DESCRIPTION OF BUSINESS

Alberto Culver Company (the company or New Alberto Culver) develops, manufactures, distributes and markets beauty care products as well as food and household products in the United States and more than 100 other countries. The company is organized into two reportable business segments-United States and International.

OVERVIEW

DISCONTINUED OPERATIONS

Cederroth International

Prior to July 31, 2008, the company also owned and operated the Cederroth International (Cederroth) business which manufactured, marketed and distributed beauty, health care and household products throughout Scandinavia and in other parts of Europe. On May 18, 2008, the company entered into an agreement to sell its Cederroth business to CapMan, a Nordic based private equity firm. Pursuant to the transaction agreement, on July 31, 2008 Cederroth Intressenter AB, a company owned by two funds controlled by CapMan, purchased all of the issued and outstanding shares of Cederroth International AB in exchange for 159.5 million Euros, from Alberto Culver AB, a wholly-owned Swedish subsidiary of the company. The Euros were immediately converted into $243.8 million based on the deal contingent Euro forward contract entered into by the company in connection with the transaction. The purchase price was adjusted in the first quarter of fiscal year 2009, resulting in a cash payment of $1.2 million from Alberto Culver AB to CapMan, and is subject to further adjustment to the extent the final, agreed-upon balances of cash, debt and working capital as of the July 31, 2008 closing date differ from estimates assumed in the transaction agreement.

In accordance with the provisions of the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the results of operations and cash flows related to the Cederroth business are reported as discontinued operations for all periods presented.

During the three and six months ended March 31, 2008, the company incurred transaction costs (primarily investment banking, legal and other professional service fees) of $938,000 and $1.9 million, respectively, which were recorded as part of the gain (loss) on the sale of Cederroth.

Sally Holdings, Inc.

Prior to November 16, 2006, the company also operated a beauty supply distribution business which included two segments: (1) Sally Beauty Supply, a domestic and international chain of cash-and-carry stores offering professional beauty supplies to both salon professionals and retail consumers, and (2) Beauty Systems Group, a full-service beauty supply distributor offering professional brands directly to salons through its own sales force and professional-only stores in exclusive geographical territories in North America and Europe. These two segments comprised Sally Holdings, Inc. (Sally Holdings), a wholly-owned subsidiary of the company.

On June 19, 2006, the company announced a plan to split Sally Holdings from the consumer products business. Pursuant to an Investment Agreement, on November 16, 2006:

• The company separated into two publicly-traded companies: New Alberto Culver and Sally Beauty Holdings, Inc. (New Sally);

• CDRS Acquisition LLC, a limited liability company organized by Clayton, Dubilier & Rice Fund VII, L.P., invested $575 million in New Sally in exchange for an equity interest representing approximately 47.55% of New Sally common stock on a fully diluted basis, and Sally Holdings incurred approximately $1.85 billion of indebtedness; and

• The company's shareholders received, for each share of common stock then owned, (i) one share of common stock of New Alberto Culver, (ii) one share of common stock of New Sally and (iii) a $25.00 per share special cash dividend.

The separation of the company into New Alberto Culver and New Sally involving Clayton, Dubilier & Rice (CD&R) is hereafter referred to as the "Separation." In accordance with the provisions of SFAS No. 144, the results of operations related to Sally Holdings' beauty supply distribution business are reported as discontinued operations for all periods presented.

NON-GAAP FINANCIAL MEASURE

To supplement the company's financial results presented in accordance with U.S. generally accepted accounting principles (GAAP), the company discloses "organic sales growth" which measures the growth in net sales excluding the effects of foreign currency fluctuations, acquisitions and divestitures. This measure is a "non-GAAP financial measure" as defined by Regulation G of the Securities and Exchange Commission (SEC). This non-GAAP financial measure is not intended to be, and should not be, considered separately from or as an alternative to the most directly comparable GAAP financial measure of "net sales growth." This specific non-GAAP financial measure is presented in MD&A with the intent of providing greater transparency to supplemental financial information used by management and the company's board of directors in their financial and operational decision-making. This non-GAAP financial measure is among the primary indicators that management and the board of directors use as a basis for budgeting, making operating and strategic decisions and evaluating performance of the company and management as it provides meaningful supplemental information regarding the normal ongoing operations of the company and its core businesses. This amount is disclosed so that the reader has the same financial data that management uses with the belief that it will assist investors and other readers in making comparisons to the company's historical operating results and analyzing the underlying performance of the company's normal ongoing operations for the periods presented. Management believes that the presentation of this non-GAAP financial measure, when considered along with the company's GAAP financial measure and the reconciliation to the corresponding GAAP financial measure, provides the reader with a more complete understanding of the factors and trends affecting the company than could be obtained absent this disclosure. It is important for the reader to note that the non-GAAP financial measure used by the company may be calculated differently from, and therefore may not be comparable to, a similarly titled measure used by other companies. A reconciliation of this measure to its most directly comparable GAAP financial measure is provided in the "Reconciliation of Non-GAAP Financial Measure" section of MD&A and should be carefully evaluated by the reader.

                    ALBERTO CULVER COMPANY AND SUBSIDIARIES



RESTRUCTURING AND OTHER

Restructuring and other expenses during the three and six months ended March 31,
2009 and 2008 consist of the following (in thousands):



                                                        Three Months Ended        Six Months Ended
                                                             March 31                 March 31
                                                       2009            2008      2009          2008
Severance and other exit costs                       $     (72 )          913      270          3,280
Impairment and other property, plant and equipment
charges                                                     22            774      147          3,074
Loss (gain) on sales of assets                              32            226      (93 )          226
Non-cash charges for the recognition of foreign
currency translation losses (gains) in connection
with the liquidation of foreign legal entities            (103 )          152     (167 )          227
Legal fees and other expenses incurred to assign
the company's trademarks following the closing of
the Separation                                             100              5      114             52

                                                     $     (21 )        2,070      271          6,859

Severance and Other Exit Costs

On November 27, 2006, the company committed to a plan to terminate employees as part of a reorganization following the Separation. In connection with this reorganization plan, on December 1, 2006 the company announced that it was going to close its manufacturing facility in Dallas, Texas. The company's worldwide workforce has been reduced by approximately 215 employees as a result of the reorganization plan, including 125 employees from the Dallas, Texas manufacturing facility.

Through March 31, 2009, the company has recorded cumulative charges related to this plan of $15.0 million for severance, $254,000 for contract termination costs and $1.3 million for other exit costs. The following table reflects the activity related to this restructuring plan during the six months ended March 31, 2009 (in thousands):

                                    Liability at           New Charges           Cash Payments &          Liability at
                                 September 30, 2008       & Adjustments         Other Settlements        March 31, 2009
Severance                       $                466                (96 )                     (84 )                 286
Contract termination costs                        -                  13                       (13 )                  -
Other                                            124                 13                       (81 )                  56

                                $                590                (70 )*                   (178 )                 342

On October 25, 2007, the company committed to a plan primarily related to the closure of its manufacturing facility in Toronto, Canada. As part of the plan, the company's workforce has been reduced by approximately 125 employees.

Through March 31, 2009, the company has recorded cumulative charges related to this plan of $2.5 million for severance and $425,000 for other exit costs. The following table reflects the activity related to this restructuring plan during the six months ended March 31, 2009 (in thousands):

                    Liability at         New        Cash Payments &       Liability at
                 September 30, 2008    Charges     Other Settlements     March 31, 2009
    Severance   $                330        -                   (241 )               89
    Other                         -         16                   (16 )               -

                $                330        16 *                (257 )               89

On May 29, 2008, the company committed to a plan to close its manufacturing facility, reduce its headcount and relocate to a smaller commercial office in Puerto Rico. As part of the plan, the company's workforce has been reduced by approximately 100 employees.

Through March 31, 2009, the company has recorded cumulative charges related to this plan of $1.7 million for severance, $8,000 for contract termination costs and $1.1 million for other exit costs. The following table reflects the activity related to this restructuring plan during the six months ended March 31, 2009 (in thousands):

                    Liability at         New        Cash Payments &       Liability at
                 September 30, 2008    Charges     Other Settlements     March 31, 2009
    Severance   $                212        29                  (213 )               28
    Other                        427       295                  (722 )               -

                $                639       324 *                (935 )               28

* The sum of these three amounts from the tables above represents the $270,000 of total charges for severance and other exit costs recorded during the first half of fiscal year 2009.

Impairment and Other Property, Plant and Equipment Charges

During the first half of fiscal year 2009, the company recorded fixed asset charges of $147,000 related to the closure of the Puerto Rico manufacturing facility. During the first half of fiscal year 2008, the company recorded total impairment and other fixed asset charges of $3.1 million, including $1.1 million in connection with the closure of the Dallas, Texas manufacturing facility and $2.0 million related to the closure of the Toronto, Canada manufacturing facility.

Loss (Gain) on Sale of Assets

The company closed on the sale of its manufacturing facility in Puerto Rico on December 19, 2008. The company received net cash proceeds of $722,000 and recognized a pre-tax gain of $93,000 in the first half of fiscal year 2009 as a result of the sale. The company closed on the sale of its manufacturing facility in Dallas, Texas on March 26, 2008. The company received net cash proceeds of $3.1 million and recognized a pre-tax loss of $226,000 in the second quarter of fiscal year 2008 as a result of the sale.

Foreign Currency Translation Loss (Gain)

The company substantially completed the liquidation of two foreign legal entities in connection with its reorganization plan and is therefore recognizing in restructuring and other expenses the accumulated foreign currency translation losses (gains) related to the entities, which resulted in a $167,000 benefit during the first half of fiscal year 2009.

Trademark Legal Fees and Other Expenses

Due to the series of transactions affecting the company's legal structure as part of the closing of the Separation, the company completed a process to assign many of its existing trademarks in various countries around the world. In connection with this effort, the company incurred legal fees and other expenses of $114,000 and $52,000 in the first half of fiscal years 2009 and 2008, respectively.

AUCTION RATE SECURITIES

Prior to the second quarter of fiscal year 2008, the company regularly invested in auction rate securities (ARS) which typically are bonds with long-term maturities that have interest rates which reset at intervals of up to 35 days through an auction process. These investments are considered available for sale in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." All of the company's remaining investments in ARS at March 31, 2009 represent interests in pools of student loans and have AAA/Aaa credit ratings. In addition, all of these securities carry an indirect guarantee by the U.S. federal government of at least 97% of the par value through the Federal Family Education Loan Program (FFELP). Based on these factors and the credit worthiness of the underlying assets, the company does not believe that it has significant principal risk with regard to these investments.

Historically, the periodic auctions for these ARS investments have provided a liquid market for these securities. As a result, the company carried its investments at par value, which approximated fair value, and classified them as short-term in the consolidated balance sheets. Starting in the second quarter of fiscal year 2008, each of the company's remaining ARS investments has experienced multiple failed auctions, meaning that there have been insufficient bidders to match the supply of securities submitted for sale. During the first half of fiscal year 2009, the company did not redeem any ARS investments as a result of successful auctions as all auctions for the company's remaining ARS investments continued to fail during the period. In addition, the company did not recognize any realized gains or losses from the sale of ARS investments in its statement of earnings. The company continues to earn interest on its investments at the maximum contractual rate and continues to collect the interest in accordance with the stated terms of the securities. At March 31, 2009, the company's outstanding ARS investments carried a weighted average tax exempt interest rate of 1.1%.

At March 31, 2009, the company has ARS with a total par value of $69.8 million. The company has recorded these investments on its consolidated balance sheet at an estimated fair value of $64.9 million and recorded an unrealized loss of $4.9 million in accumulated other comprehensive income, reflecting the decline in the estimated fair value. The unrealized loss has been recorded in accumulated other comprehensive income and not the statement of earnings as the company has concluded at March 31, 2009 that no other-than-temporary impairment losses have occurred because its investments continue to be of high credit quality and the company has the intent and ability to hold these investments until the anticipated recovery in market value occurs. The company will continue to analyze its ARS in future periods for impairment and may be required to record a charge in its statement of earnings in future periods if the decline in fair value is determined to be other-than-temporary. The fair value of these securities has been estimated by management using unobservable input data from external sources. Because there is no active market for these securities, management utilized a discounted cash flow valuation model to estimate the fair value of each individual security, with the key assumptions in the model being the expected holding period for the ARS, the expected coupon rate over the holding period and the required rate of return by market participants (discount rate), adjusted to reflect the current illiquidity in the market. For each of the company's existing securities, the model calculates an expected periodic coupon rate using regression analysis and a market required rate of return that includes a risk-free interest rate and a credit spread. At March 31, 2009, the estimated required rate of return was adjusted by a spread of 1.5% to reflect the illiquidity in the market. The model then discounts the expected coupon rate at the adjusted discount rate to arrive at the fair value price. At March 31, 2009, the assumed holding period for the ARS was three years and the weighted average expected coupon rate and adjusted discount rate used in the valuation model were 4.3% and 4.2%, respectively.

One of the company's outstanding ARS investments with an estimated $8.5 million fair value is scheduled to mature on September 1, 2009 and is therefore classified as short-term on the March 31, 2009 balance sheet. The remainder of the investments have been classified as long-term as the company cannot be certain that they will settle within the next twelve months. Other than the one ARS investment which matures September 1, 2009, the company's remaining ARS investments have scheduled maturities ranging from 2029 to 2042. As noted above, it is management's intent to hold these investments until the company is able to recover the full par value, either through issuer calls, refinancings or other refunding initiatives, the recovery of the auction market or the emergence of a new secondary market. Management's assumption used in the current fair value estimates is that this will occur within the next three years.

The company anticipates that its existing cash and cash equivalent balances, along with cash flows from operations and available credit, will be sufficient to fund its operating and other requirements.

RECLASSIFICATION

During the fourth quarter of fiscal year 2008, the company determined that certain costs previously classified in the consolidated statements of earnings as components of advertising, marketing, selling and administrative expenses should be classified as cost of products sold to be consistent with the company's policy of capitalizing these costs in inventory. As a result, for the three and six months ended March 31, 2008 the company has reclassified $4.2 million and $8.3 million of these costs, respectively, which are associated with the transfer of finished goods from manufacturing plants to distribution centers. The reclassifications had no effect on earnings or cash flows.

RESULTS OF OPERATIONS

Comparison of the Quarters Ended March 31, 2009 and 2008

The company recorded second quarter net sales of $344.3 million in fiscal year 2009, a decrease of $5.0 million or 1.4% compared to the same period of the prior year. Organic sales, which exclude the effect of foreign currency fluctuations (an adverse impact of 10.1%) and the net sales of Noxzema products in 2009 (a positive impact of 2.4%), grew 6.3% during the second quarter of fiscal year 2009.

Earnings from continuing operations were $27.8 million for the three months ended March 31, 2009 versus $26.6 million for the same period of the prior year. Diluted earnings per share from continuing operations were 28 cents in the second quarter of fiscal year 2009 compared to 26 cents in the same period of fiscal year 2008. In the second quarter of fiscal year 2009, restructuring and other expenses and discrete tax items increased earnings from continuing operations by $45,000 and $229,000, respectively, and neither amount had an impact on diluted earnings per share from continuing operations. In the second quarter of fiscal year 2008, restructuring and other expenses reduced earnings from continuing operations by $1.4 million and diluted earnings per share from continuing operations by 2 cents, while discrete tax items increased earnings from continuing operations by $927,000 and diluted earnings per share from continuing operations by 1 cent.

Net sales for the United States segment in the second quarter of fiscal year 2009 increased 5.2% to $229.6 million from $218.2 million in the same quarter last year. The 2009 sales increase was principally due to higher sales of Nexxus products (2.8%) and TRESemmé shampoos, conditioners and styling products (2.7%). In addition, the acquisition of Noxzema in October 2008 added approximately 3.6% to sales for the second quarter of fiscal year 2009. These increases were partially offset by lower sales from other brands including Alberto VO5 and St. Ives.

Net sales for the International segment decreased to $114.7 million in the second quarter of fiscal year 2009 compared to $131.1 million in the comparable period last year. This sales decrease of 12.5% was primarily attributable to the effect of foreign exchange rates (27.0%), partially offset by higher sales of TRESemmé shampoos, conditioners and styling products (7.1%) including the effect of the launch in Spain, as well as the company's multicultural product lines (2.7%), Alberto VO5 (1.9%) and St. Ives (0.8%). The launch of Nexxus in Canada also contributed to the segment's organic growth during the quarter.

Gross profit decreased $12.7 million or 6.8% to $173.4 million for the second quarter of fiscal year 2009 compared to the second quarter of the prior year. Gross profit, as a percentage of net sales, was 50.3% for the second quarter of fiscal year 2009 compared to 53.3% for the same period in the prior year. Gross profit in the United States in the second quarter of fiscal year 2009 decreased $2.8 million or 2.4% from the prior year period. As a percentage of net sales, United States' gross profit was 50.1% during the second quarter of fiscal year 2009 compared to 54.1% in the comparable quarter last year. The decrease in gross profit margin in the United States was primarily attributable to higher raw material costs due to short-term cost pressures resulting from higher oil prices in the fall of 2008 as well as supply and demand issues leading to significantly higher prices for other materials such as tin plate and chemicals. Gross profit for the International segment decreased $9.9 million or 14.5% in the second quarter of fiscal year 2009 versus last year's second quarter. As a percentage of net sales, International's gross profit was 50.7% in the second quarter of fiscal year 2009 compared to 51.9% in the prior year period. The gross profit margin for International was also affected by higher raw material costs, as noted above, as well as negative effects from foreign currency fluctuations because in certain markets significant raw material purchases are made in U.S. dollars. In the International segment, these effects were partially offset by favorable product mix, driven by the TRESemmé launch in Spain.

Compared to the prior year, advertising, marketing, selling and administrative expenses in fiscal year 2009 decreased $16.3 million or 11.0% for the second quarter. This overall decrease consists of lower advertising and marketing expenses (6.6%) and selling and administrative expenses (4.4%).

Advertising and marketing expenditures decreased 14.5% to $57.6 million (16.7% of net sales) in the second quarter of 2009 compared to $67.3 million (19.3% of net sales) in the prior year primarily due to the effect of foreign exchange rates, which accounted for 7.5% of the decrease, a lower investment behind St. Ives due to the timing of brand initiatives, media efficiencies in several markets and a shift in the United States to higher trade promotion spending. Advertising and marketing expenditures in the United States decreased 16.3% in the second quarter of fiscal year 2009 compared to the same period in the prior year. The decrease was primarily due to lower advertising and marketing expenditures for St. Ives (12.9%) as a result of significant expenditures in the second quarter of fiscal year 2008 to support the Elements launch, as well as the company's multicultural product lines (2.1%). Advertising and marketing expenditures for the International segment decreased 10.7% in the second quarter of fiscal year 2009 compared to the same period last year, primarily due to the effect of foreign exchange rates (23.5%) and lower advertising and marketing expenditures for Alberto VO5 (7.9%), partially offset by increased advertising and marketing expenditures for TRESemmé (14.0%) due in part to the launch in Spain and Nexxus (8.2%) to support the launch in Canada.

Selling and administrative expenses decreased 8.1% to $73.9 million in the second quarter of fiscal year 2009 from $80.4 million in the second quarter of fiscal year 2008. Selling and administrative expenses, as a percentage of net sales, decreased to 21.5% in the second quarter of fiscal year 2009 from 23.0% in the comparable period of the prior year. Selling and administrative expenses in the United States decreased 6.8% for the second quarter of fiscal year 2009 compared to the prior year period primarily due to lower incentive expenses and freight costs. International's selling and administrative expenses decreased 11.6% in the second quarter of fiscal year 2009 compared to the same quarter last year primarily due to the effect of foreign exchange rates. Selling and administrative expenses for both reportable segments were also positively impacted by cost savings initiatives implemented by the company. Stock option expense, which is included in selling and administrative expenses but is not allocated to the company's reportable segments, was $1.5 million in the second quarter of fiscal year 2009 compared to $836,000 in the same period in fiscal year 2008.

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