1385718--11/26/2008--SALLY_CAPITAL

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{debt, indebtedness, cash}

{operation, natural, condition}

{acquisition, growth, future}

{stock, price, operating}

{competitive, industry, competition}

{customer, product, revenue}

{product, liability, claim}

{system, service, information}

{property, intellectual, protect}

{provision, law, control}

{operation, international, foreign}

{condition, economic, financial}

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We may be unable to anticipate changes in consumer preferences and buying trends or manage our product lines and inventory commensurate with consumer demand. Our same store sales and quarterly financial performance may fluctuate for a variety of reasons. We depend upon manufacturers who may be unable to provide products of adequate quality or who may be unwilling to continue to supply products to us. Any significant interruption in the supply of beauty supply products by manufacturers of our products could disrupt our ability to deliver merchandise to our stores and customers in a timely manner, which could have a material adverse effect on our business, financial condition and results of operations. If products sold by us are found to be defective in labeling or content, our credibility and that of the brands we sell may be harmed, marketplace acceptance of our products may decrease and we may be exposed to liability in excess of our products liability insurance coverage and manufacturer indemnities. We could be adversely affected if we do not comply with laws and regulations or if we become subject to additional or more stringent laws and regulations. Product diversion could have an adverse impact on our revenues. BSG s financial results are affected by the financial results of BSG s franchised-based business (Armstrong McCall). Our new Internet-based business may be unsuccessful or may cause internal channel conflict. We may not be able to successfully identify acquisition candidates or successfully complete desirable acquisitions. If we acquire any businesses in the future, they could prove difficult to integrate, disrupt our business or have an adverse effect on our results of operations. If we are unable to profitably open and operate new stores, our business, financial condition and results of operations may be adversely affected. A downturn in the economy may affect consumer purchases of discretionary items such as beauty products and salon services, which could have a material adverse effect on our business, financial condition and results of operations. We cannot be certain that our ongoing cost control plans will continue to be successful. If we are unable to protect our intellectual property rights, specifically our trademarks, our ability to compete could be negatively impacted. Our ability to conduct business in international marketplaces may be affected by legal, regulatory and economic risks. We may be adversely affected by any disruption in our information technology systems. The occurrence of one or more natural disasters or acts of terrorism could adversely affect our operations and financial performance. The accounting and other management systems, controls and resources of Sally Beauty, our ultimate parent, may not be adequately prepared to meet the financial reporting and other requirements to which Sally Beauty and we are subject. We are a holding company, with no operations of our own, and we depend on our subsidiaries for cash. Risks Relating to Our Substantial Indebtedness We have substantial debt and may incur substantial additional debt, which could adversely affect our financial health, our ability to obtain financing in the future and our ability to react to changes in our business. Despite our current indebtedness levels, we and our subsidiaries may be able to incur substantially more debt, including secured debt, which could further exacerbate the risks associated with our substantial indebtedness. The agreements and instruments governing our debt contain restrictions and limitations that could significantly impact our ability to operate our business. Our ability to generate the significant amount of cash needed to service all of our debt and our ability to refinance all or a portion of our indebtedness or obtain additional financing depend on many factors beyond our control. You should not expect Sally Capital to participate in making payments on the Notes. An increase in interest rates would increase the cost of servicing our debt and could reduce our profitability. A decrease in interest rates would increase our interest expense (due to one of our interest rate swaps) and could reduce our profitability. The Impairment of Other Financial Institutions Could Adversely Affect Us Risks Relating to Our Separation from Alberto-Culver and Relating to Sally Beauty s Largest Stockholder Our historical consolidated financial information contained in this Annual Report does not represent our future financial position, results of operations or cash flows nor does it reflect what our financial position, results of operations or cash flows would have been as a separate reporting company during the periods presented. Sally Beauty and we rely upon Alberto-Culver for the accuracy of certain historical services and information. If the share distribution of Alberto-Culver common stock in the transactions separating us from Alberto-Culver did not constitute a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended, or the Code, or if Sally Beauty became liable for additional taxes owed by Alberto-Culver, then we may be responsible for payment of significant U.S. federal income taxes. Actions taken by the Lavin family stockholders or by the CDR Investors could adversely affect the tax-free nature of the share distribution of Alberto-Culver common stock in connection with the transactions separating us from Alberto-Culver. The voting power of Sally Beauty s largest stockholder may discourage third party acquisitions of Sally Beauty at a premium. The interests of Sally Beauty s largest stockholder may differ from the interests of other holders of its common stock.

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1385718--11/26/2008--SALLY_CAPITAL_INC.