| It is best to file a Schedule C if your wife really intended to operate this as a business with a serious intention of generating a profit. Usually, most small businesses have a difficult time generating a profit in the first year of operations. Thus, it would not be unusual for your business to have a loss in the first year of business.
With respect to the 2007 inventory, I suggest is that you do not worry about any inventory in 2007 and not file an amended tax return for 2007. It won't make a significant difference in the 2007 tax return.
Well, it seems your wife has no intention of continuing this business into the next year! Well, the IRS may disallow all the losses generated in the 2008 year.
I suggest that you show some ending inventory in the 2008 tax return that would be reflected as opening inventory in the 2009 tax return. Then please ask your wife to actively pursue the business in 2009 and attempt to least sell off all the remaining inventory completely in 2009. This will create an impression that your wife was seriously pursuing the business in 2009.
This will generate a small amount of revenue and ensure at least 2 years of business, thus perhaps ensuring that the IRS may not disallow the loss from the 2008.
I am afraid that filing a 1 year schedule C as a Mary Kay agent may result in the IRS recharacterizing the business as a Hobby, and thus may result in disallowance of the losses claimed on your schedule C in 2007. | 
