Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in five sections:

† Management's Overview

† Critical Accounting Policies

† Overview of Results

† Results of Operations

† Liquidity and Capital Resources

MANAGEMENT'S OVERVIEW

Regis Corporation (RGS, we, our, or us) owns, franchises or holds ownership interests in beauty salons, hair restoration centers and educational institutions. As of December 31, 2008, we owned, franchised or held ownership interests in over 13,600 worldwide locations. Our locations consisted of 10,740 system wide North American and International salons, 94 hair restoration centers and approximately 2,800 locations in which we maintain an ownership interest. Our salon concepts offer generally similar products and services and serve mass market consumers. Our salon operations are organized to be managed based on geographical location. Our North American salon operations include 10,271 salons, including 2,102 franchise salons, operating in the United States, Canada and Puerto Rico primarily under the trade names of Regis Salons, MasterCuts, Trade Secret, SmartStyle, Supercuts and Cost Cutters. Our International salon operations include 469 company-owned salons, located in the United Kingdom. Our hair restoration centers, operating under the trade name Hair Club for Men and Women, include 94 North American locations, including 33 franchise locations. As of December 31, 2008, we had approximately 65,000 corporate employees worldwide.

On January 26, 2009, the Company entered into an agreement to sell its Trade Secret salon concept (Trade Secret). The Company concluded, after a comprehensive review of strategic and financial options, to divest Trade Secret. The sale of Trade Secret includes 659 company-owned salons and 62 franchise salons, all of which have historically been reported within the Company's North America reportable segment. The sale of Trade Secret is expected to close on February 15, 2009, and will reduce the worldwide locations noted above by the 659 company-owned salons and 62 franchise salons. The sale of Trade Secret includes Cameron Capital I, Inc. (CCI). CCI owns and operates PureBeauty and BeautyFirst salons and was acquired by the Company on February 20, 2008.

On August 1, 2007, we contributed our 51 accredited cosmetology schools to Empire Education Group, Inc., creating the largest beauty school operator in North America. As of December 31, 2008, we own a 55.1 percent equity interest in Empire Education Group, Inc. (EEG). Our investment in EEG is accounted for under the equity method as Empire Beauty School retains majority voting interest and has full responsibility for managing EEG. This transaction leverages EEG's management expertise, while enabling us to maintain a vested interest in the beauty school industry. The combined Empire Education Group, Inc. includes 86 accredited cosmetology schools with annual revenues of approximately $130 million. Results of operations of the accredited beauty schools for the month ended July 31, 2007 are reported in the North American salons segment. The Company retained ownership of its one North American and four United Kingdom Vidal Sassoon schools. Results of operations for the Vidal Sassoon schools are included in the respective North American and International salon segments.

On January 31, 2008, we merged our continental European franchise salon operations with the Franck Provost Salon Group in exchange for a 30.0 percent equity interest in the newly formed entity, Provalliance. This transaction is expected to create significant growth opportunities for Europe's salon brands. The Provost Salon Group management structure has a proven platform to build and acquire company-owned stores as well as a strong franchise operating group that is positioned for expansion. Provalliance operates over 2,400 company-owned and franchise salons.

Over the next twelve to eighteen months our strategy is to focus on strengthening our balance sheet by reducing our overall combined current and long-term debt to below $700.0 million. This will be achieved by moderating our acquisition and capital expenditure spending, as well as focusing on reducing overhead expenses. Our long-term growth strategy consists of

two primary, but flexible, components. Through a combination of organic and acquisition growth, we seek to achieve six to ten percent annual revenue growth. We anticipate that going forward, the mix of organic and acquisition growth will be roughly equal. However, depending on several factors, including the ability of our salon development program to keep pace with the availability of real estate for new construction, hair restoration lead generation, the availability of attractive acquisition candidates and same-store sales trends, this mix will vary from year to year.

We are in compliance with all covenants and other requirements of our financing arrangements as of December 31, 2008. However, the continued global economic downturn and credit crisis have negatively impacted our operating results in the three and six months ended December 31, 2008. Accordingly we continue to take action to reduce debt and interest expense by utilizing intercompany borrowings on a short-term basis as allowed by a recently expanded IRS ruling. We are also focused on reducing capital expenditure and acquisition budgets, reducing inventory levels, and reducing overhead.

Salon Business

The strength of our salon business is in the fundamental similarity and broad appeal of our salon concepts that allow flexibility and multiple salon concept placements in shopping centers and neighborhoods. Each concept generally targets the middle market customer, however, each attracts a different demographic. We believe there are growth opportunities in all of our salon concepts. When commercial opportunities arise, we anticipate testing and developing new salon concepts to complement our existing concepts.

We execute our salon growth strategy by focusing on real estate. Our salon real estate strategy is to add new units in convenient locations with good visibility and customer traffic, as well as appropriate trade demographics. Our various salon and product concepts operate in a wide range of retailing environments, including regional shopping malls, strip centers and Wal-Mart Supercenters. We believe that the availability of real estate will augment our ability to achieve the aforementioned long-term growth objectives.

Organic salon revenue growth is achieved through the combination of new salon construction and salon same-store sales increases. During the next twelve to eighteen months we will be slowing our capital expenditures which includes building new salons. Once the economy normalizes we expected we will continue with our historical trend of building several hundred company-owned salons. We anticipate our franchisees will open approximately 80 to 120 salons as well. Older, unprofitable salons will be closed or relocated. Our long-term outlook for our salon business is for annual consolidated low single digit same-store sales increases.

Historically, our salon acquisitions have varied in size from as small as one salon to over one thousand salons. The median acquisition size is approximately ten salons. From fiscal year 1994 to December 31, 2008, we acquired 7,952 salons, net of franchise buybacks. We anticipate adding several hundred company-owned salons each year from acquisitions. Some of these acquisitions may include buying salons from our franchisees.

Hair Restoration Business

In December 2004, we acquired Hair Club for Men and Women. Hair Club for Men and Women is a provider of hair loss solutions with an estimated five percent share of the $4 billion domestic market. This industry is comprised of numerous locations domestically and is highly fragmented. As a result, we believe there is an opportunity to consolidate this industry through acquisition. Expanding the hair loss business organically and through acquisition would allow us to add incremental revenue which is neither dependent upon, nor dilutive to, our existing salon business.

Our organic growth plans for hair restoration include the construction of a modest number of new locations in untapped markets domestically and internationally. However, the success of our hair restoration business is not dependent on the same real estate criteria used for salon expansion. In an effort to provide confidentiality for our customers, hair restoration centers operate primarily in professional or medical office buildings. Further, the hair restoration business is more marketing intensive. As a result, organic growth at our hair restoration centers will be dependent on successfully generating new leads and converting them into hair restoration customers. Our growth expectations for our hair restoration business are not dependent on referral business from, or cross marketing with, our hair salon business, but these concepts are continually evaluated closely for additional growth opportunities.

CRITICAL ACCOUNTING POLICIES

The Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the Condensed Consolidated Financial Statements, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the Condensed Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Changes in these estimates could have a material effect on our Condensed Consolidated Financial Statements.

Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements contained in Part II, Item 8 of the June 30, 2008 Annual Report on Form 10-K, as well as Note 1 to the Condensed Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q. We believe the accounting policies related to the valuation of goodwill, the valuation and estimated useful lives of long-lived assets, purchase price allocations, revenue recognition, the cost of product used and sold, self-insurance accruals, stock-based compensation expense, legal contingencies and estimates used in relation to tax liabilities and deferred taxes are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations. Discussion of each of these policies is contained under "Critical Accounting Policies" in Part II, Item 7 of our June 30, 2008 Annual Report on Form 10-K. Other than the valuation of goodwill, there were no significant changes in or application of our critical accounting policies during the three months ended December 31, 2008.

Goodwill:

As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008, we perform our impairment analysis of goodwill during the third quarter of each fiscal year in accordance with Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). Fair values are estimated based on our best estimate of the expected present value of future cash flows and compared with the corresponding carrying value of the reporting unit, including goodwill. Where available and as appropriate comparative market multiples are used to corroborate the results of the present value method. We consider our various concepts to be reporting units when we test for goodwill impairment because that is where we believe goodwill resides.

During the three months ended December 31, 2008 the fair value of the Company's stock declined such that it began trading below book value per share. Due to the adverse changes in operating results and the continuation of the Company's stock trading below book value per share, the Company performed an interim impairment test of goodwill during the three months ended December 31, 2008. The fair value of the Company's reporting units was estimated based on discounted cash flows that utilize estimates of revenues, driven by assumed same-store sales rates, estimated future gross margins and expense rates, as well as acquisition integration and maturation and appropriate discount rates.

The Regis, Mastercuts, SmartStyle, Supercuts and Promenade reporting units within the Company's North America reportable segment had estimated fair values that exceeded carrying values by a minimum of approximately 30.0 percent as of December 31, 2008 and therefore goodwill in those reporting units was not impaired. The remaining reporting unit within the North America reportable segment is Trade Secret. See Note 2 of the Condensed Consolidated Financial Statements for discussion on the $78.1 million goodwill impairment of Trade Secret recorded within discontinued operations.

A $41.7 million impairment charge for the full carrying amount of goodwill within the salon concepts in the United Kingdom was recorded within continuing operations during the three months ended December 31, 2008. The recent performance challenges of the International salon operations indicated that the estimated fair value was less than the current carrying value of this reporting unit's net assets, including goodwill.

The estimated fair value of Hair Restoration Centers exceeded its carrying value by approximately five percent at December 31, 2008 and therefore no goodwill impairment was recorded. The Hair Restoration Centers were acquired on December 1, 2004 at fair market value. Since the date of acquisition the financial performance of the Hair Restoration Centers has continued to meet or exceed the Company's internal expectations, however, because of some of the inherent assumptions and estimates in determining fair value are outside the control of management, changes in these assumptions can adversely impact fair value.

As of December 31, 2008, our estimated fair value as determined by the sum of our reporting units based upon discounted cash flow calculations reconciled to within a reasonable range of our market capitalization which included an assumed control premium. Subsequent to December 31, 2008, the fair value of our stock continues to fluctuate and regularly trades below our book value per share. Adverse changes in expected operating results, an extended period of our stock trading significantly below book value per share, and unfavorable changes in other economic factors may result in further impairments of goodwill. We will reassess the possible impairment of goodwill during the third quarter of fiscal year 2009 as part of our annual assessment.

OVERVIEW OF RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2008

† Trade Secret was classified as held for sale and reported as a discontinued operation. Reported as part of the loss on discontinued operations was a pre-tax $171.8 million non-cash write-off of the net assets associated with the sale of Trade Secret ($115.8 million, net of tax). The locations include 659 company-owned salons and 62 franchised salons that are within the Trade Secret concept.

† Revenues from continuing operations decreased 4.4 percent to $587.4 million, primarily related to a consolidated same-store sales decrease of 3.8 percent during the three months ended December 31, 2008.

† During the three months ended December 31, 2008, we acquired two corporate locations, both of which were franchise location buybacks (neither of which were hair restoration centers). We built 46 corporate locations and closed, converted or relocated 82 locations. Our franchisees constructed 28 locations and closed, sold back to us, converted or relocated 22 locations during the three months ended December 31, 2008. As of December 31, 2008, we had 8,638 company-owned locations, 2,102 franchise locations and 94 hair restoration centers (61 company-owned and 33 franchise locations).

† A pre-tax, non-cash goodwill impairment charge of $41.7 million was associated with our United Kingdom salon division.

† Lease termination costs of $1.3 million ($0.8 million pre-tax, or $0.5 million net of tax is included in continuing operations, with $0.5 million pre-tax, or $0.3 million net of tax, included in loss from discontinued operations) were incurred as a result of 14 stores that ceased using the right to use the leased property or negotiated a lease termination agreement in connection with the Company's planned closure of up to 160 underperforming company-owned salons .

† The Company recorded a $6.8 million reduction to our self-insurance accruals primarily for workers' compensation ($6.7 million included in continuing operations or $4.1 million, net of tax and $0.1 million, included, net of tax, in loss from discontinued operations ).

† A pre-tax, non-cash impairment charge of $7.8 million was related to our equity method investment in and loans to Intelligent Nutrients, LLC (the charge of $4.8 million, net of tax, is included in equity in loss of affiliated companies).

RESULTS OF OPERATIONS

As of December 31, 2008 the Trade Secret concept within the North American reportable segment was accounted for as a discontinued operation. All comparable periods will reflect Trade Secret as a discontinued operation. The following discussion of results of operations will reflect results from continuing operations. Discontinued operations will be discussed at the end of this section.

Consolidated Results of Continuing Operations

The following table sets forth, for the periods indicated, certain information derived from our Condensed Consolidated Statement of Operations, expressed as a percent of revenues. The percentages are computed as a percent of total consolidated revenues, except as noted.

                                                        For the Periods Ended December 31,
                                                      Three Months              Six Months
Results of Operations as a Percent of Revenues      2008         2007        2008         2007
Service revenues                                       75.8 %      73.4 %       76.1 %      73.9 %
Product revenues                                       22.6        23.1         22.2        22.6
Franchise royalties and fees                            1.6         3.5          1.7         3.5
Operating expenses:
Cost of service (1)                                    57.7        57.5         57.3        57.1
Cost of product (2)                                    49.0        48.5         49.0        48.1
Site operating expenses                                 8.1         7.2          8.0         7.6
General and administrative                             12.3        13.5         12.5        13.6
Rent                                                   14.0        14.5         14.5        14.4
Depreciation and amortization                           4.7         4.6          4.6         4.6
Goodwill impairment                                     7.1           -          3.5           -
Lease termination costs                                 0.1           -          0.2           -

Operating (loss) income                                (1.1 )       6.8          2.3         6.6
(Loss) income from continuing operations
before income taxes and equity in (loss)
income of affiliated companies                         (2.4 )       5.2          1.0         5.1
Income taxes                                            1.6         1.9          1.6         1.8
Equity in affiliates                                   (0.4 )       0.1         (0.2 )       0.0
(Loss) income from continuing operations               (4.4 )       3.4         (0.8 )       3.3
(Loss) income from discontinued operations            (20.0 )       0.3         (9.9 )       0.2
Net (loss) income                                     (24.4 )       3.7        (10.7 )       3.5

(2) Computed as a percent of product revenues and excludes depreciation expense.

Consolidated Revenues

Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees, hair restoration center revenues, and franchise royalties and fees. As compared to the respective prior fiscal year, consolidated revenues decreased 4.4 percent to $587.4 million during the three months ended December 31, 2008 and decreased 1.7 percent to $1,201.0 million during the six months ended December 31, 2008. The following table details our consolidated revenues by concept. All service revenues, product revenues (which include product and equipment sales to franchisees), and franchise royalties and fees are included within their respective concept within the table.

                                                    For the Periods Ended December 31,
                                                Three Months                 Six Months
                                             2008         2007          2008           2007
                                                          (Dollars in thousands)
North American salons:
Regis                                      $ 121,020    $ 128,971    $   243,343    $   256,568
MasterCuts                                    42,083       43,879         85,514         87,468
SmartStyle                                   127,785      122,179        259,041        244,282
Strip Center(1)                              220,525      213,476        453,450        426,555
Other(2)                                           -            -              -          5,558
Total North American salons (5)              511,413      508,505      1,041,348      1,020,431
International salons(1)(3)                    41,268       73,056         89,715        136,337
Hair restoration centers(1)                   34,745       33,105         69,892         65,228
Consolidated revenues                      $ 587,426    $ 614,666    $ 1,200,955    $ 1,221,996
Percent change from prior year                  (4.4 )%       5.2 %         (1.7 )%         5.5 %
Salon same-store sales (decrease)
increase(4)                                     (3.8 )%       0.1 %         (1.9 )%         1.0 %

The percent changes in consolidated revenues during the three and six months ended December 31, 2008 and 2007, respectively, were driven by the following:

                                                For the Periods Ended December 31,
                                                 Three Months           Six Months
Percentage Increase (Decrease) in Revenues     2008        2007       2008        2007
Acquisitions (previous twelve months)              6.1 %      4.3 %      6.5 %     3.9 %
Organic growth                                    (4.7 )      3.3       (3.8 )     4.2
Foreign currency                                  (2.8 )      1.7       (1.6 )     1.5
Franchise revenues(3)                             (1.8 )      0.1       (1.7 )     0.1
Closed salons(2)(3)                               (1.2 )     (4.2 )     (1.1 )    (4.2 )
                                                 (4.4) %      5.2 %     (1.7 )%    5.5 %

(2) On August 1, 2007, the Company contributed its 51 accredited cosmetology schools to Empire Education Group, Inc. Accordingly, revenue growth was negatively impacted as a result of the deconsolidation. For the three and six months ended December 31, 2007, the accredited cosmetology schools generated revenue of $0.0 and $5.6 million, respectively, which represented 0.0 and 0.5 percent of consolidated revenues, respectively.

(3) On January 31, 2008, the Company deconsolidated the results of operations of its European franchise salon operations. Accordingly, revenue growth was negatively impacted as a result of the deconsolidation. For the three and six months ended December 31, 2007 the European franchise salon operations generated revenue of $16.6 and $31.2 million which represented 2.7 and 2.6 percent of consolidated revenues, respectively.

(4) Salon same-store sales increases or decreases are calculated on a daily basis as the total change in sales for company-owned salons which were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date salon same-store sales increases are the sum of the same-store sales increases computed on a daily basis. Relocated salons are included in same-store sales as they are considered to have been open in the prior period. International same-store sales are calculated in local currencies so that foreign currency fluctuations do not impact the calculation. Management believes that same-store sales, a component of organic growth, are useful in determining the increase in salon revenues attributable to its organic growth (new salon construction and same-store sales growth) versus growth from acquisitions.

(5) As of December 31, 2008, the Trade Secret concept within the North American reportable segment was accounted for as a discontinued operation. All periods presented reflect Trade Secret as a discontinued operation. Accordingly, Trade Secret revenues are excluded from this presentation.

We acquired 323 salons (including 159 franchise salon buybacks and two hair restoration centers) during the twelve months ended December 31, 2008. The organic growth decrease was due to the salon same-store sales decrease, partially offset by the construction of 248 company-owned salons during the twelve months ended December 31, 2008. We closed 268 salons (including 65 franchise salons) during the twelve months ended December 31, 2008.

. . .