NOTE 3-STAFF ACCOUNTING BULLETIN NO. 108
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB No. 108"), which sets forth the SEC Staff's views on the proper methods for quantifying errors when there were uncorrected errors in a prior year. Under SAB No. 108, companies should evaluate a misstatement that existed in prior years based on its impact on the current year income statement (the "rollover" approach), as well as the cumulative effect of correcting such misstatements in the current year's ending balance sheet (the "iron curtain" approach), or collectively, the "dual" approach.

SAB No. 108 became effective for the Company's fiscal year ended June 30, 2007. Prior to application of this guidance, the Company utilized the "rollover" approach to evaluate uncorrected misstatements and believed the conclusions reached regarding its quantitative and qualitative assessments of materiality of such items, both individually and in the aggregate, were appropriate. In accordance with the transition guidance set forth in SAB No. 108, the Company elected to record a one-time cumulative effect adjustment to opening retained earnings to correct errors in certain balance sheet accounts that arose in prior years, which previously had been considered immaterial using the "rollover" approach.

Since the fiscal 1996 acquisition of the Bobbi Brown brand and through the application of SAB No. 108 on July 1, 2006, the Company made payments to the sellers based on a percentage of Bobbi Brown sales internationally, which should have been capitalized as goodwill in accordance with SFAS No. 141, "Business Combinations," as amended. These payments were previously recorded as Selling, general and administrative expenses in the consolidated statements of earnings. As such, goodwill increased by $10.5 million and opening retained earnings increased by $6.7 million, net of tax, in the accompanying fiscal 2007 consolidated balance sheet.

In connection with the Company's defined benefit pension obligations, certain liability amounts were incorrectly reflected on the balance sheet in years prior to fiscal 2002, the majority of which related to benefit plans for the Company's international operations. As such, upon initial application of SAB No. 108 on July 1, 2006, other noncurrent liabilities decreased by $8.7 million and opening retained earnings increased by $5.0 million, net of tax, in the accompanying fiscal 2007 consolidated balance sheet.

Beginning in years prior to fiscal 2003, inventory valuation was impacted by the incorrect application of profit in ending inventory partially offset by the overstatement of inventory obsolescence reserves, culminating in a fiscal 2007 decrease to inventory of $2.5 million and an opening retained earnings decrease of $2.0 million, net of tax pursuant to initial application of SAB No. 108.

In years prior to fiscal 2004 and through the initial application of SAB No. 108, the Company overstated certain accrued liability positions. As such, Other accrued liabilities decreased by $19.1 million and opening retained earnings increased by $14.5 million, net of tax, in the accompanying fiscal 2007 consolidated balance sheet.