**Exhibit 10.1**

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**SALLY BEAUTY HOLDINGS,INC.**

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**ANNUAL INCENTIVE PLAN**

 

**2007**

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# **SECTION 1PURPOSE**

 

The purpose of the Sally Beauty Holdings Annual Incentive Plan is topermit Sally Beauty Holdings, Inc. (the “Company”), through awards ofannual incentive compensation that satisfy the requirements forperformance-based compensation under Section 162(m) of the InternalRevenue Code, to attract and retain executives and to motivate these executivesto promote the profitability and growth of the Company.

 

# **SECTION 2DEFINITIONS**

 

“Award” shall mean the amount granted to a Participant by theCommittee for a Performance Period.

 

“Board” shall mean the Board of Directors of the Company, or thesuccessor thereto.

 

“Code” shall mean the Internal Revenue Code of 1986, as amended.

 

“Committee” shall mean the Compensation Committee of the Boardor any subcommittee thereof which meets the requirements of Section 162(m)(4)(C) ofthe Code.

 

“Exchange Act” shall mean the Securities Exchange Act of 1934,as amended.

 

“Executive” shall mean any “covered employee” (as defined in Section 162(m) ofthe Code) and, in the discretion of the Committee, any other executive officerof the Company or its Subsidiaries.

 

“Operating Income” shall mean, for each Performance Period, theoperating income of the Company as reported in the Company’s auditedconsolidated financial statements for the Performance Period, with suchadjustments for such Performance Period as the Committee may provide for priorto the commencement thereof, or at such later time as may be permitted byapplicable provisions of the Code (which adjustments may include effects ofcharges for restructurings, discontinued operations, extraordinary items, otherunusual or non-recurring items, and the cumulative effect of tax or accountingchanges, each as determined in accordance with generally accepted accountingprinciples and identified in the financial statements, notes to the financialstatements or management’s discussion and analysis).

 

“Participant” shall mean, for each Performance Period, eachExecutive who has been selected by the Committee to participate in the Plan.

 

“Performance Period” shall mean the Company’s fiscal year or anyother period designated by the Committee with respect to which an Award may begranted.

 

“Plan” shall mean this Sally Beauty Holdings Annual IncentivePlan, as amended from time to time.

 

“Stock Plans” shall mean the Sally Beauty Holdings 2007 OmnibusIncentive Plan and any future equity compensation plans approved by theshareholders of the Company.

 

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**SECTION 3ADMINISTRATION**

 

The Committee shall administer the Plan and shall have full authorityto interpret the Plan, to establish rules and regulations relating to theoperation of the Plan, to select Participants, to determine the amounts of anyAwards and to make all determinations and take all other actions necessary orappropriate for the proper administration of the Plan.  The Committee’s interpretation of the Plan,and all actions taken within the scope of its authority, shall be final andbinding on the Company, its stockholders and Participants, Executives, formerExecutives and their respective successors and assigns.  No member of the Committee shall be eligibleto participate in the Plan.

 

# **SECTION 4DETERMINATION OF AWARDS**

 

(a)   Prior to the beginningof each Performance Period, or at such later time as may be permitted byapplicable provisions of the Code, the Committee shall establish the Executivesor class of Executives who will be Participants in the Plan.  For each Performance Period the Award payableto the Chief Executive Officer of the Company is 1% of Operating Income withrespect to such Performance Period, and the Award payable to each other Participantis 0.5% of Operating Income with respect to such Performance Period.

 

(b)  Following the end of each Performance Period, and before anypayments are made under the Plan, the Committee shall certify in writing (i) thatthe Company has positive Operating Income for such Performance Period and (ii) theamount of the maximum Awards provided for in paragraph (a) of thissection.

 

(c)  Following the certification required by paragraph (b) ofthis section, the Committee may determine to grant to any Participant an Award,which may not exceed the amount determined in accordance with paragraph (a) ofthis section for such Participant.  TheCommittee may reduce or eliminate the Award granted to any Participant based onfactors determined by the Committee, including but not limited to, performanceagainst financial goals and the Participant’s personal performance.

 

# **SECTION 5PAYMENT OF AWARDS**

 

Each Participant shall be eligible to receive, as soon as practicableafter the amount of such Participant’s Award for a Performance Period has beendetermined, payment of the Award in cash, stock, restricted stock, options,other stock-based or stock-denominated units or any combination thereofdetermined by the Committee.  Equity orequity-based awards shall be granted under the terms and conditions of one or moreof the Company’s Stock Plans.  Payment ofthe award may be deferred in accordance with a written election by theParticipant pursuant to procedures established by the Committee.

 

# **SECTION 6AMENDMENTS**

 

The Committee may amend the Plan at any time and from time to time,provided that no such amendment that would require the consent of thestockholders of the Company pursuant to Section 162(m) of the Code,New York Stock Exchange listing rules or the Exchange Act, or any otherapplicable law, rule or regulation, shall be effective without suchconsent.  No amendment which adverselyaffects a Participant’s rights to, or interest in, an Award granted prior tothe date of the amendment shall be effective unless the Participant shall haveagreed thereto in writing.

 

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# **SECTION 7TERMINATION**

 

The Committee may terminate this Plan at any time but in no event shallthe termination of the Plan adversely affect the rights of any Participant to apreviously granted Award without such Participant’s written consent.

 

# **SECTION 8OTHER PROVISIONS**

 

(a)  No Executive or other person shall have any claim or right tobe granted an Award under this Plan until such Award is actually granted.  Neither the establishment of this Plan, norany action taken hereunder, shall be construed as giving any Executive anyright to be retained in the employ of the Company.  Nothing contained in this Plan shall limitthe ability of the Company to make payments or awards to Executives under anyother plan, agreement or arrangement.

 

(b)  The rights and benefits of a Participant hereunder arepersonal to the Participant and, except for payments made following aParticipant’s death, shall not be subject to any voluntary or involuntaryalienation, assignment, pledge, transfer, encumbrance, attachment, garnishmentor other disposition.

 

(c)  Awards under this Plan shall not constitute compensation forthe purpose of determining participation or benefits under any other plan ofthe Company unless specifically included as compensation in such plan.

 

(d)  The Company shall have the right to deduct from Awards anytaxes or other amounts required to be withheld by law.

 

(e)  Nothing contained in the Plan shall be construed to preventthe Company or any of its subsidiaries from taking any corporate action whichis deemed by it to be appropriate or in its best interest, whether or not suchaction would have an adverse effect on any awards made under the Plan andnothing in the Plan shall be deemed to limit or restrict the ability of theCompany or any of its subsidiaries from establishing any compensation plan orarrangement, or making any payment, or granting any award to any Executive orother person.  No employee, beneficiaryor other person shall have any claim against the Company or any of itssubsidiaries as a result of any such action.

 

(f)  All questions pertaining to the construction, regulation,validity and effect of the provisions of the Plan shall be determined inaccordance with the laws of the State of New York without regard to principlesof conflict of laws.

 

(g)  No member of the Committee or the Board, and no officer,employee or agent of the Company shall be liable for any act or actionhereunder, whether of commission or omission, taken by any other member, or byany officer, agent, or employee, or, except in circumstances involving badfaith, for anything done or omitted to be done in the administration of thePlan.

 

# **SECTION 9EFFECTIVE DATE**

 

The Plan shall be effective as of April 26,2007, subject to approval by the stockholders of the Company in accordance withSection 162(m) of the Code.

 

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