among MD Beauty, Inc., Registrant, BNP Paribas, and certain lenders dated February 18, 2005.   
|10.26(4)  |  | Form of Term Loan Note in connection with the Credit Agreement.                                                                                           
|10.27(4)  |  | Form of Revolving Note in connection with the Credit Agreement.                                                                                           
|10.28(4)  |  | Term Loan Agreement among MD Beauty, Inc., Registrant, BNP Paribas, and certain lenders dated February 18, 2005.                                          
|10.29(4)  |  | First Amendment to Term Loan Agreement among MD Beauty, Inc., Registrant, BNP Paribas and certain lenders dated July 21, 2005.                            
|10.30(4)  |  | Second Amendment to Term Loan Agreement among MD Beauty, Inc., Registrant, BNP Paribas and certain lenders dated October 7, 2005.                         
|10.31(4)  |  | Third Amendment to Term Loan Agreement among MD Beauty, Inc., Registrant, BNP Paribas and certain lenders dated March 17, 2006.                           
|10.32(4)  |  | Fourth Amendment to Term Loan Agreement among MD Beauty, Inc., Registrant, BNP Paribas and certain lenders dated June 7, 2006.                            
|10.33(4)  |  | Security Agreement in connection with the Term Loan Agreement among MD Beauty, Inc., Registrant, BNP Paribas, and certain lenders dated February 18, 2005.

107

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|10.34(4)  |  | Form of Term Loan Note in connection with Term Loan Agreement.                                                                                                                                     
|--------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.35(4)  |  | Note Purchase Agreement among the Registrant and certain purchasers dated June 7, 2006, including Form of Notes.                                                                                   
|10.36(4)  |  | Lease between MD Beauty, Inc. and Davis Forbes Partners, L.P. dated May 26, 2005.                                                                                                                  
|10.37(4)  |  | Office Lease between MD Beauty, Inc. and ECI Stevenson LLC dated February 23, 2005, and First Amendment to Office Lease, dated March 6, 2006.                                                      
|10.38(6) |  | License Agreement between MD Beauty, Inc. and TriStrata Technology, Inc. dated July 15, 1999.                                                                                                      
|10.39(6) |  | Amendment to License Agreement between MD Beauty, Inc. and TriStrata Technology, Inc. dated March 7, 2003.                                                                                         
|10.40(6)  |  | Amendment to License Agreement between MD Beauty, Inc. and TriStrata Technology, Inc. dated October 2, 2003.                                                                                       
|10.41(6) |  | Purchase and Sale Agreement among MD Formulations, Inc., Allergan, Inc. and Allergan Sales, Inc. dated May 14, 1999.                                                                               
|10.42(4) |  | Third Amendment to Amended and Restated Agreement between Bare Escentuals Beauty, Inc. and QVC, Inc. dated September 5, 2006.                                                                      
|10.43(3)  |  | Fifth Amendment to Credit Agreement among Bare Escentuals Beauty, Inc., formerly known as MD Beauty, Inc., Registrant, BNP Paribas and certain lenders dated September 11, 2006.                   
|10.44(3)  |  | Name and Likeness License Agreement between the Registrant and Leslie A. Blodgett dated September 22, 2006.                                                                                        
|10.45(7)  |  | Sixth Amendment to Credit Agreement among Bare Escentuals Beauty, Inc., the Registrant, BNP Paribas and the lenders party thereto dated December 20, 2006.                                         
|10.46(7)  |  | Amended and Restated Credit Agreement among Bare Escentuals Beauty, Inc., the Registrant., BNP Paribas and the lenders party thereto dated December 20, 2006.                                      
|10.47(8)  |  | Second Amendment to Office Lease between Bare Escentuals Beauty, Inc., formerly known as MD Beauty, Inc. and Forward One, LLC, successor-in-interest to ECI Stevenson, LLC dated December 19, 2006.
|10.48(8)  |  | Lease between Bare Escentuals Beauty, Inc. and Centerpoint II, LLC dated January 31, 2007.                                                                                                         
|10.49(8)  |  | Guaranty by Registrant dated January 31, 2007 to Lease between Bare Escentuals Beauty, Inc. and Centerpoint II LLC.                                                                                
|10.50#(9) |  | Employment Offer Letter to James Taschetta dated August 23, 2007.                                                                                                                                  
|10.51#(9) |  | Amendment to Employment Offer Letter to James Taschetta dated August 23, 2007.                                                                                                                     
|10.52     |  | Master Services Agreement between Registrant and DataPak Services Corporation dated January 1, 2008                                                                                                
|21.1      |  | List of Subsidiaries.                                                                                                                                                                              
|23.1      |  | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.                                                                                                                       

108

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|31.1  |  | Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934.                                            
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.2  |  | Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934.                                            
|32.1* |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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109

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this on Annual Report on
Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized.

|                         |  | BARE ESCENTUALS, INC.
|------------------------ |  | ---------------------
|Dated: February 28, 2008 |  | By:                  

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

|Name                                    |  | Title                                                                                                                      |  | Date             
|--------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | -----------------
|                                        |  |                                                                                                                            |  |                  
|/s/LESLIE A. BLODGETTLeslie A. Blodgett |  | Chief Executive Officer and Director
(Principal Executive Officer)                                                         |  | February 28, 2008
|/s/MYLES B. MCCORMICKMyles B. McCormick |  | Executive Vice President, Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer) |  | February 28, 2008
|/s/ROSS M. JONESRoss M. Jones           |  | Director                                                                                                                   |  | February 28, 2008
|/s/BRADLEY M. BLOOMBradley M. Bloom     |  | Director                                                                                                                   |  | February 28, 2008
|/s/JOHN C. HANSENJohn C. Hansen         |  | Director                                                                                                                   |  | February 28, 2008
|/s/MICHAEL J. JOHNMichael J. John       |  | Director                                                                                                                   |  | February 28, 2008
|/s/KRISTINA M. LESLIEKristina M. Leslie |  | Director                                                                                                                   |  | February 28, 2008
|/s/LEA ANNE OTTINGERLea Anne Ottinger   |  | Director                                                                                                                   |  | February 28, 2008
|/s/KAREN M. ROSEKaren M. Rose           |  | Director                                                                                                                   |  | February 28, 2008
|/s/GLEN T. SENKGlen T. Senk             |  | Director                                                                                                                   |  | February 28, 2008

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