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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 28, 2009

Or



| ̈ | 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: 001-33048





Bare Escentuals, Inc.

(Exact
name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 20-1062857                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

71 Stevenson Street, 22ndFloor

San Francisco, CA 94105

(Address of principal executive offices with zip code)

(415) 489-5000

(Registrants telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)





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

Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):





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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    YES   ̈    NO  x

At July 29, 2009, the number of shares outstanding of the registrants common stock, $0.001 par value, was 91,995,001.









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##### Table of Contents

Table of Contents

Bare Escentuals, Inc.

INDEX



|                             |  |                                                                                                        |  |   
|---------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | --
|PART IFINANCIAL INFORMATION |  | 3                                                                                                     
|                             |  |                                                                                                       
|Item 1                       |  | Financial Statements (unaudited):                                                                      |  | 3 
|                             |  | Condensed Consolidated Balance SheetsJune 28, 2009 and December 28, 2008                              |  | 3 
|                             |  | Condensed Consolidated Statements of IncomeThree and Six Months Ended June 28, 2009 and June 29, 2008 |  | 4 
|                             |  | Condensed Consolidated Statements of Cash FlowsSix Months Ended June 28, 2009 and June 29, 2008       |  | 5 
|                             |  | Notes to Condensed Consolidated Financial Statements                                                   |  | 6 
|Item 2                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                  |  | 21
|Item 3                       |  | Quantitative and Qualitative Disclosures About Market Risk                                             |  | 31
|Item 4                       |  | Controls and Procedures                                                                                |  | 31
|                             | 
|PART IIOTHER INFORMATION    |  | 32                                                                                                    
|                             |  |                                                                                                       
|Item 1                       |  | Legal Proceedings                                                                                      |  | 32
|Item 1A                      |  | Risk Factors                                                                                           |  | 32
|Item 2                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                            |  | 33
|Item 3                       |  | Defaults Upon Senior Securities                                                                        |  | 33
|Item 4                       |  | Submission of Matters to a Vote of Security Holders                                                    |  | 33
|Item 5                       |  | Other Information                                                                                      |  | 33
|Item 6                       |  | Exhibits                                                                                               |  | 34
|Signatures                   |  | 35                                                                                                    



2



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##### Table of Contents

PART IFINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

BARE ESCENTUALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)



|                                                                                                                                                                |  |              |          |   |                     |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ------------------- | - | -------- | -
|                                                                                                                                                                |  | June 28,2009 |          |   | December 28,2008(a) |  
|                                                                                                                                                                |  | (unaudited)  |          |   |                     |  
|ASSETS                                                                                                                                                          |  |              |          |   |                     |   |          |  
|Current assets:                                                                                                                                                 |  |              |          |   |                     |   |          |  
|Cash and cash equivalents                                                                                                                                       |  | $            | 97,499   |   |                     | $ | 47,974   |  
|Inventories                                                                                                                                                     |  |              | 75,032   |   |                     |   | 92,576   |  
|Accounts receivable, net of allowances of $4,965 and $8,930 at June 28, 2009 and December 28, 2008,
respectively                                                |  |              | 29,090   |   |                     |   | 42,304   |  
|Prepaid expenses and other current assets                                                                                                                       |  |              | 11,867   |   |                     |   | 10,302   |  
|Prepaid income taxes                                                                                                                                            |  |              | 2,541    |   |                     |   |         |  
|Deferred tax assets, net                                                                                                                                        |  |              | 10,011   |   |                     |   | 10,011   |  
|                                                                                                                                                                |  |              |          |   |                     |   |          |  
|Total current assets                                                                                                                                            |  |              | 226,040  |   |                     |   | 203,167  |  
|Property and equipment, net                                                                                                                                     |  |              | 78,883   |   |                     |   | 71,157   |  
|Goodwill                                                                                                                                                        |  |              | 15,409   |   |                     |   | 15,409   |  
|Intangible assets, net                                                                                                                                          |  |              | 5,460    |   |                     |   | 6,943    |  
|Other assets                                                                                                                                                    |  |              | 3,112    |   |                     |   | 3,105    |  
|                                                                                                                                                                |  |              |          |   |                     |   |          |  
|Total assets                                                                                                                                                    |  | $            | 328,904  |   |                     | $ | 299,781  |  
|                                                                                                                                                                |  |              |          |   |                     |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                  |  |              |          |   |                     |   |          |  
|Current liabilities:                                                                                                                                            |  |              |          |   |                     |   |          |  
|Current portion of long-term debt                                                                                                                               |  | $            | 17,216   |   |                     | $ | 17,216   |  
|Accounts payable                                                                                                                                                |  |              | 12,286   |   |                     |   | 16,534   |  
|Accrued liabilities                                                                                                                                             |  |              | 22,263   |   |                     |   | 20,260   |  
|Income taxes payable                                                                                                                                            |  |              |         |   |                     |   | 3,053    |  
|                                                                                                                                                                |  |              |          |   |                     |   |          |  
|Total current liabilities                                                                                                                                       |  |              | 51,765   |   |                     |   | 57,063   |  
|Long-term debt, less current portion                                                                                                                            |  |              | 216,921  |   |                     |   | 223,808  |  
|Other liabilities                                                                                                                                               |  |              | 18,779   |   |                     |   | 19,218   |  
|Commitments and contingencies                                                                                                                                   |  |              |          |   |                     |   |          |  
|Stockholders equity (deficit):                                                                                                                                 |  |              |          |   |                     |   |          |  
|Preferred stock; $0.001 par value; 10,000 shares authorized; zero shares issued and outstanding                                                                 |  |              |         |   |                     |   |         |  
|Common stock; $0.001 par value; 200,000 shares authorized; 91,995 and 91,608 shares issued and outstanding at June 28, 2009 and
December 28, 2008, respectively |  |              | 92       |   |                     |   | 92       |  
|Additional paid-in capital                                                                                                                                      |  |              | 428,885  |   |                     |   | 425,352  |  
|Accumulated other comprehensive loss                                                                                                                            |  |              | (2,392   | ) |                     |   | (4,155   | )
|Accumulated deficit                                                                                                                                             |  |              | (385,146 | ) |                     |   | (421,597 | )
|                                                                                                                                                                |  |              |          |   |                     |   |          |  
|Total stockholders equity (deficit)                                                                                                                            |  |              | 41,439   |   |                     |   | (308     | )
|                                                                                                                                                                |  |              |          |   |                     |   |          |  
|Total liabilities and stockholders equity (deficit)                                                                                                            |  | $            | 328,904  |   |                     | $ | 299,781  |  
|                                                                                                                                                                |  |              |          |   |                     |   |          |  



|(a) | Condensed consolidated balance sheet as of December 28, 2008 has been derived from the audited consolidated financial statements as of that date.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes.



3



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BARE ESCENTUALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per
share data)



|                                                                               |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ------------------ | ------- | - | ---------------- | - | ------- | ------------ |  | - | ------------ | - |  | - | ------- | -
|                                                                               |  | Three months ended |         |   | Six months ended |  
|                                                                               |  | (unaudited)        |         |   | (unaudited)      |  
|                                                                               |  | June 28,2009       |         |   | June 29,2008     |   |         | June 28,2009 |  |   | June 29,2008 |  
|Sales, net                                                                     |  | $                  | 132,467 |   |                  | $ | 138,518 |              |  | $ | 256,720      |   |  | $ | 278,876 |  
|Cost of goods sold                                                             |  |                    | 35,533  |   |                  |   | 39,017  |              |  |   | 68,870       |   |  |   | 77,674  |  
|                                                                               |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Gross profit                                                                   |  |                    | 96,934  |   |                  |   | 99,501  |              |  |   | 187,850      |   |  |   | 201,202 |  
|Expenses:                                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Selling, general and administrative                                            |  |                    | 56,165  |   |                  |   | 50,691  |              |  |   | 110,227      |   |  |   | 101,155 |  
|Depreciation and amortization, relating to selling, general and administrative |  |                    | 4,247   |   |                  |   | 2,821   |              |  |   | 8,341        |   |  |   | 5,442   |  
|Stock-based compensation, relating to selling, general and administrative      |  |                    | 1,543   |   |                  |   | 968     |              |  |   | 3,014        |   |  |   | 2,880   |  
|                                                                               |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Operating income                                                               |  |                    | 34,979  |   |                  |   | 45,021  |              |  |   | 66,268       |   |  |   | 91,725  |  
|Interest expense                                                               |  |                    | (2,825  | ) |                  |   | (4,280  | )            |  |   | (5,614       | ) |  |   | (8,924  | )
|Other income (expense), net                                                    |  |                    | 599     |   |                  |   | (40     | )            |  |   | 161          |   |  |   | 667     |  
|                                                                               |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Income before provision for income taxes                                       |  |                    | 32,753  |   |                  |   | 40,701  |              |  |   | 60,815       |   |  |   | 83,468  |  
|Provision for income taxes                                                     |  |                    | 12,991  |   |                  |   | 16,009  |              |  |   | 24,364       |   |  |   | 32,993  |  
|                                                                               |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Net income                                                                     |  | $                  | 19,762  |   |                  | $ | 24,692  |              |  | $ | 36,451       |   |  | $ | 50,475  |  
|                                                                               |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Net income per share:                                                          |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Basic                                                                          |  | $                  | 0.22    |   |                  | $ | 0.27    |              |  | $ | 0.40         |   |  | $ | 0.55    |  
|                                                                               |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Diluted                                                                        |  | $                  | 0.21    |   |                  | $ | 0.26    |              |  | $ | 0.39         |   |  | $ | 0.54    |  
|                                                                               |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Weighted-average shares used in per share calculations:                        |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Basic                                                                          |  |                    | 91,844  |   |                  |   | 91,377  |              |  |   | 91,766       |   |  |   | 91,319  |  
|                                                                               |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Diluted                                                                        |  |                    | 93,371  |   |                  |   | 93,363  |              |  |   | 93,124       |   |  |   | 93,320  |  
|                                                                               |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  

See accompanying notes.



4



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BARE ESCENTUALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                  |  |                  |         |   |              |   |         |  
|--------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | -
|                                                                                  |  | Six months ended |        
|                                                                                  |  | June 28,2009     |         |   | June 29,2008 |  
|                                                                                  |  | (unaudited)      |        
|Operating activities                                                              |  |                  |         |   |              |   |         |  
|Net income                                                                        |  | $                | 36,451  |   |              | $ | 50,475  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                  |         |   |              |   |         |  
|Depreciation of property and equipment                                            |  |                  | 6,807   |   |              |   | 3,958   |  
|Amortization of intangible assets                                                 |  |                  | 1,483   |   |              |   | 1,484   |  
|Amortization of debt issuance costs                                               |  |                  | 97      |   |              |   | 123     |  
|Stock-based compensation                                                          |  |                  | 3,014   |   |              |   | 2,880   |  
|Excess tax benefit from stock option exercises                                    |  |                  | (158    | ) |              |   | (2,474  | )
|Deferred income tax benefit                                                       |  |                  | (729    | ) |              |   | (866    | )
|Loss on disposal of property and equipment                                        |  |                  | 484     |   |              |   |        |  
|Changes in assets and liabilities:                                                |  |                  |         |   |              |   |         |  
|Inventories                                                                       |  |                  | 17,886  |   |              |   | (21,826 | )
|Accounts receivable                                                               |  |                  | 13,584  |   |              |   | (1,897  | )
|Income taxes                                                                      |  |                  | (5,335  | ) |              |   | (6,286  | )
|Prepaid expenses and other current assets                                         |  |                  | (1,441  | ) |              |   | (570    | )
|Other assets                                                                      |  |                  | (85     | ) |              |   | (151    | )
|Accounts payable and accrued liabilities                                          |  |                  | (2,950  | ) |              |   | 2,381   |  
|Other liabilities                                                                 |  |                  | 1,465   |   |              |   | 680     |  
|                                                                                  |  |                  |         |   |              |   |         |  
|Net cash provided by operating activities                                         |  |                  | 70,573  |   |              |   | 27,911  |  
|Investing activities                                                              |  |                  |         |   |              |   |         |  
|Purchase of property and equipment                                                |  |                  | (14,769 | ) |              |   | (16,744 | )
|Proceeds from sale of property and equipment                                      |  |                  |        |   |              |   | 1,299   |  
|                                                                                  |  |                  |         |   |              |   |         |  
|Net cash used in investing activities                                             |  |                  | (14,769 | ) |              |   | (15,445 | )
|Financing activities                                                              |  |                  |         |   |              |   |         |  
|Repayments on First Lien Term Loan                                                |  |                  | (6,887  | ) |              |   | (17,023 | )
|Excess tax benefit from stock option exercises                                    |  |                  | 158     |   |              |   | 2,474   |  
|Exercise of stock options                                                         |  |                  | 228     |   |              |   | 1,107   |  
|                                                                                  |  |                  |         |   |              |   |         |  
|Net cash used in financing activities                                             |  |                  | (6,501  | ) |              |   | (13,442 | )
|Effect of foreign currency exchange rate changes on cash                          |  |                  | 222     |   |              |   | (6      | )
|                                                                                  |  |                  |         |   |              |   |         |  
|Net increase (decrease) in cash and cash equivalents                              |  |                  | 49,525  |   |              |   | (982    | )
|Cash and cash equivalents, beginning of period                                    |  |                  | 47,974  |   |              |   | 32,117  |  
|                                                                                  |  |                  |         |   |              |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                | 97,499  |   |              | $ | 31,135  |  
|                                                                                  |  |                  |         |   |              |   |         |  
|Supplemental disclosure of cash flow information                                  |  |                  |         |   |              |   |         |  
|Cash paid for interest                                                            |  | $                | 5,490   |   |              | $ | 7,469   |  
|                                                                                  |  |                  |         |   |              |   |         |  
|Cash paid for income taxes                                                        |  | $                | 30,408  |   |              | $ | 38,273  |  
|                                                                                  |  |                  |         |   |              |   |         |  

See accompanying notes.



5



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BARE ESCENTUALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. 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 the bareMinerals,
RareMinerals, Buxom and md formulations brands. The bareMinerals cosmetics, 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 utilizing traditional retail distribution channels consisting of premium wholesale customers including Sephora, Ulta and select department stores; company-owned boutiques; and spas and salons; as well
as direct to consumer media distribution channels consisting of home shopping television on QVC, infomercials, and online shopping. The Company also sells products internationally in the United Kingdom, Japan, France, Germany and Canada as well as
in smaller international markets via distributors.

2. Summary of Significant Accounting Policies

The Companys significant accounting policies are disclosed in Note 2 in the Companys Form 10-K for the year ended December 28, 2008.
The Companys significant accounting policies have not changed significantly as of June 28, 2009 with the exception of the adoption of the new accounting pronouncements as noted below.

Unaudited Interim Financial Information

The
accompanying condensed consolidated balance sheet as of June 28, 2009, the condensed consolidated statements of income for the three and six months ended June 28, 2009 and June 29, 2008, and the condensed consolidated statements of
cash flows for the six months ended June 28, 2009 and June 29, 2008, are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for
interim financial information, Form 10-Q and Article 10 of Regulation S-X. In the opinion of the Companys management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the
annual consolidated financial statements and include all adjustments of a normal recurring nature necessary for the fair presentation of the Companys financial position as of June 28, 2009, its results of operations for the three and six
months ended June 28, 2009 and June 29, 2008, and its cash flows for the six months ended June 28, 2009 and June 29, 2008. The results for the interim periods are not necessarily indicative of the results to be expected for any
future period or for the fiscal year ending January 3, 2010. We have evaluated subsequent events through August 5, 2009, which is the date these financial statements were issued (Note 18).

These unaudited interim condensed consolidated financial statements should be read in conjunction with the Companys consolidated financial
statements and related notes included in the Companys 2008 Annual Report on Form 10-K filed with the SEC on February 26, 2009.

Fiscal Quarter

The Companys fiscal quarters end on the Sunday closest to March 31, June 30,
September 30 and December 31. The three months ended June 28, 2009 and June 29, 2008 each contained 13 weeks. The six months ended June 28, 2009 and June 29, 2008 each contained 26 weeks.

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 financial institutions with high credit standing and as such, management believes that minimal credit risk exists with respect to these balances.

Sales generated through credit card purchases were approximately 43.3% and 45.6% of total net sales for the three and six months ended June 28, 2009, respectively, and approximately 43.2% and 44.4% of total net
sales for the three and six months ended June 29, 2008, respectively. The Company uses a third party to collect its credit card sales 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 third-party resellers not paying by credit card. 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.



6



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##### Table of Contents

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



|           |  |              |   |  |                  |  
|---------- |  | ------------ | - |  | ---------------- | -
|           |  | June 28,2009 |   |  | December 28,2008 |  
|Customer A |  | 28           | % |  | 15               | %
|Customer B |  | 15           | % |  | 19               | %
|Customer C |  | 17           | % |  | 39               | %

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



|           |  |                    |   |  |                  |   |  |              |   |  |              |  
|---------- |  | ------------------ | - |  | ---------------- | - |  | ------------ | - |  | ------------ | -
|           |  | Three months ended |   |  | Six months ended |  
|           |  | June 28,2009       |   |  | June 29,2008     |   |  | June 28,2009 |   |  | June 29,2008 |  
|Customer A |  | 16                 | % |  | 17               | % |  | 12           | % |  | 15           | %
|Customer B |  | 11                 | % |  | 11               | % |  | 12           | % |  | 12           | %
|Customer C |  | 13                 | % |  | 13               | % |  | 12           | % |  | 14           | %

As of June 28, 2009 and December 28, 2008, the Company had no off-balance sheet
concentrations of credit risk.

Derivative Financial Instruments

The Company accounts for derivative financial instruments in accordance with Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Certain Hedging Activities, as amended (Statement 133), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. Statement 133 also requires that all derivative instruments be recognized as either assets or liabilities on the balance sheet and that they be measured at fair value. On December 29, 2008,
the Company adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB No. 133(Statement 161), which supplements the required disclosures under Statement 133 and its
related interpretations.

Earnings per Share

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



|                                                                        |  |                    |        |                  |   |              |  |              |        |  |   |       
|----------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- | - | ------------ |  | ------------ | ------ |  | - | ------
|                                                                        |  | Three months ended |        | Six months ended
|                                                                        |  | June 28,2009       |        | June 29,2008     |   | June 28,2009 |  | June 29,2008
|Numerator:                                                              |  |                    |        |                  |   |              |  |              |        |  |   |       
|Net income                                                              |  | $                  | 19,762 |                  | $ | 24,692       |  | $            | 36,451 |  | $ | 50,475
|                                                                        |  |                    |        |                  |   |              |  |              |        |  |   |       
|Denominator:                                                            |  |                    |        |                  |   |              |  |              |        |  |   |       
|Weighted average common shares used in per share calculations  basic   |  |                    | 91,844 |                  |   | 91,377       |  |              | 91,766 |  |   | 91,319
|Add: Dilution from employee stock plans                                 |  |                    | 1,527  |                  |   | 1,986        |  |              | 1,358  |  |   | 2,001 
|                                                                        |  |                    |        |                  |   |              |  |              |        |  |   |       
|Weighted-average common shares used in per share calculations  diluted |  |                    | 93,371 |                  |   | 93,363       |  |              | 93,124 |  |   | 93,320
|                                                                        |  |                    |        |                  |   |              |  |              |        |  |   |       
|Net income per share                                                    |  |                    |        |                  |   |              |  |              |        |  |   |       
|Basic                                                                   |  | $                  | 0.22   |                  | $ | 0.27         |  | $            | 0.40   |  | $ | 0.55  
|                                                                        |  |                    |        |                  |   |              |  |              |        |  |   |       
|Diluted                                                                 |  | $                  | 0.21   |                  | $ | 0.26         |  | $            | 0.39   |  | $ | 0.54  
|                                                                        |  |                    |        |                  |   |              |  |              |        |  |   |       

For the three and six months ended June 28, 2009, options to purchase 1,241,420 and 1,699,809
shares of common stock, respectively, were excluded from the calculation of weighted average shares for diluted net income per share as their impact was anti-dilutive. For the three and six months ended June 29, 2008, options to purchase
582,900 and 495,938 shares of common stock, respectively, were excluded from the calculation of weighted average shares for diluted net income per share as their impact was anti-dilutive.

Comprehensive Income

Comprehensive income
consists of net income and other comprehensive income (loss). Other comprehensive income (loss) consists of foreign currency translation adjustments and changes in unrealized gains or losses on interest rate swap, net of tax.



7



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##### Table of Contents

Reclassifications

Certain reclassifications of prior year amounts have been made to conform to the current year presentation. In the fourth quarter of fiscal 2008, the Company changed its operating segments, and historical segment
financial information presented have been revised to reflect these new operating segments (Note 17).

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value
Measurements(Statement 157). 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. For financial assets and liabilities, the provisions of Statement 157 are effective for fiscal years beginning after November 15, 2007. In
February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which amends Statement 157 by delaying the effective date of Statement 157 to fiscal years ending after November 15,
2008 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company adopted Statement 157 on December 31, 2007 for financial assets and
financial liabilities and on December 29, 2008 for nonfinancial assets and liabilities. It did not have any material impact on the Companys results of operations or financial position (Note 14).

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations(Statement 141(R)). Statement 141(R)
significantly changed 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 adopted Statement 141(R) on December 29, 2008, as required. It did not have any material impact on the Companys results of operations or financial position.

In March 2008, the FASB issued Statement 161 which amends and expands the disclosure requirements of Statement 133 with the intent to
provide users of financial statements with an enhanced understanding of: 1) how and why an entity uses derivative instruments; 2) how derivative instruments and related hedged items are accounted for under Statement 133 and its related
interpretations; and 3) how derivative instruments and related hedged items affect an entitys financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The Company adopted Statement 161 on December 29, 2008. The adoption of Statement 161 had no financial impact on the financial position or results of operations as it is disclosure-only in nature.

In April 2009, the FASB issued FASB Staff Position SFAS 107-1 and Accounting Principles Board (APB) Opinion No. 28-1, Interim
Disclosures about Fair Value of Financial Instruments (SFAS 107-1 and APB 28-1), which requires quarterly disclosure of information about fair value of financial instruments within the scope of Statement 107, Disclosures about
Fair Values of Financial Instruments. SFAS 107-1 and APB 28-1 are effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. The Company adopted the
provisions of SFAS 107-1 and APB 28-1 in the second quarter of 2009. The adoption of SFAS 107-1 and APB 28-1 had no financial impact on the financial position or results of operations as it is disclosure-only in nature.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events(Statement 165). Statement 165 establishes general standards of
accounting for, and requires disclosures of, events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. Statement 165 is effective for interim or annual financial periods ending after
June 15, 2009, and should be applied prospectively. The Company adopted Statement 165 in the second quarter of 2009. It did not have any material impact on the Companys results of operations or financial position.

In June 2009, the FASB issued SFAS No. 168, FASB Accounting Standards CodificationTMand the Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS No. 162(Statement 168). Statement 168 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity
with generally accepted accounting principles. Statement 168 explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws as authoritative GAAP for SEC registrants.
Statement 168 is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. The Company will adopt Statement 168 in the third quarter of 2009, as required. The Company does not expect
Statement 168 to have a material impact on its financial position or results of operations.



8



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##### Table of Contents

3. Acquisition

On April 3, 2007, the Company completed its acquisition of U.K.-based Cosmeceuticals Limited (Cosmeceuticals), which distributed Bare Escentuals bareMinerals, md formulations and
MD Forte brands primarily to spas and salons and QVC U.K. The acquired entity has been renamed Bare Escentuals U.K. 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. Pro forma results of operations have not been presented because the effect of the acquisition was not material.

The total purchase price of $23.1 million was allocated as follows: $12.6 million to goodwill included as corporate assets (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 most significant factor that resulted in the recognition of goodwill in the purchase price allocation was the ability to
expand on an accelerated basis into trade areas beyond the acquired distribution rights.

During the six months ended June 29, 2008,
the Company sold $1.3 million of the net tangible assets acquired to a third party for proceeds of $1.3 million. There was no gain or loss recorded in this transaction.

4. Comprehensive Income

The components of comprehensive income were as follows (in thousands):



|                                                         |  |                    |        |                  |   |              |  |              |        |  |   |        |  
|-------------------------------------------------------- |  | ------------------ | ------ | ---------------- | - | ------------ |  | ------------ | ------ |  | - | ------ | -
|                                                         |  | Three months ended |        | Six months ended |  
|                                                         |  | June 28,2009       |        | June 29,2008     |   | June 28,2009 |  | June 29,2008 |       
|Net income                                               |  | $                  | 19,762 |                  | $ | 24,692       |  | $            | 36,451 |  | $ | 50,475 |  
|Foreign currency translation adjustments, net of tax     |  |                    | 1,149  |                  |   | 55           |  |              | 565    |  |   | (6     | )
|Unrealized gain (loss) on interest rate swap, net of tax |  |                    | 659    |                  |   | 1,277        |  |              | 1,198  |  |   | (191   | )
|                                                         |  |                    |        |                  |   |              |  |              |        |  |   |        |  
|Comprehensive income                                     |  | $                  | 21,570 |                  | $ | 26,024       |  | $            | 38,214 |  | $ | 50,278 |  
|                                                         |  |                    |        |                  |   |              |  |              |        |  |   |        |  

The components of accumulated other comprehensive loss were as follows (in thousands):



|                                                     |  |              |        |   |                  |   |        |  
|---------------------------------------------------- |  | ------------ | ------ | - | ---------------- | - | ------ | -
|                                                     |  | June 28,2009 |        |   | December 28,2008 |  
|Foreign currency translation adjustments, net of tax |  | $            | (1,927 | ) |                  | $ | (2,492 | )
|Unrealized loss on interest rate swap, net of tax    |  |              | (465   | ) |                  |   | (1,663 | )
|                                                     |  |              |        |   |                  |   |        |  
|Total accumulated other comprehensive loss           |  | $            | (2,392 | ) |                  | $ | (4,155 | )
|                                                     |  |              |        |   |                  |   |        |  

5. Inventories

Inventories consisted of the following (in thousands):



|                |  |              |        |                  |   |       
|--------------- |  | ------------ | ------ | ---------------- | - | ------
|                |  | June 28,2009 |        | December 28,2008
|Work in process |  | $            | 12,367 |                  | $ | 14,058
|Finished goods  |  |              | 62,665 |                  |   | 78,518
|                |  |              |        |                  |   |       
|                |  | $            | 75,032 |                  | $ | 92,576
|                |  |              |        |                  |   |       



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##### Table of Contents

6. Property and Equipment, Net

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



|                            |  |              |         |   |                  |   |         |  
|--------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                            |  | June 28,2009 |         |   | December 28,2008 |  
|Furniture and equipment     |  | $            | 19,446  |   |                  | $ | 16,749  |  
|Computers and software      |  |              | 26,940  |   |                  |   | 22,347  |  
|Leasehold improvements      |  |              | 52,292  |   |                  |   | 45,959  |  
|                            |  |              |         |   |                  |   |         |  
|                            |  |              | 98,678  |   |                  |   | 85,055  |  
|Accumulated depreciation    |  |              | (23,316 | ) |                  |   | (17,285 | )
|                            |  |              |         |   |                  |   |         |  
|                            |  |              | 75,362  |   |                  |   | 67,770  |  
|Construction-in-progress    |  |              | 3,521   |   |                  |   | 3,387   |  
|                            |  |              |         |   |                  |   |         |  
|Property and equipment, net |  | $            | 78,883  |   |                  | $ | 71,157  |  
|                            |  |              |         |   |                  |   |         |  



10



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7. Intangible Assets, Net

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



|                               |  |              |        |   |                  |   |        |  
|------------------------------ |  | ------------ | ------ | - | ---------------- | - | ------ | -
|                               |  | June 28,2009 |        |   | December 28,2008 |  
|Customer relationships         |  | $            | 8,000  |   |                  | $ | 8,000  |  
|Trademarks                     |  |              | 3,233  |   |                  |   | 3,233  |  
|Domestic customer base         |  |              | 939    |   |                  |   | 939    |  
|International distributor base |  |              | 820    |   |                  |   | 820    |  
|Non-compete agreements         |  |              | 900    |   |                  |   | 900    |  
|                               |  |              |        |   |                  |   |        |  
|                               |  |              | 13,892 |   |                  |   | 13,892 |  
|Accumulated amortization       |  |              | (8,432 | ) |                  |   | (6,949 | )
|                               |  |              |        |   |                  |   |        |  
|Intangible assets, net         |  | $            | 5,460  |   |                  | $ | 6,943  |  
|                               |  |              |        |   |                  |   |        |  

8. Other Assets

Other assets consisted of the following (in thousands):



|                                                                                                                           |  |              |       |                  |   |      
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----- | ---------------- | - | -----
|                                                                                                                           |  | June 28,2009 |       | December 28,2008
|Debt issuance costs, net of accumulated amortization of $667 and $570 at June 28, 2009 and December 28, 2008,
respectively |  | $            | 451   |                  | $ | 548  
|Other assets                                                                                                               |  |              | 2,661 |                  |   | 2,557
|                                                                                                                           |  |              |       |                  |   |      
|                                                                                                                           |  | $            | 3,112 |                  | $ | 3,105
|                                                                                                                           |  |              |       |                  |   |      

9. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):



|                                     |  |              |        |                  |   |       
|------------------------------------ |  | ------------ | ------ | ---------------- | - | ------
|                                     |  | June 28,2009 |        | December 28,2008
|Employee compensation and benefits   |  | $            | 9,888  |                  | $ | 6,793 
|Gift cards and customer liabilities  |  |              | 2,350  |                  |   | 2,817 
|Royalties                            |  |              | 1,683  |                  |   | 1,646 
|Sales taxes and local business taxes |  |              | 1,807  |                  |   | 1,983 
|Interest                             |  |              | 233    |                  |   | 311   
|Other                                |  |              | 6,302  |                  |   | 6,710 
|                                     |  |              |        |                  |   |       
|                                     |  | $            | 22,263 |                  | $ | 20,260
|                                     |  |              |        |                  |   |       

10. Revolving Lines of Credit

At June 28, 2009, $24,680,000 was available under our revolving line of credit (the Revolver) and $320,000 was outstanding in letters of credit. Borrowings under the Revolver bear interest at a rate
equal to, at the Companys option, either 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 debt rating (2.25% plus LIBOR or
1.25% plus lenders base rate; actual rate of 2.57% at June 28, 2009 and 2.76% at December 28, 2008). The Company is also required to pay commitment fees of 0.5% per annum on any unused portions of the facility.



11



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##### Table of Contents

11. Long-Term Debt

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



|                                             |  |              |         |   |                  |   |         |  
|-------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                             |  | June 28,2009 |         |   | December 28,2008 |  
|First Lien Term Loan                         |  | $            | 234,137 |   |                  | $ | 241,024 |  
|Less current portion                         |  |              | (17,216 | ) |                  |   | (17,216 | )
|                                             |  |              |         |   |                  |   |         |  
|Total long-term debt, net of current portion |  | $            | 216,921 |   |                  | $ | 223,808 |  
|                                             |  |              |         |   |                  |   |         |  

First Lien Term Loan

The First Lien Term Loan has an original term of seven years expiring on February 18, 2012 and bears 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 June 28, 2009 and December 28, 2008, the interest rate on the First Lien Term Loan was accruing at 2.57% and 2.76%, respectively (without giving
effect to the interest rate swap agreement).

Borrowings under the Revolver (Note 10) and the First Lien Term Loan 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 and 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 June 28, 2009, the Company was in compliance with its financial and nonfinancial covenants.

Scheduled Maturities of Long-Term Debt

At June 28, 2009, future scheduled principal payments on
long-term debt were as follows (in thousands):



|                                             |  |   |        
|-------------------------------------------- |  | - | -------
|Year ending:                                 |  |   |        
|Remainder of the year ending January 3, 2010 |  | $ | 10,330 
|January 2, 2011                              |  |   | 13,773 
|January 1, 2012                              |  |   | 158,386
|December 30, 2012                            |  |   | 51,648 
|                                             |  |   |        
|                                             |  | $ | 234,137
|                                             |  |   |        

12. Derivative Financial Instruments

On December 29, 2008, the Company adopted Statement 161. 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 June 28, 2009, the Company had borrowings of $234.1 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 June 28, 2009, the interest rate on the First Lien Term Loan was accruing at 2.57% (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, unless the Company satisfies specified
coverage ratio tests. For the three and six months ended June 28, 2009, 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 had an initial notional
amount of $200 million which declined 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. dollar LIBOR. As a result of the interest rate swap transaction, 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 transaction as to the scheduled payments are guaranteed and secured on the same
basis as is its obligations under the First Lien Credit Agreement.



12



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##### Table of Contents

The following table summarizes the fair value and presentation within the unaudited condensed
consolidated balance sheets for derivatives designated as hedging instruments under Statement 133 (in thousands):



|                   |  |                      |  |                  |     |                      |                   |           |   |      
|------------------ |  | -------------------- |  | ---------------- | --- | -------------------- | ----------------- | --------- | - | -----
|                   |  | Liability Derivative
|                   |  | June 28,2009         |  | December 28,2008
|                   |  | BalanceSheetLocation |  | FairValue        |     | BalanceSheetLocation |                   | FairValue
|Interest rate swap |  | Other liabilities    |  | $                | 770 |                      | Other liabilities |           | $ | 2,752
|                   |  |                      |  |                  |     |                      |                   |           |   |      

The following table presents the impact of derivative instruments and their location within the
unaudited condensed consolidated statements of income and accumulated other comprehensive income (AOCI) (in thousands):

Derivatives in Statement 133
Cash Flow Hedging Relationships



|                               |  |                                                                          |        |   |                                                                            |   |                                                                              |              |  |              |   |              |   |              |  |   |   |  |   |  
|------------------------------ |  | ------------------------------------------------------------------------ | ------ | - | -------------------------------------------------------------------------- | - | ---------------------------------------------------------------------------- | ------------ |  | ------------ | - | ------------ | - | ------------ |  | - | - |  | - | -
|                               |  | Amount of (Gain) LossRecognized in AOCI onDerivatives (EffectivePortion) |        |   | Amount of (Gain) LossReclassified from AOCI intoIncome (Effective Portion) |   | Amount of (Gain) LossRecognized in Income onDerivatives (IneffectivePortion)
|                               |  | Three months ended                                                       |        |   | Three months ended                                                         |   | Three months ended                                                          
|                               |  | June 28,2009                                                             |        |   | June 29,2008                                                               |   |                                                                              | June 28,2009 |  | June 29,2008 |   | June 28,2009 |   | June 29,2008
|Interest rate swap, net of tax |  | $                                                                        | (659   | ) |                                                                            | $ | (1,277                                                                       | )            |  | $            |  |              | $ |             |  | $ |  |  | $ | 
|                               |  |                                                                          |        |   |                                                                            |   |                                                                              |              |  |              |   |              |   |              |  |   |   |  |   |  
|                               |  |                                                                          |       
|                               |  | Amount of (Gain) LossRecognized in AOCI onDerivatives (EffectivePortion) |        |   | Amount of (Gain) LossReclassified from AOCI intoIncome (Effective Portion) |   | Amount of (Gain) LossRecognized in Income onDerivatives
(IneffectivePortion)
|                               |  | Six months ended                                                         |        |   | Six months ended                                                           |   | Six months ended                                                            
|                               |  | June 28,2009                                                             |        |   | June 29,2008                                                               |   |                                                                              | June 28,2009 |  | June 29,2008 |   | June 28,2009 |   | June 29,2008
|Interest rate swap, net of tax |  | $                                                                        | (1,198 | ) |                                                                            | $ | 191                                                                          |              |  | $            |  |              | $ |             |  | $ |  |  | $ | 
|                               |  |                                                                          |        |   |                                                                            |   |                                                                              |              |  |              |   |              |   |              |  |   |   |  |   |  

13. Commitments and Contingencies

Lease Commitments

The Company leases retail boutiques, distribution facilities, office space
and certain office equipment under non-cancelable operating leases with various expiration dates through January 2021. 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 at June 28, 2009. 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 June 28, 2009, were as follows (in thousands):



|                                             |  |                       |         |                      |   |                         |  |   |        
|-------------------------------------------- |  | --------------------- | ------- | -------------------- | - | ----------------------- |  | - | -------
|                                             |  | MinimumRentalPayments |         | SubleaseRentalIncome |   | NetMinimumLeasePayments
|Year ending:                                 |  |                       |         |                      |   |                         |  |   |        
|Remainder of the year ending January 3, 2010 |  | $                     | 9,143   |                      | $ | 12                      |  | $ | 9,131  
|January 2, 2011                              |  |                       | 20,049  |                      |   | 25                      |  |   | 20,024 
|January 1, 2012                              |  |                       | 20,067  |                      |   | 25                      |  |   | 20,042 
|December 30, 2012                            |  |                       | 20,223  |                      |   | 1                       |  |   | 20,222 
|December 29, 2013                            |  |                       | 20,632  |                      |   |                        |  |   | 20,632 
|Thereafter                                   |  |                       | 93,276  |                      |   |                        |  |   | 93,276 
|                                             |  |                       |         |                      |   |                         |  |   |        
|                                             |  | $                     | 183,390 |                      | $ | 63                      |  | $ | 183,327
|                                             |  |                       |         |                      |   |                         |  |   |        



13



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##### Table of Contents

Many of the Companys retail boutique leases require additional contingent rents when certain sales
volumes are reached. Total rent expense was $6,546,000 and $12,630,000 for the three and six months ended June 28, 2009, respectively, and $4,982,000 and $9,403,000 for the three and six months ended June 29, 2008, respectively. Total rent
expense included contingent rents of $155,000 and $345,000 for the three and six months ended June 28, 2009, respectively, and $384,000 and $940,000 for the three and six months ended June 29, 2008, 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 inception.

As of June 28, 2009, under the terms of its corporate office lease, the Company had outstanding an irrevocable standby letter of credit of $100,000 to the lessor for the term of the lease.

Royalty Agreements

The Company is 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 three and six months ended June 28, 2009 was $150,000 and $300,000, respectively and $150,000 and $300,000, for the three and six months ended June 29, 2008, respectively.

In March 2009, the Company entered into a new agreement for the license rights to proprietary mineral extraction technology and a limited exclusive right
to purchase certain ingredients based on such technology. The license is exclusive to the Company for a specified period from the date of the agreement in certain defined fields of use and is otherwise nonexclusive for the term of the agreement.
However, the Company has the right to extend the term of the exclusivity in the defined fields of use to the full term of the agreement upon a one-time payment of a specified amount or achievement of a specified level of annual aggregate gross
revenues from the sale of licensed products in the defined fields of use. The Company is required to pay three lump-sum commencement payments over the course of the first year of the term of the agreement. In addition, on a quarterly basis during
the term of the agreement, the Company is required to pay royalties on its net revenue resulting from the sale of products containing the licensed ingredients. Such royalties are not subject to any minimum annual amounts. The new agreement has an
initial term of 10 years. As a result of the new agreement, the Companys previous agreement was terminated. The Companys expense under these agreements for the three and six months ended June 28, 2009 was $83,000 and $126,000,
respectively, and was $259,000 and $569,000 for the three and six months ended June 29, 2008.

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, results of operations or cash flows.

14. Fair Value Measurements

The Company adopted Statement 157 as of December 31, 2007 for financial assets and
liabilities and as of December 29, 2008 for nonfinancial assets and liabilities. The Company also adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement
No. 115(Statement 159), in which entities are permitted to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value option for any of its eligible financial
assets or liabilities under Statement 159.

Statement 157 established a three-tier hierarchy for fair value measurements, which prioritizes
the inputs used in measuring fair value as follows:



| |  |  | Level 1  observable inputs such as quoted prices for identical instruments in active markets.
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Level 2  inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market
data.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  unobservable inputs in which there is little or no market data, which would require the Company to develop its own assumptions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------

As of June 28, 2009 and December 28, 2008, the Company held certain assets that are required to be measured at
fair value on a recurring basis. These included the Companys interest rate swap agreement and certain investments associated with the Companys Long-Term Employee-Related Benefits Plan. The fair value of the Companys interest
rate swap agreement is determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized the interest rate swap as Level
2. The fair value of the Companys investments associated with its Long-Term Employee-Related Benefits Plan is based on third-party reported net asset values, which is primarily based on quoted market prices of the underlying assets of the
funds and have been categorized as Level 2.



14



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##### Table of Contents

The following table presents the Companys financial assets and liabilities measured at fair value
on a recurring basis as of June 28, 2009 subject to the disclosure requirements of Statement 157 (in thousands):



|                      |  |       |       |                               |   |         |  |         |       |  |   |  
|--------------------- |  | ----- | ----- | ----------------------------- | - | ------- |  | ------- | ----- |  | - | -
|                      |  |       |       | Fair Value Measurements Using
|                      |  | Total |       | Level 1                       |   | Level 2 |  | Level 3
|Other assets:         |  |       |       |                               |   |         |  |         |       |  |   |  
|Deferred compensation |  | $     | 1,276 |                               | $ |        |  | $       | 1,276 |  | $ | 
|                      |  |       |       |                               |   |         |  |         |       |  |   |  
|Other liabilities:    |  |       |       |                               |   |         |  |         |       |  |   |  
|Interest rate swap    |  | $     | 770   |                               | $ |        |  | $       | 770   |  | $ | 
|Deferred compensation |  |       | 758   |                               |   |        |  |         | 758   |  |   | 
|                      |  |       |       |                               |   |         |  |         |       |  |   |  
|Total liabilities     |  | $     | 1,528 |                               | $ |        |  | $       | 1,528 |  | $ | 
|                      |  |       |       |                               |   |         |  |         |       |  |   |  

The following table presents the Companys financial assets and liabilities measured at fair
value on a recurring basis as of December 28, 2008 subject to the disclosure requirements of Statement 157 (in thousands):



|                      |  |       |       |                               |   |         |  |         |       |  |   |  
|--------------------- |  | ----- | ----- | ----------------------------- | - | ------- |  | ------- | ----- |  | - | -
|                      |  |       |       | Fair Value Measurements Using
|                      |  | Total |       | Level 1                       |   | Level 2 |  | Level 3
|Other assets:         |  |       |       |                               |   |         |  |         |       |  |   |  
|Deferred compensation |  | $     | 1,232 |                               | $ |        |  | $       | 1,232 |  | $ | 
|                      |  |       |       |                               |   |         |  |         |       |  |   |  
|Other liabilities:    |  |       |       |                               |   |         |  |         |       |  |   |  
|Interest rate swap    |  | $     | 2,752 |                               | $ |        |  | $       | 2,752 |  | $ | 
|Deferred compensation |  |       | 886   |                               |   |        |  |         | 886   |  |   | 
|                      |  |       |       |                               |   |         |  |         |       |  |   |  
|Total liabilities     |  | $     | 3,638 |                               | $ |        |  | $       | 3,638 |  | $ | 
|                      |  |       |       |                               |   |         |  |         |       |  |   |  

15. Income Taxes

As of June 28, 2009, the total amount of net unrecognized tax benefits was $2,829,000. This amount includes $260,000 of net unrecognized tax benefits that, if recognized, would affect the effective tax rate. The
Company accrues interest related to unrecognized tax benefits in its provision for income taxes. As of June 28, 2009, the Company had approximately $365,000 of accrued interest, net of tax, related to uncertain tax positions.

The Company anticipates that it is reasonably possible that the gross amount of unrecognized tax benefits balance may change by a range of zero to
$250,000 in the next twelve months as a result of the settlement of certain tax audits and expiration of applicable statutes of limitation in certain jurisdictions.

The Company files income tax returns in the United States and in various states, local and foreign jurisdictions. The tax years subsequent to 2003 remain open to examination by the major taxing jurisdictions in the
United States.

16. Stock-Based Employee Compensation Plans

As of June 28, 2009, the Company had reserved 8,957,886 shares of common stock for future issuance.

2004 Equity
Incentive Plan

On June 10, 2004, the board of directors adopted the 2004 Equity Incentive Plan (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 over a period of five years from the date of grant and have a maximum term of
ten years.

In conjunction with the adoption of the 2006 Equity Incentive Plan in September 2006, no additional options are permitted
to be granted under the 2004 Plan. In addition, any shares subject to outstanding options cancelled under the 2004 Plan became available to grant under the 2006 Equity Incentive Plan.



15



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##### Table of Contents

A summary of activity under the 2004 Plan is set forth below:



|                             |  |                                            |   |  |                     |   |  |                               |     
|---------------------------- |  | ------------------------------------------ | - |  | ------------------- | - |  | ----------------------------- | ----
|                             |  |                                            |   |  | Options Outstanding
|                             |  | Shares Subjectto OptionsAvailablefor Grant |   |  | Number ofShares     |   |  | Weighted-AverageExercisePrice
|Balance at December 28, 2008 |  |                                           |   |  | 3,550,729           |   |  | $                             | 2.37
|Exercised                    |  |                                           |   |  | (262,377            | ) |  |                               | 0.87
|Canceled                     |  | 70,386                                     |   |  | (70,386             | ) |  |                               | 5.21
|Rolled over to 2006 Plan     |  | (70,386                                    | ) |  |                    |   |  |                               |    
|                             |  |                                            |   |  |                     |   |  |                               |     
|Balance at June 28, 2009     |  |                                           |   |  | 3,217,966           |   |  | $                             | 2.42
|                             |  |                                            |   |  |                     |   |  |                               |     

At June 28, 2009, there were total outstanding vested options to purchase 1,583,100 shares
under the 2004 Plan at a weighted-average exercise price of $1.91.

The total intrinsic value of options exercised under the 2004 Plan for
the six months ended June 28, 2009 was $868,000.

2006 Equity Incentive Plan

On September 12, 2006, the Companys stockholders approved the 2006 Equity Incentive Award Plan (the 2006 Plan) for executives,
directors, employees and consultants of the Company. A total of 4,500,000 shares of the Companys Common Stock have been reserved for issuance under the 2006 Plan. Awards are granted with an exercise price equal to the closing market price of
the Companys Common Stock at the date of grant except for restricted stock awards (RSAs) and restricted stock units (RSUs). The awards generally vest over a period of one to five years from the date of grant and have a
maximum term of ten years.

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



|                             |  |                                            |   |  |                     |   |  |                               |      
|---------------------------- |  | ------------------------------------------ | - |  | ------------------- | - |  | ----------------------------- | -----
|                             |  |                                            |   |  | Options Outstanding
|                             |  | Shares Subjectto OptionsAvailablefor Grant |   |  | Number ofShares     |   |  | Weighted-AverageExercisePrice
|Balance at December 28, 2008 |  | 4,131,681                                  |   |  | 1,518,350           |   |  | $                             | 12.36
|Rolled over from 2004 Plan   |  | 70,386                                     |   |  |                    |   |  |                               |     
|Granted                      |  | (351,985                                   | ) |  | 351,985             |   |  |                               | 5.33 
|Canceled                     |  | 163,775                                    |   |  | (163,775            | ) |  |                               | 15.39
|                             |  |                                            |   |  |                     |   |  |                               |      
|Balance at June 28, 2009     |  | 4,013,857                                  |   |  | 1,706,560           |   |  | $                             | 10.62
|                             |  |                                            |   |  |                     |   |  |                               |      

At June 28, 2009, there were total outstanding vested options to purchase 164,593 shares
under the 2006 Plan at a weighted-average exercise price of $25.40.

The total cash received from employees as a result of employee stock
option exercises under all plans for the six months ended June 28, 2009 was $228,000. In connection with these exercises, the tax benefits realized by the Company for the six months ended June 28, 2009 were $158,000.

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



|                             |  |         |  
|---------------------------- |  | ------- | -
|                             |  | Shares  |  
|Balance at December 28, 2008 |  | 50,000  |  
|Granted                      |  | 94,804  |  
|Vested                       |  | (12,500 | )
|Canceled                     |  |        |  
|                             |  |         |  
|Balance at June 28, 2009     |  | 132,304 |  
|                             |  |         |  



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##### Table of Contents

The weighted average fair value of RSAs and RSUs granted during the six months ended June 28, 2009
was $4.54. The total fair value of RSAs vested during the six months ended June 28, 2009 was $248,000.

17. Segment and Geographic Information

Operating segments are defined as components of an enterprise engaging in business activities for which 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.

One of the Companys key objectives is the
further expansion of its business internationally and as a consequence, the operating results that the CODM reviews to make decisions about resource allocations and to assess performance have changed to be more geographically focused. In the fourth
quarter of fiscal 2008, the Company re-evaluated its operating segments to bring them in line with these changes and how management currently reviews and evaluates the operating performance of the Company and accordingly, the new segments include:
North America Retail, North America Direct to Consumer, and International. The North America Retail segment includes all products marketed in the United States and Canada and consists of sales to end users either directly through company-owned
boutiques or through third-party resellers in a branded, prestige retail environment. The North America Direct to Consumer segment includes all products marketed in the United States and Canada and consists of sales through television or online
media to end users who then receive their product via mail. The International segment includes all operations outside the United States and Canada, regardless of method of delivery to the end user. Prior to fiscal 2008, the Companys operating
segments were Retail and Wholesale. As a result, historical segment financial information presented has been revised to reflect these new operating segments.

These reportable segments are strategic business units that are managed separately based on the fundamental differences in their operations. The following table presents certain financial information for each segment.
Operating income is the gross margin of the segment less direct expenses of the segment. Some direct expenses, such as media and advertising spend, do impact the performance of the other segments, but these expenses are recorded in the segment to
which they directly relate and are not allocated among the segments. The Corporate column includes unallocated selling, general and administrative expenses, depreciation and amortization and stock-based compensation expenses. 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 CODM in assessing segment performance.



|                                         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|---------------------------------------- |  | ------------------- | ------ | ------------------------------ | - | ------------- |  | --------- | ------ |  | ----- | ------- | - |  | - | ------- | -
|                                         |  | North AmericaRetail |        | North AmericaDirect toConsumer |   | International |  | Corporate |        |  | Total |        
|Three Months ended June 28, 2009         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Sales, net                               |  | $                   | 77,930 |                                | $ | 38,971        |  | $         | 15,566 |  | $     |        |   |  | $ | 132,467 |  
|Cost of goods sold                       |  |                     | 17,508 |                                |   | 12,595        |  |           | 5,430  |  |       |        |   |  |   | 35,533  |  
|                                         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Gross profit                             |  |                     | 60,422 |                                |   | 26,376        |  |           | 10,136 |  |       |        |   |  |   | 96,934  |  
|Operating expenses:                      |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Selling, general and administrative      |  |                     | 25,332 |                                |   | 9,449         |  |           | 5,690  |  |       | 15,694  |   |  |   | 56,165  |  
|Depreciation and amortization            |  |                     | 1,444  |                                |   |              |  |           | 1,036  |  |       | 1,767   |   |  |   | 4,247   |  
|Stock-based compensation                 |  |                     |       |                                |   |              |  |           |       |  |       | 1,543   |   |  |   | 1,543   |  
|                                         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Total expenses                           |  |                     | 26,776 |                                |   | 9,449         |  |           | 6,726  |  |       | 19,004  |   |  |   | 61,955  |  
|                                         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Operating income (loss)                  |  |                     | 33,646 |                                |   | 16,927        |  |           | 3,410  |  |       | (19,004 | ) |  |   | 34,979  |  
|Interest expense                         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   | (2,825  | )
|Other income, net                        |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   | 599     |  
|                                         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Income before provision for income taxes |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   | 32,753  |  
|Provision for income taxes               |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   | 12,991  |  
|                                         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Net income                               |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  | $ | 19,762  |  
|                                         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  



17



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##### Table of Contents

|                                         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|---------------------------------------- |  | ------------------- | ------ | ------------------------------ | - | ------------- |  | --------- | ------ |  | ----- | ------- | - |  | - | ------- | -
|                                         |  | North AmericaRetail |        | North AmericaDirect toConsumer |   | International |  | Corporate |        |  | Total |        
|Three Months ended June 29, 2008         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Sales, net                               |  | $                   | 74,110 |                                | $ | 48,420        |  | $         | 15,988 |  | $     |        |   |  | $ | 138,518 |  
|Cost of goods sold                       |  |                     | 16,827 |                                |   | 16,360        |  |           | 5,830  |  |       |        |   |  |   | 39,017  |  
|                                         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Gross profit                             |  |                     | 57,283 |                                |   | 32,060        |  |           | 10,158 |  |       |        |   |  |   | 99,501  |  
|Operating expenses:                      |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Selling, general and administrative      |  |                     | 17,953 |                                |   | 13,937        |  |           | 3,249  |  |       | 15,552  |   |  |   | 50,691  |  
|Depreciation and amortization            |  |                     | 755    |                                |   | 7             |  |           | 844    |  |       | 1,215   |   |  |   | 2,821   |  
|Stock-based compensation                 |  |                     |       |                                |   |              |  |           |       |  |       | 968     |   |  |   | 968     |  
|                                         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Total expenses                           |  |                     | 18,708 |                                |   | 13,944        |  |           | 4,093  |  |       | 17,735  |   |  |   | 54,480  |  
|                                         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Operating income (loss)                  |  |                     | 38,575 |                                |   | 18,116        |  |           | 6,065  |  |       | (17,735 | ) |  |   | 45,021  |  
|Interest expense                         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   | (4,280  | )
|Other expense, net                       |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   | (40     | )
|                                         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Income before provision for income taxes |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   | 40,701  |  
|Provision for income taxes               |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   | 16,009  |  
|                                         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Net income                               |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  | $ | 24,692  |  
|                                         |  |                     |        |                                |   |               |  |           |        |  |       |         |   |  |   |         |  



|                                         |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|---------------------------------------- |  | ------------------- | ------- | ------------------------------ | - | ------------- |  | --------- | ------ |  | ----- | ------- | - |  | - | ------- | -
|                                         |  | North AmericaRetail |         | North AmericaDirect toConsumer |   | International |  | Corporate |        |  | Total |        
|Six Months ended June 28, 2009           |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Sales, net                               |  | $                   | 151,139 |                                | $ | 74,141        |  | $         | 31,440 |  | $     |        |   |  | $ | 256,720 |  
|Cost of goods sold                       |  |                     | 35,466  |                                |   | 22,889        |  |           | 10,515 |  |       |        |   |  |   | 68,870  |  
|                                         |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Gross profit                             |  |                     | 115,673 |                                |   | 51,252        |  |           | 20,925 |  |       |        |   |  |   | 187,850 |  
|Operating expenses:                      |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Selling, general and administrative      |  |                     | 47,500  |                                |   | 20,836        |  |           | 9,731  |  |       | 32,160  |   |  |   | 110,227 |  
|Depreciation and amortization            |  |                     | 2,807   |                                |   | 7             |  |           | 1,975  |  |       | 3,552   |   |  |   | 8,341   |  
|Stock-based compensation                 |  |                     |        |                                |   |              |  |           |       |  |       | 3,014   |   |  |   | 3,014   |  
|                                         |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Total expenses                           |  |                     | 50,307  |                                |   | 20,843        |  |           | 11,706 |  |       | 38,726  |   |  |   | 121,582 |  
|                                         |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Operating income (loss)                  |  |                     | 65,366  |                                |   | 30,409        |  |           | 9,219  |  |       | (38,726 | ) |  |   | 66,268  |  
|Interest expense                         |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   | (5,614  | )
|Other income, net                        |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   | 161     |  
|                                         |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Income before provision for income taxes |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   | 60,815  |  
|Provision for income taxes               |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   | 24,364  |  
|                                         |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Net income                               |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  | $ | 36,451  |  
|                                         |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  



18



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|                                         |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|---------------------------------------- |  | ------------------- | ------- | ------------------------------ | - | ------------- |  | --------- | ------ |  | ----- | ------- | - |  | - | ------- | -
|                                         |  | North AmericaRetail |         | North AmericaDirect toConsumer |   | International |  | Corporate |        |  | Total |        
|Six Months ended June 29, 2008           |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Sales, net                               |  | $                   | 152,152 |                                | $ | 96,668        |  | $         | 30,056 |  | $     |        |   |  | $ | 278,876 |  
|Cost of goods sold                       |  |                     | 37,033  |                                |   | 30,365        |  |           | 10,276 |  |       |        |   |  |   | 77,674  |  
|                                         |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Gross profit                             |  |                     | 115,119 |                                |   | 66,303        |  |           | 19,780 |  |       |        |   |  |   | 201,202 |  
|Operating expenses:                      |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Selling, general and administrative      |  |                     | 33,246  |                                |   | 29,598        |  |           | 5,454  |  |       | 32,857  |   |  |   | 101,155 |  
|Depreciation and amortization            |  |                     | 1,398   |                                |   | 14            |  |           | 1,663  |  |       | 2,367   |   |  |   | 5,442   |  
|Stock-based compensation                 |  |                     |        |                                |   |              |  |           |       |  |       | 2,880   |   |  |   | 2,880   |  
|                                         |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Total expenses                           |  |                     | 34,644  |                                |   | 29,612        |  |           | 7,117  |  |       | 38,104  |   |  |   | 109,477 |  
|                                         |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Operating income (loss)                  |  |                     | 80,475  |                                |   | 36,691        |  |           | 12,663 |  |       | (38,104 | ) |  |   | 91,725  |  
|Interest expense                         |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   | (8,924  | )
|Other income, net                        |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   | 667     |  
|                                         |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Income before provision for income taxes |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   | 83,468  |  
|Provision for income taxes               |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   | 32,993  |  
|                                         |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  
|Net income                               |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  | $ | 50,475  |  
|                                         |  |                     |         |                                |   |               |  |           |        |  |       |         |   |  |   |         |  

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



|                                 |  |              |        |                  |   |       
|-------------------------------- |  | ------------ | ------ | ---------------- | - | ------
|                                 |  | June 28,2009 |        | December 28,2008
|North America Retail             |  | $            | 44,956 |                  | $ | 38,628
|North America Direct to Consumer |  |              |       |                  |   | 84    
|International                    |  |              | 5,616  |                  |   | 2,594 
|Corporate                        |  |              | 29,591 |                  |   | 31,036
|                                 |  |              |        |                  |   |       
|                                 |  | $            | 80,163 |                  | $ | 72,342
|                                 |  |              |        |                  |   |       

Long-lived assets allocated to the North America Retail segment consist of fixed assets and
deposits for retail stores. Long-lived assets in Corporate 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). For the table below, Canada
is included in International.



|              |  |              |        |                  |   |       
|------------- |  | ------------ | ------ | ---------------- | - | ------
|              |  | June 28,2009 |        | December 28,2008
|United States |  | $            | 74,345 |                  | $ | 69,390
|International |  |              | 5,818  |                  |   | 2,952 
|              |  |              |        |                  |   |       
|              |  | $            | 80,163 |                  | $ | 72,342
|              |  |              |        |                  |   |       

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). For the table below, Canada is included in International.



|              |  |                    |         |                  |   |              |  |              |         |  |   |        
|------------- |  | ------------------ | ------- | ---------------- | - | ------------ |  | ------------ | ------- |  | - | -------
|              |  | Three months ended |         | Six months ended
|              |  | June 28,2009       |         | June 29,2008     |   | June 28,2009 |  | June 29,2008
|United States |  | $                  | 116,332 |                  | $ | 122,528      |  | $            | 224,340 |  | $ | 248,818
|International |  |                    | 16,135  |                  |   | 15,990       |  |              | 32,380  |  |   | 30,058 
|              |  |                    |         |                  |   |              |  |              |         |  |   |        
|Sales, net    |  | $                  | 132,467 |                  | $ | 138,518      |  | $            | 256,720 |  | $ | 278,876
|              |  |                    |         |                  |   |              |  |              |         |  |   |        



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18. Subsequent Event

On July 17, 2009, the Material Yard Workers Local 1175 Benefit Funds filed a stockholder class action in the United States District Court for the Northern District of California. The complaint names as
defendants the Company, our Chief Executive Officer and our Chief Financial Officer. It was purportedly filed on behalf of all persons who purchased Company stock between November 7, 2006, and November 26, 2007 (the Class
Period). The complaint alleges violations of the Securities Exchange Act of 1934 based on, among other things, alleged misrepresentations and omissions of material facts relating to the Companys financial condition during
the Class Period, and it seeks relief in the form of compensatory damages, attorneys fees and costs.



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by words such as anticipate, expect, believe, plan, intend,
predict, will, may, and similar terms. The forward-looking statements in this Form 10-Q include, but are not limited to, statements regarding our plans to grow our business by expanding product offerings and
developing new brands or brand extensions; our planned opening of new boutiques; our intention to invest strategically in areas of our business and the potential for those investments to create long-term value; our plans to enhance our information
technology systems and make other investments in domestic and international corporate infrastructure; our expectations for future revenue, margins, expenses, operating results, inventory levels and capital expenditures; our anticipated working
capital needs and the adequacy of our capital resources; and our possible acquisition of or investment in complementary businesses or products. Such forward-looking statements are based on current expectations, estimates and projections about our
industry, as well as our managements beliefs and assumptions. Forward-looking statements, by their nature, involve risks and uncertainties and are not guarantees of future performance. Our actual results may differ materially from the results
discussed in the forward-looking statements due to a variety of factors including, but not limited to, those discussed in Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 28, 2008, filed with
the SEC on February 26, 2009. The discussion throughout this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 Financial Statements in this Form 10-Q. Unless
required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview

Founded in 1976, Bare Escentuals is one of the leading prestige cosmetic companies in the United States
and an innovator in mineral-based cosmetics. We develop, market and sell branded cosmetics and skin care products primarily under our bareMinerals, RareMinerals, Buxom and md formulations brands worldwide.

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

In the fourth quarter of fiscal 2008, we re-evaluated how we internally review our business
performance and, in turn, changed our operating segments to be more geographically focused (and have revised historical segment financial information presented to reflect these new operating segments). As a result, our business is now comprised of
three strategic business units constituting reportable segments that we manage separately based on fundamental differences in their operations:



| |  |  | Our North America Retail segment includes the United States and Canada and consists of our company-owned boutiques; premium wholesale customers and spas and salons.
Our company-owned boutiques enhance our ability to build strong consumer relationships and promote additional product use through personal demonstrations and product consultations. We also sell to retailers that we believe feature our products in
settings that support and reinforce our brand image and provide a premium in-store experience. Similarly, our spa and salon customers provide an informative and treatment-focused environment in which aestheticians and spa professionals can
communicate the benefits of our core products.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our North America Direct to Consumer segment includes infomercials, home shopping television in the United States and Canada and online shopping. We believe that
our infomercial business helps us to build brand awareness, communicate the benefits of our core products and establish a base of recurring revenue. Our sales through home shopping television help us to build brand awareness, educate consumers
through live product demonstrations and develop close connections with our consumers. In addition, our online shopping business allows us to educate consumers as to the benefits as well as proper usage and application techniques for each product
offered.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our International segment includes premium wholesale, spas and salons, home shopping television, infomercial, and international distributors outside of North
America. We have partnered with a third party to build our infomercial business in Japan and currently have an international home shopping television presence and appear on QVC in Japan, the U.K. and Germany. We have a presence in brick-and-mortar
locations overseas, including in certain international Sephora locations as well as spas, salons and department stores in the U.K. We also sell our products in smaller international markets primarily through a network of third-party distributors.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We manage our business segments to maximize overall sales growth and market share. We believe that our multi-channel
distribution strategy enhances 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, financial results can be affected by the timing of shipments as well as the impact of key
promotional events.



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##### Table of Contents

Our performance depends on economic conditions in the United States and globally and their impact on
levels of consumer confidence and spending. We have continued to see a trend, driven in part by the recent challenging economic environment, across our distribution channels of customers favoring lower-ticket, non-kit items in lieu of higher-priced
kits. Although this trend has the impact of reducing our sales growth, the impact to net income is partially mitigated as these non-kit items sell at a higher gross margin.

In the current economic environment, we continue to closely manage our expenses and allocate resources with the goal of maximizing
cash flow and liquidity. This includes continuing a more conservative approach to inventory management in light of the challenging retail environment. At the same time, we continue to invest strategically in areas that we believe will
create long-term value including our international operations, domestic distribution expansion, education and field teams, and customer acquisition activities. We anticipate that our capital expenditures for fiscal 2009 will be approximately
$28.0 million to support boutique and department store build-outs as well as international infrastructure investments.

During the second
quarter of fiscal 2009, net sales decreased $6.1 million, or 4.4%, to $132.5 million from the second quarter of fiscal 2008. Net sales for the six months ended June 28, 2009 decreased $22.2 million, or 8.0%, to $256.7 million from the same
period last year. As anticipated, the economic environment remained challenging in the second quarter impacting our net sales.

Diluted
earnings per share for the second quarter of fiscal 2009 decreased 19.2% to $0.21 compared to $0.26 per diluted share in the second quarter of fiscal 2008. Diluted earnings per share for the six months ended June 28, 2009 decreased 27.8% to
$0.39 compared to $0.54 per diluted share in the same period last year. Diluted earnings per share decreased due to a decline in sales combined with selling, general and administrative increases largely resulting from an increase of 42 boutiques as
compared with the prior year.

Basis of Presentation

The Companys significant accounting policies are disclosed in Note 2 in the Companys Form 10-K for the year ended December 28, 2008. The Companys significant accounting policies have not
changed significantly as of June 28, 2009.

Results of Operations

The following is a discussion of our results of operations and percentage of net sales for the three months ended June 28, 2009 compared to the three months ended June 29, 2008 and for the six months ended
June 28, 2009 compared to the six months ended June 29, 2008.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME



|                                         |  |                                    |         |   |                  |       |   |              |   |         |              |  |      |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|---------------------------------------- |  | ---------------------------------- | ------- | - | ---------------- | ----- | - | ------------ | - | ------- | ------------ |  | ---- | - |  | - | ------- | - |  | ----- | - |  | - | ------- | - |  | ----- | -
|                                         |  | Three months ended                 |         |   | Six months ended |      
|                                         |  | June 28,2009                       |         |   | June 29,2008     |       |   | June 28,2009 |   |         | June 29,2008 | 
|                                         |  | (in thousands, except percentages) |        
|Sales, net                               |  | $                                  | 132,467 |   |                  | 100.0 | % |              | $ | 138,518 |              |  | 100  | % |  | $ | 256,720 |   |  | 100.0 | % |  | $ | 278,876 |   |  | 100.0 | %
|Cost of goods sold                       |  |                                    | 35,533  |   |                  | 26.8  |   |              |   | 39,017  |              |  | 28.2 |   |  |   | 68,870  |   |  | 26.8  |   |  |   | 77,674  |   |  | 27.9  |  
|                                         |  |                                    |         |   |                  |       |   |              |   |         |              |  |      |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|Gross profit                             |  |                                    | 96,934  |   |                  | 73.2  |   |              |   | 99,501  |              |  | 71.8 |   |  |   | 187,850 |   |  | 73.2  |   |  |   | 201,202 |   |  | 72.1  |  
|Expenses:                                |  |                                    |         |   |                  |       |   |              |   |         |              |  |      |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|Selling, general and administrative      |  |                                    | 56,165  |   |                  | 42.4  |   |              |   | 50,691  |              |  | 36.6 |   |  |   | 110,227 |   |  | 42.9  |   |  |   | 101,155 |   |  | 36.3  |  
|Depreciation and amortization            |  |                                    | 4,247   |   |                  | 3.2   |   |              |   | 2,821   |              |  | 2.0  |   |  |   | 8,341   |   |  | 3.3   |   |  |   | 5,442   |   |  | 1.9   |  
|Stock-based compensation                 |  |                                    | 1,543   |   |                  | 1.2   |   |              |   | 968     |              |  | 0.7  |   |  |   | 3,014   |   |  | 1.2   |   |  |   | 2,880   |   |  | 1.0   |  
|                                         |  |                                    |         |   |                  |       |   |              |   |         |              |  |      |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|Operating income                         |  |                                    | 34,979  |   |                  | 26.4  |   |              |   | 45,021  |              |  | 32.5 |   |  |   | 66,268  |   |  | 25.8  |   |  |   | 91,725  |   |  | 32.9  |  
|Interest expense                         |  |                                    | (2,825  | ) |                  | (2.1  | ) |              |   | (4,280  | )            |  | (3.1 | ) |  |   | (5,614  | ) |  | (2.2  | ) |  |   | (8,924  | ) |  | (3.2  | )
|Other income (expense), net              |  |                                    | 599     |   |                  | 0.4   |   |              |   | (40     | )            |  | 0.0  |   |  |   | 161     |   |  | 0.1   |   |  |   | 667     |   |  | 0.2   |  
|                                         |  |                                    |         |   |                  |       |   |              |   |         |              |  |      |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|Income before provision for income taxes |  |                                    | 32,753  |   |                  | 24.7  |   |              |   | 40,701  |              |  | 29.4 |   |  |   | 60,815  |   |  | 23.7  |   |  |   | 83,468  |   |  | 29.9  |  
|Provision for income taxes               |  |                                    | 12,991  |   |                  | 9.8   |   |              |   | 16,009  |              |  | 11.6 |   |  |   | 24,364  |   |  | 9.5   |   |  |   | 32,993  |   |  | 11.8  |  
|                                         |  |                                    |         |   |                  |       |   |              |   |         |              |  |      |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|Net income                               |  | $                                  | 19,762  |   |                  | 14.9  | % |              | $ | 24,692  |              |  | 17.8 | % |  | $ | 36,451  |   |  | 14.2  | % |  | $ | 50,475  |   |  | 18.1  | %
|                                         |  |                                    |         |   |                  |       |   |              |   |         |              |  |      |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  



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Net sales by business segment and percentage of net sales for the three and six months ended
June 28, 2009 and the three and six months ended June 29, 2008 are as follows:



|                                                                                                                                                                    |  |                                    |         |   |                  |       |   |              |   |         |              |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ------- | - | ---------------- | ----- | - | ------------ | - | ------- | ------------ |  | ----- | - |  | - | ------- | - |  | ----- | - |  | - | ------- | - |  | ----- | -
|                                                                                                                                                                    |  | Three months ended                 |         |   | Six months ended |      
|                                                                                                                                                                    |  | June 28,2009                       |         |   | June 29,2008     |       |   | June 28,2009 |   |         | June 29,2008 | 
|                                                                                                                                                                    |  | (in thousands, except percentages) |        
|North America Retail                                                                                                                                                |  | $                                  | 77,930  |   |                  | 58.8  | % |              | $ | 74,110  |              |  | 53.5  | % |  | $ | 151,139 |   |  | 58.9  | % |  | $ | 152,152 |   |  | 54.5  | %
|North America Direct to Consumer                                                                                                                                    |  |                                    | 38,971  |   |                  | 29.4  |   |              |   | 48,420  |              |  | 35.0  |   |  |   | 74,141  |   |  | 28.9  |   |  |   | 96,668  |   |  | 34.7  |  
|International                                                                                                                                                       |  |                                    | 15,566  |   |                  | 11.8  |   |              |   | 15,988  |              |  | 11.5  |   |  |   | 31,440  |   |  | 12.2  |   |  |   | 30,056  |   |  | 10.8  |  
|                                                                                                                                                                    |  |                                    |         |   |                  |       |   |              |   |         |              |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|Sales, net                                                                                                                                                          |  | $                                  | 132,467 |   |                  | 100.0 | % |              | $ | 138,518 |              |  | 100.0 | % |  | $ | 256,720 |   |  | 100.0 | % |  | $ | 278,876 |   |  | 100.0 | %
|                                                                                                                                                                    |  |                                    |         |   |                  |       |   |              |   |         |              |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|                                                                                                                                                                   
|Gross profit and gross margin by business segment for the three and six months ended June 28, 2009 and the three and six months ended
June 29, 2008 are as follows: | 
|                                                                                                                                                                    |  |                                   
|                                                                                                                                                                    |  | Three months ended                 |         |   | Six months ended |      
|                                                                                                                                                                    |  | June 28,2009                       |         |   | June 29,2008     |       |   | June 28,2009 |   |         | June 29,2008 | 
|                                                                                                                                                                    |  | (in thousands, except percentages) |        
|North America Retail                                                                                                                                                |  | $                                  | 60,422  |   |                  | 77.5  | % |              | $ | 57,283  |              |  | 77.3  | % |  | $ | 115,673 |   |  | 76.5  | % |  | $ | 115,119 |   |  | 75.7  | %
|North America Direct to Consumer                                                                                                                                    |  |                                    | 26,376  |   |                  | 67.7  |   |              |   | 32,060  |              |  | 66.2  |   |  |   | 51,252  |   |  | 69.1  |   |  |   | 66,303  |   |  | 68.6  |  
|International                                                                                                                                                       |  |                                    | 10,136  |   |                  | 65.1  |   |              |   | 10,158  |              |  | 63.5  |   |  |   | 20,925  |   |  | 66.6  |   |  |   | 19,780  |   |  | 65.8  |  
|                                                                                                                                                                    |  |                                    |         |   |                  |       |   |              |   |         |              |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|Gross profit/gross margin                                                                                                                                           |  | $                                  | 96,934  |   |                  | 73.2  | % |              | $ | 99,501  |              |  | 71.8  | % |  | $ | 187,850 |   |  | 73.2  | % |  | $ | 201,202 |   |  | 72.1  | %
|                                                                                                                                                                    |  |                                    |         |   |                  |       |   |              |   |         |              |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|                                                                                                                                                                   
|Operating income (loss) by business segment for the three and six months ended June 28, 2009 and the three and six months ended June 29,
2008 are as follows:       | 
|                                                                                                                                                                    |  |                                   
|                                                                                                                                                                    |  | Three months ended                 |         |   | Six months ended |      
|                                                                                                                                                                    |  | June 28,2009                       |         |   | June 29,2008     |       |   | June 28,2009 |   |         | June 29,2008 | 
|                                                                                                                                                                    |  | (in thousands, except percentages) |        
|North America Retail                                                                                                                                                |  | $                                  | 33,646  |   |                  | 43.2  | % |              | $ | 38,575  |              |  | 52.1  | % |  | $ | 65,366  |   |  | 43.2  | % |  | $ | 80,475  |   |  | 52.9  | %
|North America Direct to Consumer                                                                                                                                    |  |                                    | 16,927  |   |                  | 43.4  |   |              |   | 18,116  |              |  | 37.4  |   |  |   | 30,409  |   |  | 41.0  |   |  |   | 36,691  |   |  | 38.0  |  
|International                                                                                                                                                       |  |                                    | 3,410   |   |                  | 21.9  |   |              |   | 6,065   |              |  | 37.9  |   |  |   | 9,219   |   |  | 29.3  |   |  |   | 12,663  |   |  | 42.1  |  
|                                                                                                                                                                    |  |                                    |         |   |                  |       |   |              |   |         |              |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|Total                                                                                                                                                               |  |                                    | 53,983  |   |                  | 40.8  | % |              |   | 62,756  |              |  | 45.3  | % |  |   | 104,994 |   |  | 40.9  | % |  |   | 129,829 |   |  | 46.6  | %
|Corporate                                                                                                                                                           |  |                                    | (19,004 | ) |                  |       |   |              |   | (17,735 | )            |  |       |   |  |   | (38,726 | ) |  |       |   |  |   | (38,104 | ) |  |       |  
|                                                                                                                                                                    |  |                                    |         |   |                  |       |   |              |   |         |              |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|Operating income                                                                                                                                                    |  | $                                  | 34,979  |   |                  | 26.4  | % |              | $ | 45,021  |              |  | 32.5  | % |  | $ | 66,268  |   |  | 25.8  | % |  | $ | 91,725  |   |  | 32.9  | %
|                                                                                                                                                                    |  |                                    |         |   |                  |       |   |              |   |         |              |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  

Three months ended June 28, 2009 compared to three months ended June 29, 2008

Sales, net

Net sales for the three months ended
June 28, 2009 decreased to $132.5 million from $138.5 million in the three months ended June 29, 2008, a decrease of $6.1 million, or 4.4%. The decrease in our net sales was mainly driven by our North America Direct to Consumer segment.

North America Retail. North America Retail net sales increased 5.2% to $77.9 million in the three months ended June 28,
2009 from $74.1 million in the three months ended June 29, 2008. This increase as compared with the prior year was mainly due to an increase of 42 boutiques open as of June 28, 2009 compared to June 29, 2008. As of June 28, 2009
and June 29, 2008, we had 112 and 70 open company-owned boutiques, respectively.

North America Direct to Consumer.
North America Direct to Consumer net sales decreased 19.5% to $39.0 million in the three months ended June 28, 2009 from $48.4 million in the three months ended June 29, 2008. This decrease primarily resulted from a reduction in net sales
from our infomercial channel due to reduced media spending versus the prior year and a decline in home shopping television net sales due to lower on-air productivity compared to the prior year.



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##### Table of Contents

International. International net sales decreased 2.6% to $15.6 million in the three months
ended June 28, 2009 from $16.0 million in the three months ended June 29, 2008 mainly due to a decrease in net sales to our international distributors as their retailers delayed replenishment purchases. The decrease also reflects the
impact of the recession in Japan which affected our home shopping television net sales.

Gross profit

Gross profit decreased $2.6 million, or 2.6%, to $96.9 million in the three months ended June 28, 2009 from $99.5 million in the three months ended
June 29, 2008. Our North America Retail segment gross profit increased 5.5% to $60.4 million in the three months ended June 28, 2009 from $57.3 million in the three months ended June 29, 2008, as a result of higher sales across our
boutique channel. Our North America Direct to Consumer segment gross profit decreased 17.7% to $26.4 million in the three months ended June 28, 2009 from $32.1 million in the three months ended June 29, 2008, primarily due to lower net
sales from our infomercial and at QVC compared to the prior year. Our International segment gross profit slightly decreased 0.2% to $10.1 million in the three months ended June 28, 2009 from $10.2 million in the three months ended June 29,
2008.

Gross margin increased approximately 140 basis points to 73.2% in the three months ended June 28, 2009 from 71.8% in the three
months ended June 29, 2008. This overall increase resulted primarily from a shift in product mix towards higher-margin open stock merchandise as well as a shift towards higher-margin sales channels.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $5.5 million, or 10.8%, to $56.2 million in the three months ended June 28, 2009 from $50.7 million in the three months ended June 29, 2008. This increase was primarily due to
increased expenses to support distribution expansion, including $7.4 million in increased operating costs mainly relating to boutique expansion and $2.4 million in increased international infrastructure expenses. This increase was partially offset
by decreased expenses of $4.5 million mainly from savings in infomercial operating expenses. As a percentage of net sales, selling, general and administrative expenses increased 580 basis points to 42.4% from 36.6%, primarily due to infrastructure
expenses increasing at a greater rate than net sales.

Depreciation and amortization

Depreciation and amortization expenses increased $1.4 million, or 50.5%, to $4.2 million in the three months ended June 28, 2009 from $2.8 million in
the three months ended June 29, 2008. This increase was primarily attributable to increases in depreciable assets as we continue to expand the number of company-owned boutiques and invest in our corporate infrastructure.

Stock-based compensation

Stock-based compensation
expense increased $0.6 million, or 59.4%, to $1.5 million in the three months ended June 28, 2009 from $1.0 million in the three months ended June 29, 2008. This increase resulted primarily from the granting of additional stock awards
offset in part by the effect of actual forfeitures.

Operating income

Operating income decreased 22.3% to $35.0 million in the three months ended June 28, 2009 from $45.0 million in the three months ended June 29, 2008, primarily due to decreases in operating income across all
segments and an increase in operating loss in Corporate due to slightly higher corporate operating expenses.

Our North America Retail
segment operating income decreased 12.8% to $33.6 million in the three months ended June 28, 2009 from $38.6 million in the three months ended June 29, 2008. This decrease was primarily driven by increased operating expenses of $8.1
million primarily related to the increase in the number of company-owned boutiques.

Our North America Direct to Consumer segment operating
income decreased 6.6% to $16.9 million in the three months ended June 28, 2009 from $18.1 million in the three months ended June 29, 2008. This decrease was primarily driven by lower net sales from our infomercial compared to the prior
year, partially offset by lower operating costs for this channel.

Our International segment operating income decreased 43.8% to $3.4
million in the three months ended June 28, 2009 from $6.1 million in the three months ended June 29, 2008 due to increased operating costs of $2.6 million.

Our Corporate operating loss increased 7.2% to $19.0 million in the three months ended June 28, 2009 from $17.7 million in the three months ended June 29, 2008 primarily due to an increase in stock-based
compensation of $0.6 million and an increase in depreciation and amortization of $0.6 million.



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##### Table of Contents

Interest expense

Interest expense decreased $1.5 million, or 34.0%, to $2.8 million in the three months ended June 28, 2009 from $4.3 million in the three months ended June 29, 2008. The decrease was attributable to lower
average interest rates on our variable interest rate debt (excluding the debt under the interest rate swap agreement) versus the prior year, combined with decreased debt balances during the three months ended June 28, 2009 as a result of
repayment of outstanding indebtedness.

Other income (expense), net

Other income (expense), net increased to net other income of $0.6 million in the three months ended June 28, 2009 from net other expense of $0.04 million in the three months ended June 29, 2008. The increase
was primary attributable to a positive foreign currency impact resulting from fluctuations in the value of the U.S. dollar as compared to certain foreign currencies, offset by lower interest income on our cash and cash equivalent balances resulting
from lower interest rates versus the prior year.

Provision for income taxes

The provision for income taxes was $13.0 million, or 39.7% of income before provision for income taxes, in the three months ended June 28, 2009
compared to $16.0 million, or 39.3% of income before provision for income taxes, in the three months ended June 29, 2008. The decrease resulted from lower income before provision for income taxes offset in part by a higher effective rate in the
three months ended June 28, 2009 compared to the three months ended June 29, 2008.

Six months ended June 28, 2009 compared to six months
ended June 29, 2008

Sales, net

Net sales for the six months ended June 28, 2009 decreased to $256.7 million from $278.9 million in the six months ended June 29, 2008, a decrease of $22.2 million, or 7.9%. The decrease in our net sales was driven by our North
America Retail and North America Direct to Consumer segments.

North America Retail. North America Retail net sales decreased
0.7% to $151.1 million in the six months ended June 28, 2009 from $152.2 million in the six months ended June 29, 2008. Net sales to our premium wholesale customers decreased as a result of challenging macro-economic conditions and the
corresponding inventory de-stocking by our major retail partners. Offsetting this decrease in part was an increase in net sales from boutiques versus the prior year due to a net increase of 42 boutiques open as of June 28, 2009 compared to
June 29, 2008. As of June 28, 2009 and June 29, 2008, we had 112 and 70 open company-owned boutiques, respectively.

North America Direct to Consumer. North America Direct to Consumer net sales decreased 23.3% to $74.1 million in the six months ended June 28, 2009 from $96.7 million in the six months ended June 29, 2008. This
decrease primarily resulted from a decline in net sales from our infomercial channel due to a reduction in infomercial performance and reduced media spending versus the prior year and a decline in home shopping television net sales due to lower
on-air productivity compared to the prior year.

International. International net sales increased 4.6% to $31.4 million in
the six months ended June 28, 2009 from $30.1 million in the six months ended June 29, 2008 as we expanded our business across our international channels. Net sales to our global premium wholesale customers increased due to continued
expansion into additional locations. Partially offsetting this increase was a decrease in net sales from international distributors and international home shopping sales.

Gross profit

Gross profit decreased $13.4 million, or 6.6%, to $187.9 million in the six months
ended June 28, 2009 from $201.2 million in the six months ended June 29, 2008. Our North America Retail segment gross profit increased 0.5% to $115.7 million in the six months ended June 28, 2009 from $115.1 million in the six months
ended June 29, 2008, as a result of the change in sales mix towards our higher margin boutiques. Our North America Direct to Consumer segment gross profit decreased 22.7% to $51.3 million in the six months ended June 28, 2009 from $66.3
million in the six months ended June 29, 2008, primarily due to lower net sales from our infomercial and at QVC compared to the prior year. Our International segment gross profit increased 5.8% to $20.9 million in the six months ended
June 28, 2009 from $19.8 million in the six months ended June 29, 2008, due to increases in sales across our global premium wholesale channel.

Gross margin increased approximately 110 basis points to 73.2% in the six months ended June 28, 2009 from 72.1% in the six months ended June 29, 2008. This overall increase resulted primarily from a shift in
product mix towards higher-margin open stock merchandise as well as a shift towards higher-margin sales channels.



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Selling, general and administrative expenses

Selling, general and administrative expenses increased $9.1 million, or 9.0%, to $110.2 million in the six months ended June 28, 2009 from $101.2
million in the six months ended June 29, 2008. The increase was primarily due to increased expenses to support distribution expansion including $14.3 million in increased operating costs mainly relating to boutique expansion and $4.3 million in
increased international infrastructure expenses. This increase was partially offset by decreased expenses of $9.5 million mainly from savings in infomercial operating expenses and lower corporate infrastructure expenses due to cost-control efforts.
As a percentage of net sales, selling, general and administrative expenses increased 660 basis points to 42.9% from 36.3%, primarily due to infrastructure expenses increasing at a greater rate than net sales.

Depreciation and amortization

Depreciation and
amortization expenses increased $2.9 million, or 53.3%, to $8.3 million in the six months ended June 28, 2009 from $5.4 million in the six months ended June 29, 2008. This increase was primarily attributable to increases in depreciable
assets as we continue to expand the number of company-owned boutiques and invest in our corporate infrastructure.

Stock-based compensation

Stock-based compensation expense increased $0.1 million, or 4.7%, to $3.0 million in the six months ended June 28, 2009 from $2.9
million in the six months ended June 29, 2008. This increase resulted primarily from the granting of additional stock awards offset in part by the effect of actual forfeitures.

Operating income

Operating income decreased 27.8% to $66.3 million in the six months ended
June 28, 2009 from $91.7 million in the six months ended June 29, 2008, primarily due to decreases in operating income across all segments.

Our North America Retail segment operating income decreased 18.8% to $65.4 million in the six months ended June 28, 2009 from $80.5 million in the six months ended June 29, 2008. This decrease was primarily
driven by lower sales and increased operating expenses of $15.7 million, primarily related to the increase in the number of company-owned boutiques.

Our North America Direct to Consumer segment operating income decreased 17.1% to $30.4 million in the six months ended June 28, 2009 from $36.7 million in the six months ended June 29, 2008. This decrease
was primarily driven by sales declines due to the lower productivity of our infomercial program compared to the prior version, partially offset by lower operating costs for this channel.

Our International segment operating income decreased 27.2% to $9.2 million in the six months ended June 28, 2009 from $12.7 million in the six
months ended June 29, 2008 due to increased operating costs of $4.6 million, which more than offset sales growth and gross margin improvements in this segment.

Our Corporate operating loss increased 1.6% to $38.7 million in the six months ended June 28, 2009 from $38.1 million in the six months ended June 29, 2008 primarily due to increases in depreciation and
amortization of $1.2 million and stock-based compensation of $0.1 million, which was partially offset by a decrease in Corporate selling, general and administrative expense of $0.7 million resulting primarily from our cost-control measures.

Interest expense

Interest expense
decreased $3.3 million, or 37.1%, to $5.6 million in the six months ended June 28, 2009 from $8.9 million in the six months ended June 29, 2008. The decrease was attributable to lower average interest rates on our variable interest rate
debt (excluding the debt under the interest rate swap agreement) versus the prior year combined with decreased debt balances during the six months ended June 28, 2009 as a result of repayment of outstanding indebtedness.

Other income, net

Other income, net decreased $0.5
million, or 75.9%, to $0.2 million in the six months ended June 28, 2009 from net other income of $0.7 million in the six months ended June 29, 2008. The decrease was primary attributable to lower interest income on our cash and cash
equivalent balances resulting from lower interest rates versus the prior year.

Provision for income taxes

The provision for income taxes was $24.4 million, or 40.1% of income before provision for income taxes, in the six months ended June 28, 2009
compared to $33.0 million, or 39.5% of income before provision for income taxes, in the six months ended June 29, 2008. The decrease resulted from lower income before provision for income taxes offset in part by a higher effective rate in the
six months ended June 28, 2009 compared to the six months ended June 29, 2008.



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Seasonality

Because our products are largely purchased for individual use and are consumable in nature, we are not generally 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. We have
financed our operations through cash flows from operations, sales of common shares and borrowings under our credit facilities.

Our
operations provided us cash of $70.6 million in the six months ended June 28, 2009. At June 28, 2009, we had working capital of $174.3 million, including cash and cash equivalents of $97.5 million, compared to working capital of $146.1
million, including $48.0 million in cash and cash equivalents, as of December 28, 2008. The $49.5 million increase in cash and cash equivalents resulted from cash provided by operations of $70.6 million, including net income for the six months
ended June 28, 2009 of $36.5 million, partially offset by cash used in investing activities of $14.8 million related to capital expenditures and cash used in financing activities of $6.5 million. The $28.2 million increase in working capital
was primarily driven by increases in cash and cash equivalents and prepaid income taxes and decreases in accounts payable and income taxes payable.

Net cash used in investing activities was $14.8 million in the six months ended June 28, 2009, attributable to the build-out of additional company-owned boutiques and department stores as well as our continued investment in our
corporate and information systems infrastructure to support our distribution expansion both in the U.S. and internationally. Our future capital expenditures will depend on the timing and rate of expansion of our business, information technology
investments, new store openings, store renovations and international expansion opportunities.

Net cash used in financing activities was
$6.5 million in the six months ended June 28, 2009, which consisted of repayments of $6.9 million on our first-lien term loan partially offset by the exercise of stock options of $0.2 million.

Our revolving credit facility of $25.0 million, of which approximately $0.3 million was utilized for outstanding letters of credit as of June 28,
2009, and our first-lien term loan of $234.1 million, 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 and debt rating.
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 June 28, 2009, interest on the first-lien
term loan was accruing at 2.57% (without giving effect to the interest rate swap transaction discussed below).

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.

In August 2007, we entered into a two-year interest rate swap transaction under our senior
secured credit facilities. The interest rate swap had an initial notional amount of $200 million which declined to $100 million after one-year under which, on a net settlement basis, we 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. dollar LIBOR. As a result of the interest rate swap transaction, we have fixed the interest rate for a two-year period subject to market-based interest rate risk on $200
million of borrowings for the first year and $100 million for the second year under our First Lien Credit Agreement. Our obligations under the interest rate swap transaction as to the scheduled payments are guaranteed and secured on the same basis
as our obligations under the First Lien Credit Agreement. The fair value of the interest rate swap as of June 28, 2009 was $0.8 million, which was recorded in other liabilities in the condensed consolidated balance sheet, with the related $0.8
million unrealized loss recorded and included in equity as a component of accumulated other comprehensive loss, net of a $0.3 million tax benefit.



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The terms of our senior secured credit facilities require us to comply with a number of financial
covenants, including maintaining a maximum leverage ratio (consolidated total debt to Adjusted EBITDA as defined in the agreement) of not greater than 4.5 to 1.0. As of June 28, 2009, our leverage ratio was 0.80 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 June 28, 2009.

Subject to specified exceptions, including for investment of proceeds from asset sales 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.

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 working capital needs, debt payments and planned capital expenditures for the next 12 months. As part of our business strategy, we intend to invest in making improvements to our information technology
systems. We opened 45 boutiques in 2008 and closed two locations. We plan to open approximately 27 new boutiques in 2009 (18 of which were opened as of June 28, 2009), which will require additional capital expenditures. Additionally, we also
plan to continue to invest in our corporate infrastructure, particularly in support of our international growth. We may also look to acquire or invest in businesses or products complementary to our own. We anticipate that our capital expenditures in
the year ending January 3, 2010 will be approximately $28.0 million. 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, including the limited availability of capital in light of the current financial crisis, 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 office equipment under noncancelable operating leases with various expiration dates
through January 2021. 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 at June 28, 2009. These future payments are subject to
foreign currency exchange rate risk. As of June 28, 2009, the scheduled maturities of our long-term contractual obligations were as follows:



|                                                                      |  |                                          |      |            |   |            |  |              |      |       |   |      |  |   |      
|--------------------------------------------------------------------- |  | ---------------------------------------- | ---- | ---------- | - | ---------- |  | ------------ | ---- | ----- | - | ---- |  | - | -----
|                                                                      |  | Remainder ofthe yearendingJanuary 3,2010 |      | 1 - 3Years |   | 4 - 5Years |  | After 5Years |      | Total
|                                                                      |  | (amounts in millions)                   
|Operating leases, net of sublease income                              |  | $                                        | 9.1  |            | $ | 60.3       |  | $            | 41.4 |       | $ | 72.5 |  | $ | 183.3
|Principal payments on long-term debt, including the current portion   |  |                                          | 10.3 |            |   | 223.8      |  |              |     |       |   |     |  |   | 234.1
|Interest payments on long-term debt, including the current portion(1) |  |                                          | 4.2  |            |   | 9.8        |  |              |     |       |   |     |  |   | 14.0 
|Payments under licensing arrangements                                 |  |                                          | 0.3  |            |   | 0.2        |  |              |     |       |   |     |  |   | 0.5  
|Purchase obligations(2)                                               |  |                                          | 1.8  |            |   |           |  |              |     |       |   |     |  |   | 1.8  
|                                                                      |  |                                          |      |            |   |            |  |              |      |       |   |      |  |   |      
|Total                                                                 |  | $                                        | 25.7 |            | $ | 294.1      |  | $            | 41.4 |       | $ | 72.5 |  | $ | 433.7
|                                                                      |  |                                          |      |            |   |            |  |              |      |       |   |      |  |   |      



|(1) | For purposes of the table, interest expense is calculated after giving effect to our interest rate swap as follows: (i) during the remaining two-month term of the swap
agreement, interest expense is based on $100 million of our first-lien term loan and based on the fixed rate of the swap of 5.03% plus a margin of 2.25% and interest expense on the remaining amount of the loan is estimated based on the rate in
effect as of June 28, 2009 and (ii) after the remaining two-month term of the swap agreement, interest expense on the loan is estimated for all periods based on the rate in effect as of June 28, 2009. A 1% change in interest rates on
our variable rate debt, including the effect of the interest rate swap, would result in a change of $5.0 million in our total interest payments, of which $1.2 million would be in the remainder of the year ended January 3, 2010 and $3.8 million
would be in years 1-3.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Purchase obligations include agreements to purchase goods that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to
be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Agreements that are cancelable without penalty have been excluded.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

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 affected significantly by inflation. We believe that replacement costs of equipment, furniture and 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 and reduce consumers discretionary spending.

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. Our critical accounting policies and estimates
are discussed in our Annual Report on Form 10-K for the fiscal year ended December 28, 2008, which was filed with the SEC on February 26, 2009. We believe that there have been no significant changes during the six months ended
June 28, 2009 to the items that we disclosed in our critical accounting policies and estimates with the exception of the adoption of the new accounting pronouncements as noted below.

Recent Accounting Pronouncements

In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (Statement 157). 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. For financial assets and liabilities, the provisions of Statement 157 are effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position
No. 157-2, Effective Date of FASB Statement No. 157, which amends Statement 157 by delaying the effective date of Statement 157 to fiscal years ending after November 15, 2008 for nonfinancial assets and liabilities, except for
items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We adopted Statement 157 on December 31, 2007 for financial assets and financial liabilities and on December 29, 2008 for nonfinancial
assets and liabilities. It did not have any material impact on our results of operations or financial position.



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In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations(Statement 141(R)). Statement 141(R) significantly changed 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 adopted Statement 141(R) on December 29, 2008, as required. It did not have any material impact on our results of operations or
financial position.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133(Statement 161). Statement 161 which amends and expands the disclosure requirements of Statement 133 with the intent to provide users of financial statements with an enhanced
understanding of: 1) how and why an entity uses derivative instruments; 2) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations; and 3) how derivative instruments and related
hedged items affect an entitys financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We adopted
Statement 161 on December 29, 2008. The adoption of Statement 161 had no financial impact on the financial position or results of operations as it is disclosure-only in nature.

In April 2009, the FASB issued FASB Staff Position SFAS 107-1 and Accounting Principles Board (APB) Opinion No. 28-1, Interim Disclosures about
Fair Value of Financial Instruments (SFAS 107-1 and APB 28-1), which requires quarterly disclosure of information about fair value of financial instruments within the scope of Statement 107, Disclosures about Fair Values of
Financial Instruments. SFAS 107-1 and APB 28-1 are effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. We adopted the provisions of FSP FAS
107-1 and APB 28-1 in the second quarter of 2009. The adoption of SFAS 107-1 and APB 28-1 had no financial impact on the financial position or results of operations as it is disclosure-only in nature.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events(Statement 165). Statement 165 establishes general standards of
accounting for, and requires disclosures of, events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. Statement 165 is effective for interim or annual financial periods ending after
June 15, 2009, and should be applied prospectively. We adopted Statement 165 in the second quarter of 2009. It did not have any material impact on our results of operations or financial position.

In June 2009, the FASB issued SFAS No. 168, FASB Accounting Standards CodificationTMand the Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS No. 162(Statement 168). Statement 168 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity
with generally accepted accounting principles. Statement 168 explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws as authoritative GAAP for SEC registrants.
Statement 168 is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. We will adopt Statement 168 in the third quarter of 2009, as required. We do not expect Statement 168 to have a
material impact our financial position or results of operations.



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|ITEM 3. | 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 had an initial notional amount of $200 million declining to $100 million after one-year under which, on a net settlement basis, we 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. dollar LIBOR. Our weighted average borrowings outstanding during the six months ended June 28, 2009 were $235.9 million and the annual effective interest
rate for the period was 4.70%, after giving effect to the interest swap agreement. A hypothetical 1% increase or decrease in interest rates would have resulted in a $1.2 million change to our interest expense in the six months ended June 28,
2009 and $2.4 million on an annualized basis.

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 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 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 currently hedge against foreign currency
risks.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

We maintain disclosure
controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods
specified in the SECs rules, and that such information 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. Management is responsible for establishing and maintaining adequate internal control over financial reporting. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the
foregoing, our Chief Executive Officer and Chief Financial Officer determined that our disclosure controls and procedures were effective as of the end of the quarter covered by this report at a reasonable assurance level.

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



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PART IIOTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

On July 17, 2009, the
Material Yard Workers Local 1175 Benefit Funds filed a stockholder class action in the United States District Court for the Northern District of California. The complaint names as defendants the Company, our Chief Executive Officer and our
Chief Financial Officer. It was purportedly filed on behalf of all persons who purchased Company stock between November 7, 2006, and November 26, 2007 (the Class Period). The complaint alleges violations of the
Securities Exchange Act of 1934 based on, among other things, alleged misrepresentations and omissions of material facts relating to the Companys financial condition during the Class Period, and it seeks relief in the form of
compensatory damages, attorneys fees and costs.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

An investment in our common stock
involves a high degree of risk. Our Annual Report on Form 10-K for the year ended December 28, 2008 includes a detailed discussion of our risk factors under the heading Part I, Item 1ARisk Factors. Set forth
below are changes from the risk factors previously disclosed in our Annual Report on Form 10-K. You should carefully consider the risk factors discussed in this report and our Annual Report on Form 10-K as well as the other information in
this report, before making an investment decision. If any of the following risks or the risks discussed in the Annual Report on Form 10-K occur, our business, financial condition, results of operations or future growth could suffer.

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. Our President of Retail resigned in July 2009, and, as a result, we will need to recruit a new executive with the requisite skills and experience to serve as President. Competition for
qualified senior management personnel is intense, and there can be no assurance that we will be able to attract additional qualified personnel or to retain our current personnel. The loss of a member of senior management, such as the President of
Retail, will require the remaining executive officers and other personnel to divert immediate and substantial attention to fulfilling his or her duties and to seeking a replacement. We may not be able to continue to attract or retain qualified
executive 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.

Several members of our senior management team have relatively recently joined the company. Additionally, our President of Retail resigned in July 2009,
and we are currently seeking to fill this vacancy on the senior management team. As a result, our senior management team has, and will continue to have, 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.



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We are currently subject to securities class action litigation and may be subject to similar litigation in the
future. If the outcome of this litigation is unfavorable, it could have a material adverse effect on our financial condition, results of operations and cash flows.

In July 2009, a purported stockholder class action was filed against us, our Chief Executive Officer and our Chief Financial Officer. The complaint was filed by a pension fund on behalf of persons who purchased our
stock during a class period from November 7, 2006 through November 26, 2007. The complaint alleges violations of the Securities Exchange Act of 1934, purportedly arising from non-disclosure of material facts relating to our
financial condition during the class period, and seeks relief in the form of compensatory damages, attorneys fees and costs, and such other relief as the court may deem proper. It is possible that, in the future, especially following periods
of volatility in the market price of our shares, other purported class action or derivative complaints may be filed against us alleging failure to disclose risks or other claims. The outcome of any litigation is difficult to predict and quantify,
and the defense against such claims or actions can be costly. In addition to diverting financial and management resources and general business disruption, we may suffer from adverse publicity that could harm our brand or reputation, regardless of
whether the allegations are valid or whether we are ultimately held liable. A judgment or settlement that is not covered by or is significantly in excess of our insurance coverage for any claims could materially and adversely affect our financial
condition, results of operations and cash flows.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



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

The following is a tabulation of the votes on proposals considered at our annual meeting of stockholders held on May 6, 2009:

1. To elect three directors to serve on our board of directors for a three-year term.



|                   |  |            |  |         
|------------------ |  | ---------- |  | --------
|                   |  | For        |  | Withheld
|Leslie A. Blodgett |  | 81,339,454 |  | 105,982 
|Karen M. Rose      |  | 81,347,279 |  | 98,157  
|John S. Hamlin     |  | 81,338,434 |  | 107,002 

The Companys board of directors is comprised of the individuals elected this year and the
following directors for the following terms: Ross M. Jones, Glen T. Senk and Kristina M. Leslie whose terms expire in 2010 and Lea Anne S. Ottinger, Ellen L. Brothers and Bradley M. Bloom whose terms expire in 2011.

2. To ratify the selection of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending
January 3, 2010.



|        |  |           
|------- |  | ----------
|For     |  | 81,378,499
|Against |  | 29,132    
|Abstain |  | 37,804    



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None.



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|ITEM 6. | EXHIBITS
|------- | --------

Exhibits

The following documents are incorporated by reference or filed herewith as Exhibits to this report:



|               |  |                                                                                                                                                                                                                                                                                                
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                    
|3.1(1)         |  | Amended and Restated Certificate of Incorporation.                                                                                                                                                                                                                                             
|               | 
|3.2(2)         |  | Amended and Restated Bylaws.                                                                                                                                                                                                                                                                   
|               | 
|10.1*          |  | Separation and Release Agreement between Bare Escentuals Beauty, Inc., a wholly owned subsidiary of the Registrant, and Michael Dadario dated July 20, 2009.                                                                                                                                   
|               | 
|10.2(3)*       |  | Description of 2009 Corporate Bonus Plan included under Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory
Arrangements of Certain Officers of our Current Report on Form 8-K and filed with the SEC on April 3, 2009.
|               | 
|31.1           |  | Certification of the Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                    
|               | 
|31.2           |  | Certification of the Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                    
|               | 
|32.1           |  | Certification of the Chief Executive Officer and the Chief Financial Officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                     



|(1) | Incorporated by reference from our Quarterly Report on Form 10-Q for the period ended October 1, 2006 filed on November 15, 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference from our Current Report on Form 8-K filed on November 30, 2007.
|--- | -----------------------------------------------------------------------------------------

|(3) | Incorporated by reference from our Current Report on Form 8-K filed on April 3, 2009.
|--- | -------------------------------------------------------------------------------------

|* | Indicates management contract or compensatory plan or arrangement
|- | -----------------------------------------------------------------



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.



|                     |  |                       |  |                                                                              
|-------------------- |  | --------------------- |  | -----------------------------------------------------------------------------
|                     |  | BARE ESCENTUALS, INC.
|                     |  |                      
|Date: August 5, 2009 |  | By:                   |  | /s/    LESLIE A. BLODGETT                                                    
|                     |  |                       |  | Leslie A. Blodgett                                                           
|                     |  |                       |  | Chief Executive Officer and Director                                         
|                     |  |                      
|                     |  | By:                   |  | /s/    MYLES B. MCCORMICK                                                    
|                     |  |                       |  | Myles B. McCormick                                                           
|                     |  |                       |  | Executive Vice President, Chief Financial Officer and Chief Operating Officer



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                    
|              | 
|3.1(1)        |  | Amended and Restated Certificate of Incorporation.                                                                                                                                                                                                                                             
|              | 
|3.2(2)        |  | Amended and Restated Bylaws.                                                                                                                                                                                                                                                                   
|              | 
|10.1*         |  | Separation and Release Agreement between Bare Escentuals Beauty, Inc., a wholly owned subsidiary of the Registrant, and Michael Dadario dated July 20, 2009.                                                                                                                                   
|              | 
|10.2(3)*      |  | Description of 2009 Corporate Bonus Plan included under Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory
Arrangements of Certain Officers of our Current Report on Form 8-K and filed with the SEC on April 3, 2009.
|              | 
|31.1          |  | Certification of the Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                    
|              | 
|31.2          |  | Certification of the Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                    
|              | 
|32.1          |  | Certification of the Chief Executive Officer and the Chief Financial Officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                     



|(1) | Incorporated by reference from our Quarterly Report on Form 10-Q for the period ended October 1, 2006 filed on November 15, 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference from our Current Report on Form 8-K filed on November 30, 2007.
|--- | -----------------------------------------------------------------------------------------

|(3) | Incorporated by reference from our Current Report on Form 8-K filed on April 3, 2009.
|--- | -------------------------------------------------------------------------------------

|* | Indicates management contract or compensatory plan or arrangement
|- | -----------------------------------------------------------------



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