UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


(MARK ONE)

           X        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
        --------
                                SECURITIES EXCHANGE ACT OF 1934
                       FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

                    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                                SECURITIES EXCHANGE ACT OF 1934
                       FOR THE TRANSITION PERIOD FROM _______ TO _______

                                 COMMISSION FILE NO. 001-05439

                             DEL LABORATORIES, INC.
             (Exact name of registrant as specified in its charter)


            DELAWARE                                        13-1953103
--------------------------------                       -------------------
(State or other jurisdiction of                          (I.R.S. Employer
 incorporation or organization)                        Identification No.)

                  726 REXCORP PLAZA, UNIONDALE, NEW YORK 11556
                  --------------------------------------------
               (Address of principal executive offices) (Zip Code)


       Registrant's telephone number, including area code: (516) 844-2020

                            -------------------------

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES ( ) NO (X)

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):

Large accelerated filer  ( )  Accelerated filer  ( )  Non-accelerated filer  (X)

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES ( ) NO (X)

        The number of shares of Common Stock, $.01 par value, outstanding as of
November 13, 2007 was 1,000.



<PAGE>





                     DEL LABORATORIES, INC. AND SUBSIDIARIES

                                      Index




Part I.    FINANCIAL INFORMATION
                                                                            PAGE
Item 1.    Financial Statements (Unaudited)

           Consolidated Balance Sheets as of September 30, 2007
                  and December 31, 2006                                        3

           Consolidated Statements of Operations for the three and
                  nine months ended September 30, 2007
                  and 2006 (restated)                                          4

           Consolidated Statements of Cash Flows for the nine months ended
               September 30, 2007 and 2006 (restated)                          5

           Notes to Consolidated Financial Statements                          6

Item 2.    Management's Discussion and Analysis of Financial
           Condition and Results of Operations                                31

Item 3.    Quantitative and Qualitative Disclosures About Market Risks        49

Item 4.    Controls and Procedures                                            50




Part II.   OTHER INFORMATION

Item 1A.   Risks Related to the Company                                       53

Item 6.    Exhibits                                                           53


SIGNATURES                                                                    54


                                      -2-
<PAGE>


<TABLE>
<CAPTION>



                          DEL LABORATORIES, INC. AND SUBSIDIARIES
                                 CONSOLIDATED BALANCE SHEETS
                           September 30, 2007 and December 31, 2006
                                         (In thousands)
                                           (UNAUDITED)

                                                                 September 30,  December 31,
                                                                     2007          2006
                                                                   ---------    ---------

       ASSETS

Current assets:
<S>                                                                <C>          <C>
       Cash and cash equivalents                                   $   2,233    $      42
       Accounts receivable, less allowance for doubtful accounts
         of $1,743 in 2007 and $2,113 in 2006                         59,828       58,250
       Inventories                                                   105,633       95,062
       Deferred income taxes                                          30,792       29,995
       Assets held for sale                                              400         --
       Prepaid expenses and other current assets                       5,870        6,409
                                                                   ---------    ---------
                   Total current assets                              204,756      189,758

Property, plant and equipment, net                                    38,646       44,647
Intangibles arising from acquisitions, net                           250,100      254,037
Goodwill                                                             145,318      145,318
Other assets                                                          24,234       26,701
Deferred income taxes                                                 19,712       25,398
                                                                   ---------    ---------

                   Total assets                                    $ 682,766    $ 685,859
                                                                   =========    =========

       LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
       Current portion of long-term debt                           $     197    $     165
       Accounts payable                                               37,618       40,127
       Accrued liabilities                                            37,217       44,334
                                                                   ---------    ---------

                   Total current liabilities                          75,032       84,626

Long-term debt, less current portion                                 375,859      370,239
Long-term pension liability, less current portion                     14,204       19,943
Deferred liabilities                                                   1,342        1,492
Deferred income taxes                                                 99,618       98,455
                                                                   ---------    ---------
                   Total liabilities                                 566,055      574,755
                                                                   ---------    ---------

Shareholders' equity:
       Common stock $.01 par value, 1,000 shares authorized
         and issued                                                     --           --
       Additional paid-in capital                                    148,742      146,261
       Accumulated other comprehensive income                            997          421
       Accumulated deficit (Note 6)                                  (33,028)     (35,578)
                                                                   ---------    ---------

                   Total shareholders' equity                        116,711      111,104
                                                                   ---------    ---------


                   Total liabilities and shareholders' equity      $ 682,766    $ 685,859
                                                                   =========    =========


                     The accompanying notes are an integral part of the
                             consolidated financial statements.
</TABLE>


                                            -3-
<PAGE>

<TABLE>
<CAPTION>


                                        DEL LABORATORIES, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF OPERATIONS
                                                    (In thousands)
                                                      (UNAUDITED)


                                                    THREE MONTHS ENDED                     NINE MONTHS ENDED
                                              --------------------------------   -------------------------------------

                                             July 1, 2007 -     July 1, 2006 -   January 1, 2007 -   January 1, 2006 -
                                             September 30,      September 30,       September 30,      September 30,
                                                 2007               2006                2007               2006
                                                ---------          ---------          ---------          ---------
                                                                  (Restated)                             (Restated)

<S>                                            <C>                <C>                <C>                <C>
Net sales                                      $ 116,807          $ 110,900          $ 342,859          $ 316,058

Cost of goods sold                                58,045             58,256            170,782            164,513
                                               ---------          ---------          ---------          ---------

Gross profit                                      58,762             52,644            172,077            151,545

Selling and administrative expenses               46,954             43,759            142,652            132,822
Gain on pension curtailment                         --                 (994)            (5,582)              (994)
Severance expenses                                   (94)               183                711                657
Gain on sale of property                            --                 --                 (115)               (41)
                                               ---------          ---------          ---------          ---------

Operating income                                  11,902              9,696             34,411             19,101

Other income (expense):
   Interest expense, net                          (9,405)            (9,385)           (28,281)           (27,659)
   Other income, net                                 689                 43              1,911                335
                                               ---------          ---------          ---------          ---------

Earnings (loss) before income taxes                3,186                354              8,041             (8,223)
Provision for (benefit from) income taxes          1,280                129              4,202             (3,005)
                                               ---------          ---------          ---------          ---------
Net earnings (loss)                            $   1,906          $     225          $   3,839          $  (5,218)
                                               =========          =========          =========          =========


                                  The accompanying notes are an integral part of the
                                          consolidated financial statements.
</TABLE>

                                                         -4-
<PAGE>

<TABLE>
<CAPTION>

                             DEL LABORATORIES, INC. AND SUBSIDIARIES
                              CONSOLIDATED STATEMENTS OF CASH FLOWS
                                         (In thousands)
                                           (UNAUDITED)



                                                                               September 30,
                                                                          ---------------------
                                                                             2007         2006
                                                                           --------    --------
                                                                                        Restated

<S>                                                              <C>                    <C>
Cash flows provided by (used in) operating activities:
Net earnings (loss)                                                        $  3,839    $ (5,218)
Adjustments to reconcile net earnings (loss) to net cash
  provided by (used in) operating activities:
Depreciation and amortization                                                12,241      11,399
Amortization of display fixtures                                              7,617       7,387
Amortization of deferred financing fees and original issue discount           2,220       2,057
Non-cash stock compensation                                                   3,077         606
Deferred income taxes                                                         5,498      (3,731)
Provision for excess and slow moving inventory                               11,469       8,679
Provision for (recovery from) doubtful accounts                                 (14)          5
Gain on pension curtailment                                                  (5,582)       (994)
Loss on asset impairment                                                        804        --
Gain on sale of property                                                       (115)        (97)
Other non-cash operating items                                               (1,348)       (266)

Changes in operating assets and liabilities:
    Accounts receivable                                                        (896)     (1,052)
    Inventories                                                             (20,417)      6,063
    Prepaid expenses and other current assets                                   680       1,001
    Other assets                                                             (7,799)     (8,764)
    Accounts payable                                                         (2,871)     (5,506)
    Accrued liabilities                                                      (5,360)        803
    Pension liability (net)                                                  (2,526)       (607)
    Deferred liability                                                         (203)        463
                                                                           --------    --------

          Net cash provided by operating activities                             314      12,228
                                                                           --------    --------

Cash flows provided by (used in) investing activities:
    Net proceeds from sale of property                                        3,439         707
    Property, plant and equipment additions                                  (5,648)     (4,774)
                                                                           --------    --------

         Net cash used in investing activities                               (2,209)     (4,067)
                                                                           --------    --------

Cash flows provided by (used in) financing activities:
    Principal borrowings (payments) under revolving credit facility, net      5,000      (5,000)
    Principal payments under mortgage                                           (44)        (44)
    Payment of deferred financing fees                                         --          (758)
    Distribution to DLI Holding Corp. (Note 9(b))                            (2,020)       --
    Contributed capital (Note 9(c))                                           1,425          40
    Payment of capital lease obligations                                        (97)        (95)
                                                                           --------    --------

          Net cash provided by (used in) financing activities                 4,264      (5,857)
                                                                           --------    --------

Effect of exchange rate changes on cash                                        (178)        129
                                                                           --------    --------

Net increase in cash and cash equivalents                                     2,191       2,433

Cash and cash equivalents at beginning of period                                 42       2,602
                                                                           --------    --------

Cash and cash equivalents at end of period                                 $  2,233    $  5,035
                                                                           ========    ========

Supplemental disclosures:
Cash paid for:
    Interest                                                               $ 29,506    $ 29,112
    Income taxes                                                           $  1,511    $  1,855

Non-cash transactions:
    Equipment acquired under capitalized leases                            $    569    $   --


                       The accompanying notes are an integral part of the
                               consolidated financial statements.
</TABLE>


                                              -5-
<PAGE>








                     DEL LABORATORIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (IN THOUSANDS)
                                   (UNAUDITED)


1. ORGANIZATION AND OTHER MATTERS

On January 27, 2005, DLI Acquisition Corp ("Sub"), a Delaware corporation and an
affiliate of Kelso & Company ("Kelso"), was merged (the "Merger") with and into
Del Laboratories, Inc., a Delaware corporation ("Del" ), pursuant to an
Agreement and Plan of Merger, dated July 1, 2004 (the "Merger Agreement"), by
and among Sub, Del and DLI Holding Corp., a Delaware corporation. Following the
Merger, Del ceased to be a publicly traded company and is now a wholly-owned
subsidiary of DLI Holding II Corp., a Delaware corporation which, in turn, is
owned by DLI Holding Corp. and is an indirect, wholly-owned subsidiary of DLI
Holding LLC, a Delaware limited liability company affiliated with Kelso ("DLI
LLC"). In connection with the Merger, Del issued 1,000 common shares with a $.01
par value. Following the completion of the Merger, affiliates of Kelso have the
right to designate, directly or indirectly, the board of directors of each of
DLI LLC, DLI Holding Corp., DLI Holding II Corp. and Del.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Del Laboratories, Inc. and subsidiaries (the "Company") is a manufacturer and
marketer of cosmetic and proprietary over-the-counter ("OTC") pharmaceutical
products. The principal products in the cosmetics segment are nail color, nail
treatment, bleaches and depilatories, beauty implements and value cosmetics. The
principal products in the pharmaceutical segment are oral analgesics, children's
toothpaste and sore throat relief and specialty OTC products.

The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with U.S. generally accepted accounting principles
for interim financial information and with the instructions to Quarterly Report
on Form 10-Q. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements. Interim results are not necessarily indicative of results
for a full year.

The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates. Estimates and
assumptions are reviewed periodically and the effects of revisions are reflected
in the consolidated financial statements in the period they are determined to be
necessary. Significant estimates made in the accompanying unaudited consolidated
financial statements include, but are not limited to, allowances for doubtful
accounts, inventory obsolescence reserves and reserves for future sales returns
and allowances and markdowns.

A summary of the Company's critical and significant accounting policies are
presented in its 2006 Annual Report on Form 10-K. Users of financial information
produced for interim periods are encouraged to refer to the footnotes contained
in the 2006 Annual Report on Form 10-K when reviewing interim financial results.
Since December 31, 2006, there have been no significant changes to the Company's
significant accounting policies or to the related assumptions and estimates
involved in applying these policies, except as described in the following
paragraph.

                                      -6-
<PAGE>

In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES - AN
INTERPRETATION OF FASB NO. 109" ("FIN No. 48"). FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "ACCOUNTING FOR INCOME TAXES." FIN No. 48 prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN No. 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The Company adopted the provisions of FIN No. 48 effective January
1, 2007. As a result of the adoption of FIN No. 48, the Company recorded a
$1,289 increase in the net liability for unrecognized tax benefits, which as
required, was accounted for as an increase to the January 1, 2007 accumulated
deficit.

In the opinion of management, the accompanying interim consolidated financial
statements contain all material adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position,
results of operations and cash flows of the Company for interim periods.

Certain reclassifications were made to prior year amounts in order to conform to
the current year presentation. The reserves for future markdowns and other
related reserves for customer liabilities previously included in accrued
liabilities in the consolidated balance sheet have been reclassified as a
reduction of accounts receivable to be consistent with the classification of
other reserves for customer liabilities. As of September 30, 2007 and December
31, 2006, reserves for customer liabilities aggregated $41,254 and $41,566,
respectively. In addition, gain on sale of property previously reported as a
separate line item within other income (expense) has been reclassified as a
separate line item within operating income.

As previously disclosed, the Company was unable to file its Quarterly Report on
Form 10-Q for the quarter ended March 31, 2007 ("First Quarter Form 10-Q") by
the required filing date of May 15, 2007 as the Company determined that it was
necessary to re-evaluate its customer liabilities pertaining to reserves
required for future sales returns and allowances and markdowns. The Company
completed this re-evaluation and concluded that immaterial adjustments were
required to previously reported amounts and made such corrections through an
adjustment (increase) to its customer liability reserves of $209 in the quarter
ended March 31, 2007.

The consolidated balance sheet as of December 31, 2006 has been revised to
correct an immaterial error in the Company's accounting for universal display
fixture reimbursement costs. The effect of this correction was to decrease other
assets by $961, increase deferred income tax assets by $359 and increase the
accumulated deficit by $602. The Company believes that the effect of this
misstatement was not material, either quantitatively or qualitatively, to 2006
or any prior year. The consolidated statement of operations for the three months
ended September 30, 2007 includes amortization of display fixtures totaling $370
of which $117 and $253 relate to the first and second quarters of 2007,
respectively. The Company believes that the effect of this misstatement was not
material, either quantitatively or qualitatively, to any prior period.


3. RESTATEMENTS

The Company's consolidated statement of operations for the three and nine months
ended September 30, 2006 and consolidated statement of cash flows for the nine
months ended September 30, 2006 included in this Quarterly Report on Form 10-Q
have been restated, principally as a result of understatements of certain
customer liabilities relating to prior financial periods. The understatements of
customer liabilities pertained to reserves required for future sales returns and
allowances and markdowns due to incorrect assumptions and methodology and an
accrual required for cooperative and promotional advertising programs. The
Company also corrected certain other errors previously considered immaterial
individually and in the aggregate. The understatements of customer liabilities
and certain other errors dated back prior to the Merger and, accordingly, the
computation of the error as of the date of the Merger is reflected in an
adjustment to goodwill of $16,022. Such restatements were previously disclosed
in Note 3 of the Consolidated Financial Statements in the Company's Annual
Report on Form 10-K for the year ended December 31, 2006.

                                      -7-
<PAGE>

The following table presents the effects of the restatements made to the
Company's previously reported consolidated statement of operations for the three
and nine months ended September 30, 2006 for the errors described above.

STATEMENT OF OPERATIONS DATA

                                          Three months ended September 30, 2006
                                         ---------------------------------------
                                          AS PREVIOUSLY
                                            REPORTED     ADJUSTMENTS    RESTATED
                                            --------     -----------    --------

Net sales                                   $111,606    $   (706)(a)    $110,900
Selling and administrative expenses           43,904        (145)(b)      43,759
Operating income                              10,257        (561)          9,696
Earnings before taxes                            915        (561)            354
Provision for income taxes                       747        (618)(c)         129
Net earnings                                     168          57             225


                                          Nine months ended September 30, 2006
                                        ----------------------------------------
                                        AS PREVIOUSLY
                                          REPORTED     ADJUSTMENTS     RESTATED
                                          --------     -----------     --------

Net sales                                $ 315,840    $     218(a)    $ 316,058
Selling and administrative expenses        133,797         (975)(b)     132,822
Operating income                            17,908        1,193          19,101
Loss before taxes                           (9,416)       1,193          (8,223)
Benefit from income taxes                   (3,230)         225(c)       (3,005)
Net loss                                    (6,186)         968          (5,218)


(a)     Adjustment recorded to the reserves for future sales returns and
        allowances and markdowns and the liability for cooperative and
        promotional advertising.
(b)     Adjustment recorded to the liability for cooperative and promotional
        advertising and for the correction of other immaterial errors.
(c)     Adjustment recorded to reflect the income tax effect of the adjustments
        recorded in footnotes (a) and (b).

4.      INVENTORIES

The components of inventories were as follows:

                                                  September 30,     December 31,
                                                     2007               2006
                                                   --------           --------

Raw materials                                      $ 56,165           $ 52,803
Work in process                                       8,273              5,687
Finished goods                                       80,812             80,896
                                                   --------           --------
Total gross inventories                             145,250            139,386

Reserve for excess and slow moving inventories       39,617             44,324
                                                   --------           --------

                                                   $105,633           $ 95,062
                                                   ========           ========

                                      -8-
<PAGE>

Inventories are valued at the lower of cost (principally first-in/first-out) or
market value. The Company records an inventory obsolescence reserve to the cost
of inventories based upon its forecasted plans to sell or scrap, historical and
projected disposal rates and the physical condition and age of the inventories.
This reserve is calculated using an estimated obsolescence percentage applied to
the inventories based on age, historical trends and requirements to support
forecasted sales. In addition, the Company may establish specific reserves for
future known or anticipated events. These reserves are estimates, which could
vary significantly, either favorably or unfavorably, from actual requirements if
future economic conditions, the timing of new product introductions, customer
inventory levels, retailer consolidations, fashion-oriented color cosmetic
trends or competitive conditions differ from expectations. However, once
established, a reserve is not reduced or eliminated until the related inventory
has been disposed of.

In accordance with SFAS No. 151, "INVENTORY COSTS", the Company charged $4,376
to cost of goods sold during the nine months ended September 30, 2006 relating
to unabsorbed overhead costs in connection with the closure of the Little Falls
manufacturing facility (Note 10).

5. INTANGIBLES

Trademarks have an indefinite life and relate to several of the Company's
product lines, including SALLY HANSEN, LA CROSS, N.Y.C. NEW YORK COLOR,
CORNSILK, ORAJEL, DERMAREST, STYE, GENTLE NATURALS and PRONTO. Trademarks have
been determined to have an indefinite life as they are renewable every 10 years
and it is the Company's intention to continuously renew them. Therefore, the
Company expects its trademarks to generate cash flows indefinitely. These
trademarks are used in the advertising and marketing of the Company's products
and are widely recognized and accepted by consumers in the Company's respective
markets. Customer relationships are being amortized on a straight-line basis
over 20 years, the period over which they are expected to contribute directly or
indirectly to future cash flows.

         The components of intangibles arising from acquisitions were as
follows:

                                                     SEPTEMBER 30, 2007
                                                     ------------------
                                          GROSS
                                         CARRYING       ACCUMULATED    NET BOOK
                                           VALUE       AMORTIZATION      VALUE
                                          --------       --------       --------
Trademarks                                $159,100       $   --         $159,100
Customer relationships                     105,000         14,000         91,000
                                          --------       --------       --------

                                          $264,100       $ 14,000       $250,100
                                          ========       ========       ========

                                                      DECEMBER 31, 2006
                                                     ------------------
                                          GROSS
                                         CARRYING       ACCUMULATED    NET BOOK
                                           VALUE       AMORTIZATION      VALUE
                                          --------       --------       --------
Trademarks                                $159,100       $   --         $159,100
Customer relationships                     105,000         10,063         94,937
                                          --------       --------       --------

                                          $264,100       $ 10,063       $254,037
                                          ========       ========       ========


Amortization expense was $1,312 for the three months ended September 30, 2007
and 2006 and was $3,937 for the nine months ended September 30, 2007 and 2006.
The estimated amortization expense for the years ending December 31, 2007, 2008,
2009, 2010 and 2011 is $5,250 in each of the five years.

                                      -9-
<PAGE>


6. INCOME TAXES

The Company adopted the provisions of FIN No. 48 effective January 1, 2007. As a
result of the adoption of FIN No. 48, the Company recorded a $1,289 increase in
the net liability for unrecognized tax benefits, which as required, was
accounted for as an increase to the January 1, 2007 accumulated deficit. The
$1,289 increase in the net liability for unrecognized tax benefits was recorded
as a $439 increase in income taxes payable and a $850 increase in net deferred
tax liabilities. As of January 1, 2007, the gross amount of the liability for
unrecognized tax benefits was $3,675. If these unrecognized tax benefits were
recognized, $3,675 would impact the effective tax rate.

The Company recognizes interest expense and penalties related to the above
unrecognized tax benefits within income tax expense. The Company has accrued
interest and penalties of $128 as of September 30, 2007.

The Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction and various state and foreign jurisdictions. The number of years
that are subject to examination by tax authorities varies depending on the tax
jurisdiction. The Company's major taxing jurisdictions include the U.S and
Canada. The Company is no longer subject to U.S. federal income tax examinations
for years before 2004. With respect to state and local jurisdictions and
countries outside of the United States, with limited exceptions, the Company and
its subsidiaries are no longer subject to income tax audits for years prior to
2000.

The Company's estimated tax liability is expected to change during the next 12
months as examinations of its tax returns are completed and the Company files
various returns to settle tax liabilities. The Company believes that any
additional taxes or related interest over the amounts accrued will not have a
material effect on its consolidated financial condition, results of operations
or cash flows. However, resolution of these matters involves uncertainties and
there can be no assurance with respect to the amount or timing of any additional
taxes or related interest.

The Company recorded a provision for income taxes of $4,202 during the nine
months ended September 30, 2007. The provision was based on the Company's
expected effective tax rate of 40.3% for the year ending December 31, 2007 and,
in addition, includes an incremental provision of $931 relating to the impact of
the $2,457 non-cash stock compensation charge recorded during the second quarter
of 2007 (see Note 9(c)) which is not deductible for income tax purposes. The
Company recorded an income tax benefit of $3,005 (restated) during the nine
months ended September 30, 2006 based on the Company's expected effective tax
rate of 36.5% for the year ended December 31, 2006. The increase in the
effective income tax rate is primarily due to a greater impact of projected
permanent items on foreign book income as compared to the previous year.

A valuation allowance is recorded when management determines that it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The Company considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies, among
other factors, in making this assessment. There was no valuation allowance as of
September 30, 2007 and December 31, 2006 as the Company believes it is more
likely than not that the net deferred tax assets will be realized.

                                      -10-
<PAGE>

7. LONG - TERM DEBT

Long - term debt consisted of the following:

<TABLE>
<CAPTION>

                                                         September 30, December 31,
                                                             2007          2006
                                                             ----          ----

<C>                                                         <S>         <S>
8% senior subordinated notes, net of unamortized
   discount of $783 in 2007 and $897 in 2006, due in 2012    $174,217   $174,103
Senior secured floating rate notes, due in 2011               185,000    185,000
Revolving credit facility                                      15,000     10,000
Mortgage on land and buildings                                  1,348      1,194
Obligations under capital leases                                  491        107
                                                             --------   --------
                                                              376,056    370,404
Less current portion                                              197        165
                                                             --------   --------
                                                             $375,859   $370,239
                                                             ========   ========
</TABLE>


The $85,000 asset-based revolving credit facility ("the ABL Credit Facility")
requires the Company to enter into interest rate protection agreements to
provide interest rate protection for a minimum of 45% of the Company's
consolidated funded indebtedness for two years. Effective February 1, 2006, the
Company entered into a cap/floor collar agreement (the "Collar") with JPMorgan
Chase Bank, N.A to provide the required interest rate protection and to manage
its exposure to changes in LIBOR. The Collar is for a notional amount of
$100,000, expires on February 1, 2009 and has a cap rate of 5.5% and a floor
rate of 4.29%. The Collar has been designated as a cash flow hedge of the
variability of the cash flows due to changes in LIBOR and has been deemed to be
highly effective. Accordingly, the Company records the fair value of the Collar
as an asset or liability on its consolidated balance sheet, and any unrealized
gain or loss is included in accumulated other comprehensive income. As of
September 30, 2007, the Company recorded a liability of $251 in the accompanying
consolidated balance sheet. The Company also recorded in accumulated other
comprehensive income after-tax net losses of $199 and $157 during the three
months and nine months ended September 30, 2007, respectively, and recorded
after-tax net losses of $419 and $41 during the three and nine months ended
September 30, 2006, respectively. No hedge ineffectiveness was recorded during
the three and nine months ended September 30, 2007 and 2006.

On March 31, 2007, the Company entered into a Waiver and Consent to the ABL
Credit Facility. Among other things, the Waiver and Consent (i) waived certain
defaults or events of default relating to any potential restatement or revision
of the Company's consolidated financial statements delivered prior to the date
of the Waiver and Consent, and (ii) extended the date on which audited financial
statements with respect to the fiscal year ended December 31, 2006, and certain
other documents under the ABL Credit Facility, were required to be delivered to
April 30, 2007 from March 31, 2007. The Company delivered its audited financial
statements for the fiscal year ended December 31, 2006 and all other required
documents under the ABL Credit Facility to its lenders on April 30, 2007.

On May 15, 2007 and June 15, 2007, the Company entered into a Second Waiver and
Consent and Third Waiver and Consent to the ABL Credit Facility, respectively.
Among other things, these waivers and consents (i) waived certain defaults or
events of default relating to any potential restatement or revision of the
Company's consolidated financial statements delivered prior to the date of such
waivers and consents, and (ii) extended the date on which unaudited financial
statements for the three months ended March 31, 2007, and certain other
documents under the ABL Credit Facility, were required to be delivered to June
15, 2007 from May 15, 2007 and subsequently from June 15, 2007 to July 10, 2007.
The Company delivered its unaudited financial statements for the three months
ended March 31, 2007 and all other required documents under the ABL Credit
Facility to its lenders on July 6, 2007.

                                      -11-
<PAGE>

On June 20, 2007, the Company received (i) a notice of default from Wells Fargo,
National Association (the "Senior Subordinated Notes Trustee"), as trustee under
the Company's indenture (the "Senior Subordinated Notes Indenture") for the
Company's 8% Senior Subordinated Notes due 2012 (the " Senior Subordinated
Notes") and (ii) a notice of default from Wells Fargo, National Association
(together with the Senior Subordinated Notes Trustee, the "Trustees"), as
trustee under the Company's indenture (the "Senior Secured Notes Indenture" and,
together with the Senior Subordinated Notes Indenture, the "Indentures") for the
Company's Senior Secured Floating Rate Notes due 2011 (the "Senior Secured
Notes" and, together with the Senior Subordinated Notes, the "Notes").

Under Section 4.03(a) of the Indentures, the Company was required to file its
First Quarter Form 10-Q within the time period specified by the SEC's rules and
regulations. The Trustee for each Indenture provided the notice of default to
notify the Company that it was in violation of Section 4.03(a) of the respective
Indenture as a result of the delay in the filing of the First Quarter Form 10-Q,
as described in Note 2 above, and to demand that the Company remedy the default.

Each Indenture provides that the Company has 30 days from receipt of a notice of
default to cure such default before an event of default occurs under the
Indenture. If an event of default occurs, the respective Trustee or the Holders
of 25% in aggregate principal amount of the Senior Subordinated Notes or the
Senior Secured Notes, as the case may be, may declare the applicable Notes to be
due and payable immediately. The Company cured the default with respect to each
Indenture as of July 6, 2007 by filing its First Quarter Form 10-Q.

In January 2007, the Company entered into a capital lease agreement (principal
amount of $569) relating to certain machinery and equipment. The lease is
payable in monthly installments of $12, including interest at 6.77%, maturing in
June 2011.

8. EMPLOYEE RETIREMENT PLANS

(a) PENSION PLANS

The Company maintains two non-contributory defined benefit pension plans
covering all U.S. eligible employees: the Employees' Pension Plan and the
LaCross Pension Plan.

The Employees' Pension Plan formula is based on years of service and the
employee's compensation during the five years before retirement. As a result of
the closure of the Company's Little Falls facility (see Note 10 for further
information), there was a partial curtailment of the Employees' Pension Plan,
resulting in a reduction of the benefit obligation of $1,356, a reduction in the
unrecognized net actuarial loss of $362 and the recording of a benefit of $994
during the third quarter of 2006. Effective April 1, 2007 (approved and adopted
on January 15, 2007 by the Board of Directors of the Company), the Company
amended the Employees' Pension Plan. As a result of this amendment, the plan is
closed to new employees and the accrual of future benefits to current employees
has been discontinued. All retirement benefits that employees earned as of April
1, 2007 were fully preserved. Employees' ongoing service with the Company will
continue to be credited for vesting purposes. The amendment of the Employees'
Pension Plan resulted in a curtailment of the plan. As a result of this
curtailment, the Company recorded a reduction in the benefit obligation of
$10,285, a reduction in the unrecognized net actuarial loss of $4,865 and a
benefit of $5,420 during the first quarter of 2007. The curtailment gain was
subsequently adjusted by an incremental $162 during the second quarter of 2007.

The LaCross Pension Plan formula is based on years of service. The LaCross
Pension Plan covers former employees of the Company's Newark, New Jersey
facility which ceased operations during 2002. As a result of this closure, more
than 20% of plan participants in the LaCross Pension Plan were terminated which
resulted in a partial termination of the plan. Due to the partial termination of
the plan, all affected participants became fully vested in their accrued
benefits at their termination date. In November 2006, the Board of Directors of
the Company approved the termination of the LaCross Pension Plan. The Company
has received a favorable determination letter from the Internal Revenue Service
approving the termination of the LaCross Pension Plan.

                                      -12-
<PAGE>

Assets held by these plans consist of cash and cash equivalents, fixed income
securities consisting of U.S. government and corporate bonds and common stocks.
The Company also has a defined benefit supplemental executive retirement plan
(SERP) for certain of its executives. The SERP is a non-qualified plan under the
Internal Revenue Code. The assets in the SERP trust are considered assets of the
Company, not plan assets, and as such, are included in other assets on the
accompanying consolidated balance sheets. The assets of the SERP, which consist
of cash and cash equivalents, are held-to-maturity securities and, as such, are
carried at cost plus accrued interest.

COMPONENTS OF NET PERIOD BENEFIT COST

The components of net periodic benefit costs of the Company's domestic plans are
set forth in the following tables:


                        JULY 1, 2007 - SEPTEMBER 30, 2007
                        ---------------------------------

                                       EMPLOYEES'      LACROSS
                                     PENSION PLAN    PENSION PLAN         SERP
                                     ------------    ------------         ----

Service cost                           $  --            $  --            $     7
Interest cost                              711               15              117
Expected return on plan assets            (682)             (16)            --
Recognized net loss                       --               --                 30
                                       -------          -------          -------

Net periodic cost                      $    29          $    (1)         $   154
                                       =======          =======          =======


                        JULY 1, 2006 - SEPTEMBER 30, 2006
                        ---------------------------------

                                       EMPLOYEES'      LACROSS
                                     PENSION PLAN    PENSION PLAN         SERP
                                     ------------    ------------         ----


Service cost                           $   860          $  --            $     5
Interest cost                              677               16              103
Expected return on plan assets            (714)             (16)            --
Recognized net loss                       --               --                 35
Curtailment                               (994)            --               --
                                       -------          -------          -------

Net periodic cost                      $  (171)         $  --            $   143
                                       =======          =======          =======

                      JANUARY 1, 2007 - SEPTEMBER 30, 2007
                      ------------------------------------

                                       EMPLOYEES'      LACROSS
                                     PENSION PLAN    PENSION PLAN         SERP
                                     ------------    ------------         ----


Service cost                           $  --            $  --            $    21
Interest cost                            2,133               47              324
Expected return on plan assets          (2,046)             (46)            --
Recognized net loss                       --               --                 90
Curtailment                             (5,582)            --               --
                                       -------          -------          -------

Net periodic cost                      $(5,495)         $     1          $   435
                                       =======          =======          =======

                                      -13-
<PAGE>

                      JANUARY 1, 2006 - SEPTEMBER 30, 2006
                      ------------------------------------

                                       EMPLOYEES'      LACROSS
                                     PENSION PLAN    PENSION PLAN         SERP
                                     ------------    ------------         ----





Service cost                                 $ 2,892       $  --         $    11
Interest cost                                  2,108            48           309
Expected return on plan assets                (2,150)          (48)         --
Recognized net loss                             --            --              99
Curtailment                                     (994)         --            --
                                             -------       -------       -------


Net periodic cost                            $ 1,856       $  --         $   419
                                             =======       =======       =======




(b) EMPLOYEE 401(k) SAVINGS PLAN

The Company maintains an Employee 401(k) Savings Plan (the "401(k) Plan"). The
401(k) Plan is a defined contribution plan which is administered by the Company.
All regular, full-time employees are eligible for voluntary participation on the
first day of the month following the date of hire and having attained the age of
twenty-one. The 401(k) Plan is subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended. Plan participants are
allowed to contribute a specified percentage of their base salary. The Company
retains the right to make optional contributions for any plan year. Optional
contributions were not made by the Company in 2006. Company contributions
charged to expense for the nine months ended September 30, 2007 (commencing
April 2, 2007) was approximately $1,095.

The 401(k) Plan has been redesigned, effective April 2, 2007, as a result of the
Company's amendment of the Employees' Pension Plan. The following represent the
material changes to the 401(k) Plan: (i) automatic enrollment for all eligible
employees; (ii) Company matching contributions of 100% of an employee's
contributions up to 3% of eligible compensation, and 50% of the next 2%
contributed; and (iii) an additional automatic contribution of 3% of eligible
compensation for employees who as of April 1, 2007, were at least 50 years of
age and had 10 or more years of vesting service.


9. SHAREHOLDERS' EQUITY

(a) STOCK-BASED COMPENSATION


Effective January 1, 2006, the Company adopted SFAS No. 123(R), "Share-Based
Payment". SFAS No. 123(R) requires an entity to recognize the grant-date fair
value of stock options and other equity-based compensation issued to employees
in the financial statements. The Company adopted SFAS 123(R) using the modified
prospective transition method. Accordingly, the Company applied the provisions
of SFAS No. 123(R) to all awards granted subsequent to December 31, 2005 and
will apply the provisions to awards previously granted to the extent that these
awards are subsequently modified, repurchased or cancelled.

Pursuant to separate exchange agreements dated January 27, 2005 (the "Exchange
Agreements"), certain continuing investors elected to exchange, immediately
prior to the effective time of the Merger, fully-vested options to purchase the
Company's common stock for options to purchase DLI Holding Corp. common stock,
constituting approximately 6.6% of the diluted share capital of DLI Holding
Corp. immediately after the Merger.

                                      -14-
<PAGE>

A summary of activity for the Exchange Options as of September 30, 2007 and
changes during the nine months ended September 30, 2007 is presented below:

<TABLE>
<CAPTION>

                                                             WEIGHTED-
                                                  WEIGHTED-   AVERAGE
                                                   AVERAGE   REMAINING   AGGREGATE
                                                  EXERCISE  CONTRACTUAL  INTRINSIC
       EXCHANGE OPTIONS               SHARES       PRICE       TERM      VALUE (1)
       ----------------               -------    ----------    ----     ---------

<S>                    <C>             <C>        <C>                  <C>
Outstanding at January 1, 2007         299,770   $ 17.71               $  9,680
     Granted                              --         --                   --
     Exercised (2)                    (134,821)    17.88                 (2,000)
     Forfeited                            --         --                  --
                                      --------
Outstanding at September 30, 2007      164,949   $17.56   7.3 years    $ 12,833
                                      ========   ======   =========    ========

Exercisable at September 30, 2007      164,949   $17.56   7.3 years    $ 12,833
                                      ========   ======   =========    ========
</TABLE>


1) The intrinsic value is the amount by which the current market value of the
underlying stock exceeds the exercise price of the option. Current market value
as of September 30, 2007 was determined by utilizing an estimated initial public
offering price of DLI Holding Corp. common stock (see Note 15).

2) Options owned by William McMenemy, a former director and officer of the
Company, were purchased on February 15, 2007. See note 9(b).


OPTION INCENTIVE PLAN

Effective January 27, 2005, DLI Holding Corp. adopted a new stock option
incentive plan (the "Option Incentive Plan"). The Option Incentive Plan provides
for grants of two types of options to officers or key employees of the Company:
Service Options and Exit Options.

Under the Option Incentive Plan, 180,000 options are reserved for issuance which
represents approximately 4.3% of the outstanding shares of DLI Holding Corp.
common stock as of the effective date of the Merger. Under the Option Incentive
Plan, 33% of the granted options are Service Options and 67% are Exit Options.

A summary of option activity under the Option Incentive Plan as of September 30,
2007 and changes during the nine months ended September 30, 2007 is presented
below:

<TABLE>
<CAPTION>

                                                             WEIGHTED-
                                                   WEIGHTED-  AVERAGE
                                                   AVERAGE   REMAINING    AGGREGATE
                                                   EXERCISE  CONTRACTUAL  INTRINSIC
        SERVICE OPTIONS                  SHARES      PRICE       TERM      VALUE (1)
       ----------------                  -------   ----------    ----     ---------

<S>                                <C>       <C>               <C>
Outstanding at January 1, 2007            44,417    $35.00            $   667
     Granted                              16,900     60.74                585
     Exercised                              --        --                   --
     Forfeited                            (1,334)    35.00                 81
                                        -------
Outstanding at September 30, 2007         59,983    $42.25   8.7 years   $ 3,186
                                         =======    ======   =========   =======

Exercisable at September 30, 2007         24,400    $35.00   8.4 years   $ 1,473
                                         =======    ======   =========   =======
</TABLE>

                                      -15-
<PAGE>

<TABLE>
<CAPTION>

                                                           WEIGHTED-
                                                WEIGHTED-  AVERAGE
                                                 AVERAGE   REMAINING   AGGREGATE
                                                EXERCISE  CONTRACTUAL  INTRINSIC
        EXIT OPTIONS                  SHARES      PRICE      TERM      VALUE (1)
       ----------------              -------   ----------    ----     ---------

<S>                                 <C>       <C>                     <C>
Outstanding at January 1, 2007        88,833    $ 35.00                 $  1,333
     Granted                          33,800      60.74                    1,170
     Exercised                          --          --                       --
     Forfeited                        (2,666)     35.00                      161
                                    --------
Outstanding at September 30, 2007    119,967    $ 42.25   8.7 years     $  6,371
                                    ========    =======   =========     ========
</TABLE>


(1) The intrinsic value is the amount by which the current market value of the
underlying stock exceeds the exercise price of the option. Current market value
as of September 30, 2007 was determined by utilizing an estimated initial public
offering price of DLI Holding Corp. common stock (see Note 15).

The weighted-average grant-date fair value of Service Options granted during the
three months ended September 30, 2007 and 2006 was $32.48 and $12.39,
respectively, and during the nine months ended September 30, 2007 and 2006 was
$49.55 and $13.11, respectively. The weighted-average grant-date fair value of
Exit Options granted during the three months ended September 30, 2007 and 2006
was $0 and $8.75, respectively, and during the nine months ended September 30,
2007 and 2006 was $34.62 and $9.56, respectively.

The Company recorded compensation expense relating to the Service Options of
$115 and $45 for the three months ended September 30, 2007 and 2006,
respectively, and $284 and $266 for the nine months ended September 30, 2007 and
2006, respectively. Exit options are subject to a performance condition that
prevents them from becoming exercisable unless there is a change in control. As
the Company has determined that it is not probable that this performance
condition will be achieved, no compensation expense relating to the Exit Options
has been recorded. The Company will measure and record compensation expense, if
any, relating to the fair value of the Exit Options upon the occurrence of a
change in control. As of September 30, 2007, the total unrecognized compensation
cost related to the non-vested Service Options was $902 and the related
weighted-average period over which this cost is expected to be recognized is
approximately 2.2 years.

The fair value of each Service Option granted was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions in the calculations for the three months ended September 30, 2007
and 2006, respectively: dividend yield of 0% and 0%; expected life of 3.0 and
3.5 years; risk-free interest rates of 4.90% and 4.85%; and expected volatility
of 42.5% and 45.0%. The weighted average assumptions used in the calculations
for the nine months ended September 30, 2007 and 2006, respectively, were:
dividend yield of 0% and 0%; expected life of 2.9 and 3.9 years; risk-free
interest rates of 4.69% and 4.74%; and expected volatility of 42.5% and 45.0%.
Because the Company's common stock is not publicly traded, the expected
volatility used was determined based on an examination of the historical
volatility of the stock price of the Predecessor Company, the historical and
implied volatility of the stock prices of selected comparable companies and the
nature of those companies, and other relevant factors.

The fair value of each Exit Option granted was estimated on the date of grant
using a lattice-based valuation model with the following weighted average
assumptions in the calculations for the three months ended September 30, 2007
and 2006, respectively: dividend yield of 0% and 0%; expected life of 3.0 and
3.5 years; early exercise factor at the time at which Kelso would sell the
Company to generate a multiple of 2.8 times their initial investment;
termination rates of 1.5% and 1.5%; risk-free interest rates of 4.90% and 4.85%;
and expected volatility of 42.5% and 45.0%. The weighted average assumptions
used in the calculations for the nine months ended September 30, 2007 and 2006,
respectively, were: dividend yield of 0% and 0%; expected life of 2.9 and 3.9
years; early exercise factor at the time at which Kelso would sell the Company
to generate a multiple of 2.8 times their initial investment; termination rates
of 1.5% and 1.5%; risk-free interest rates of 4.69% and 4.74%; and expected
volatility of 42.5% and 45.0%.

                                      -16-
<PAGE>


OVERRIDE UNITS

Certain of the Company's executives made an investment in DLI LLC, and have been
granted certain profit interests (the "Override Units") in DLI LLC. The Override
Units have two sub-classes: Operating Units and Value Units. Subject to
forfeiture and participation provisions (including the applicable Benchmark
Amount of $32.718857) as detailed in the DLI LLC Agreement, the holders of
Override Units will have voting rights with respect to their Override Units and
shall have the rights with respect to profits and losses of DLI LLC and
distributions from DLI LLC as set forth in the DLI LLC Agreement. The Override
Units are not convertible into common stock and are not saleable or generally
transferable.

DLI LLC's board approved 294,486 Override Units, as defined available for grant,
of which 201,778 Override Units were granted as of December 31, 2005 and an
additional 92,707 Override Units were granted on January 31, 2006. The Override
Units were granted to Company executives at no cost to the executives.

A summary of the Override Units granted as of September 30, 2007 and changes
during the nine months ended September 30, 2007 is presented below:


<TABLE>
<CAPTION>
                                                                         GRANT-DATE
                  OPERATING UNITS                               UNITS    FAIR VALUE
                  ---------------                               -----    ----------

<S>                                              <C>            <C>       <C>
Operating Units subject to forfeiture at January 1, 2007        47,717    $ 14.30
     Granted                                                      --        --
     Exempt from forfeiture                                    (23,177)     14.37
     Forfeited                                                    --        --
                                                              --------
Operating Units subject to forfeiture at September 30, 2007     24,540    $ 14.23
                                                              ========    =======


                                                                         GRANT-DATE
                    VALUE UNITS                                 UNITS    FAIR VALUE
                  ---------------                               -----    ----------


Value Units subject to forfeiture at January 1, 2007           196,323    $ 13.08
     Granted                                                      --        --
     Exempt from forfeiture                                       --        --
     Forfeited                                                    --        --
                                                              --------
Value Units subject to forfeiture at September 30, 2007        196,323    $ 13.08
                                                              ========    =======
</TABLE>

Total compensation expense recorded in connection with the Operating Units was
$111 and $116 for the three months ended September 30, 2007 and 2006,
respectively, and was $336 and $340 (restated) for the nine months ended
September 30, 2007 and 2006, respectively. Value Units are subject to a
performance condition that prevents them from becoming eligible for
distributions unless there is a change in control. As the Company has determined
that it is not probable that this performance condition will be achieved, no
compensation expense relating to the Value Units has been recorded. The Company
will measure and record compensation expense, if any, relating to the fair value
of the Value Units upon the occurrence of a change in control. As of September
30, 2007, the total unrecognized compensation cost related to Operating Units
subject to forfeiture was $273 and the related weighted-average period over
which this cost is expected to be recognized is approximately 0.9 years.

                                      -17-
<PAGE>

In accordance with APB No. 25, the fair value of each Operating Unit and Value
Unit granted prior to January 1, 2006 was estimated on the date of grant using
the Black-Scholes option-pricing model. The fair value of each Operating Unit
granted subsequent to January 1, 2006 was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions in the calculation: dividend yield 0%; expected life of 4.0 years;
risk-free interest rate 4.52%; and expected volatility of 45%. The fair value of
each Value Unit granted subsequent to January 1, 2006 was estimated on the date
of grant using a lattice-based valuation model with the following weighted
average assumptions in the calculation: dividend yield 0%; expected life of 4.0
years; early exercise factor at the time at which Kelso would sell the Company
to generate a multiple of 2.8 times their initial investment; termination rate
of 1.0%; risk-free interest rate 4.52%; and expected volatility of 45%.


(B) STOCK REPURCHASE

On February 15, 2007, DLI Holding Corp. and DLI LLC entered into an Equity
Settlement Agreement (the "Equity Settlement Agreement") with William McMenemy,
a former director and officer of the Company. Pursuant to the Equity Settlement
Agreement, DLI Holding Corp. agreed to pay Mr. McMenemy a total of $2,020 to
repurchase (i) 571.42 shares of the common stock of DLI Holding Corp. (the
"Shares") and (ii) options to purchase 134,821 shares of the common stock of DLI
Holding Corp. ("the Options"). The payment was funded by the Company through a
distribution. The amounts paid did not exceed the fair value of these equity
instruments. Also in connection with this transaction, Mr. McMenemy agreed to
forfeit the 5,454.42 Operating Units he held in DLI LLC. The Shares were
repurchased pursuant to the terms of the Transition Arrangements Agreement,
dated as of August 15, 2005, among Mr. McMenemy, DLI Holding Corp. and DLI LLC.
The Options were repurchased pursuant to the Rollover Stock Option Agreement,
dated as of January 27, 2005, between DLI Holding Corp. and Mr. McMenemy. The
Shares, the Options, and the Operating Units in DLI LLC constituted Mr.
McMenemy's entire equity interest in the Company and its affiliates.

(C) SALE OF STOCK

On May 18, 2007, certain of the Company's key employees and an advisor purchased
a total of 40,711 shares of the common stock of DLI Holding Corp. for an
aggregate purchase price of $1,425 or $35 per share. The Company recorded a
non-cash compensation charge of $2,457 relating to these transactions during the
second quarter of 2007. The charge was calculated using the difference between
an estimated initial public offering price of DLI Holding Corp. common stock
(see Note 15) and the price per share paid by the employees and the advisor.


10. RESTRUCTURING AND SEVERANCE

In September 2005, the Company implemented a workforce reduction program to
streamline the Company's organization and reduce costs. Additional severance
costs of $598 and $116 were recorded during fiscal 2006 and in the first nine
months of 2007, respectively. As of September 30, 2007, all remaining cash
payments have been paid.

On January 13, 2006, the Company announced the cessation of manufacturing
activities at its facility in Little Falls, New York. The Company transferred a
majority of these manufacturing operations to its Rocky Point, North Carolina
manufacturing facility and outsourced the remainder. The Company converted the
Little Falls facility to a warehouse to store a portion of its inventory and is
in the process of closing an additional short-term leased warehouse facility in
upstate New York.

                                      -18-
<PAGE>

Pursuant to the Company's formal severance policy, a charge of $1,243 for
severance costs and related benefits for approximately 289 employees was
recorded in December 2005 in accordance with SFAS No. 112, "EMPLOYERS'
ACCOUNTING FOR POSTEMPLOYMENT BENEFITS" ("SFAS No. 112"). Additional severance
benefits earned for future services by employees being terminated were
recognized as a charge in the consolidated financial statements as such
severance benefits were earned. During the nine months ended September 30, 2007,
an adjustment of $(1) was recorded. During the nine months ended September 30,
2006, a charge of $274 was recorded for such earned benefits, in addition to an
adjustment of $(110) to the initial accrual. Also during the nine months ended
September 30, 2006, the Company recorded charges to cost of goods sold of $392,
related to moving costs for relocated inventory, break down, moving and start-up
costs associated with equipment transfers and other related charges. As of
September 30, 2007, all severance benefits have been paid and all employees have
been terminated.

A summary of the activity in the accrual for the Little Falls restructuring is
as follows:

            Balance at December 31, 2006                       $ 188
                        Adjustment                                (1)
                        Payments                                (187)
                                                               -----
            Balance at September 30, 2007                      $--
                                                               =====


On February 12, 2007, the Company announced plans to transfer the manufacturing
activities performed at its facility in Canajoharie, New York to independent
contractors in North Carolina. The transfer resulted in the termination of
approximately 71 employees, which was conducted in phases which began in mid
April 2007 and was completed as of June 30, 2007. The Company is currently
listing the Canajoharie Plant for sale. Pursuant to the Company's formal
severance policy, a charge of $709 for severance costs and related benefits was
recorded during the nine months ended September 30, 2007 in accordance with SFAS
No. 112. In addition, adjustments of $(94) and $(113) were recorded during the
three and nine months ended September 30, 2007, respectively. Additional
severance benefits earned for future services by employees being terminated were
recognized as a charge in the consolidated financial statements as such
severance benefits were earned. Cash payouts are expected to be completed by the
end of 2007. As of September 30, 2007, all employees had been terminated and
$588 in severance benefits has been paid.

A summary of the activity in the accrual for the Canajoharie facility
restructuring is as follows:

             Balance at December 31, 2006                 $ --
                         Provision                          709
                         Adjustments                       (113)
                         Payments                          (588)
                                                          -----
             Balance at September 30, 2007                $   8
                                                          =====

During the second quarter of 2007, the Company recorded an impairment loss of
$804 related to the Canajoharie facility which has been included within selling
and administrative expenses in the accompanying consolidated statements of
operations. The impairment loss was based upon a current market valuation of the
property. The Company has classified the Canajoharie facility as an asset held
for sale in the accompanying consolidated balance sheet as of September 30,
2007.


                                      -19-
<PAGE>

11. RELATED PARTY TRANSACTIONS

On January 27, 2005, DLI Holding Corp. entered into a financial advisory
agreement with Kelso to provide consulting and advisory services to the Company
in exchange for fees of $1,200 per year, plus out of pocket expenses, commencing
on that date with a term ending on the date on which Kelso and its affiliates
ceases to own any share of common stock of the Company. The Company has recorded
fees of $900 during the nine months ended September 30, 2007 and 2006,
respectively, and as of September 30, 2007, the Company has accrued $2,700 for
fees relating to 2007, 2006 and the 2005 Successor Period.


12. COMPREHENSIVE INCOME (LOSS)

         The components of comprehensive income (loss) were as follows:
<TABLE>
<CAPTION>

                                          THREE MONTHS ENDED     NINE MONTHS ENDED
                                              SEPTEMBER 30,         SEPTEMBER 30,
                                              -------------         -------------
                                             2007       2006      2007       2006
                                             ----       ----      ----       ----
                                                      Restated              Restated

<S>                                        <C>        <C>        <C>        <C>
Net earnings (loss)                        $ 1,906    $   225    $ 3,839    $(5,218)
Other comprehensive income
   Foreign currency translation gain           449         14        733        681
   Change in fair value of interest rate
     Collar, net of taxes                     (199)      (419)      (157)       (41)
                                           -------    -------    -------    -------

Total comprehensive income (loss)          $ 2,156    $  (180)   $ 4,415    $(4,578)
                                           =======    =======    =======    =======
</TABLE>

                                      -20-
<PAGE>

13. SEGMENT INFORMATION

The Company operates in two segments, Cosmetic and Pharmaceutical that have been
organized by the products they offer. The Cosmetic segment's principal products
are nail color, nail treatment, bleaches and depilatories, beauty implements and
value cosmetics. The Pharmaceutical segment's principal products are oral
analgesics, children's toothpaste and sore throat relief and specialty OTC
products. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates the performance of its operating segments based on operating income.

<TABLE>
<CAPTION>

                                        Three Months Ended        Nine Months Ended
                                        ------------------        -----------------
                                           SEPTEMBER 30,            SEPTEMBER 30,
                                         2007         2006         2007         2006
                                      ---------    ---------    ---------    ---------
                                                   (Restated)                (Restated)
Net sales:
<S>                                   <C>          <C>          <C>          <C>
   Cosmetic                           $  89,103    $  88,139    $ 266,703    $ 251,331
   Pharmaceutical                        27,704       22,761       76,156       64,727
                                      ---------    ---------    ---------    ---------
   Consolidated                       $ 116,807    $ 110,900    $ 342,859    $ 316,058
                                      =========    =========    =========    =========

Operating income (1):
   Cosmetic                           $   3,590    $   3,907    $  15,808    $   8,468
   Pharmaceutical                         8,312        5,789       18,603       10,633
                                      ---------    ---------    ---------    ---------
   Consolidated                          11,902        9,696       34,411       19,101

Other income (expense):
   Interest expense, net                 (9,405)      (9,385)     (28,281)     (27,659)
   Other income (expense), net              689           43        1,911          335
                                      ---------    ---------    ---------    ---------
Earnings (loss) before income taxes   $   3,186    $     354    $   8,041    $  (8,223)
                                      =========    =========    =========    =========

Depreciation and amortization:
   Cosmetic                           $   2,984    $   2,985    $   9,794    $   9,013
   Pharmaceutical                           759          807        2,447        2,386
                                      ---------    ---------    ---------    ---------
   Consolidated                       $   3,743    $   3,792    $  12,241    $  11,399
                                      =========    =========    =========    =========

Amortization of display fixtures:
   Cosmetic                           $   2,938    $   2,897    $   7,617    $   7,387
   Pharmaceutical                          --           --           --           --
                                      ---------    ---------    ---------    ---------

   Consolidated                       $   2,938    $   2,897    $   7,617    $   7,387
                                      =========    =========    =========    =========
</TABLE>



(1) Operating income for the three and nine months September 30, 2007 includes
severance expense of $(94) and $711, respectively, which was all charged to the
Cosmetic segment. Operating income for the three and nine months ended September
30, 2006 includes severance expense of $183 and $657, respectively, which was
all charged to the Cosmetic segment. The pension curtailment gain of $5,582 for
the nine months ended September 30, 2007 was allocated $4,415 to the Cosmetic
segment and $1,167 to the Pharmaceutical segment. The impairment loss of $804
related to the Canajoharie facility for the nine months ended September 30, 2007
was all charged to the Cosmetic segment.


                                      -21-
<PAGE>

14. SALE OF PROPERTY

In June 2007, the Company sold land and buildings located in Newark, New Jersey
to an unrelated third party for gross proceeds of $575, less $45 in closing
costs. The land and buildings had a net book value of $400, resulting in a gain
on the sale of approximately $130.

In January 2007, the Company sold land and buildings located in Little Falls,
New York to an unrelated third party for gross proceeds of $2,999, less $228 in
closing costs and leased back the properties for a six year term. The land and
buildings had a net book value of $3,118 as of December 31, 2006. In connection
with this sale, the Company recorded an impairment loss of approximately $347 in
fiscal 2006.

In June 2006, the Company sold land and a building located in Newark, New Jersey
to an unrelated third party for gross proceeds of $500, less $9 in closing
costs. The land and building had a net book value at June 30, 2006 of $450,
resulting in a gain on the sale of $41.

15. PROPOSED INITIAL PUBLIC OFFERING

On August 10, 2007, as amended on September 27, 2007, DLI Holding Corp., the
Company's indirect parent company, filed a registration statement on Form S-1
("Form S-1") in respect of an offering by existing stockholders of shares of DLI
Holding Corp.'s common stock. The registration statement provides for a proposed
maximum aggregate offering price of $200,000 and that the shares of common stock
are being sold by existing stockholders. It is currently anticipated that
neither DLI Holding Corp. nor the Company will receive any of the proceeds from
the sale of these shares.

                                      -22-
<PAGE>


16.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Company's obligations related to its ABL Credit Facility, Senior Secured
Notes and Senior Subordinated Notes are guaranteed jointly and severally by the
Company's direct and indirect present and future domestic restricted
subsidiaries (the "Guarantors"). The following financial information sets forth,
on a condensed consolidating basis, balance sheets, statements of operations and
statements of cash flows for domestic subsidiaries of the Company that are
Guarantors (collectively, the "Guarantor Subsidiaries") and foreign subsidiaries
of the Company that are not Guarantors (collectively, the "Non-Guarantor
Subsidiaries"). The accounting policies of the issuer, the Guarantor
Subsidiaries and the Non-Guarantor Subsidiaries are the same as those described
for the Company in the 2006 Annual Report on Form 10-K. See Note 3 for
information relating to the restatements.
<TABLE>
<CAPTION>

                                                     CONSOLIDATING BALANCE SHEET

                                                         September 30, 2007


                                                                          Guarantor      Non-Guarantor
                                                            Issuer       Subsidiaries    Subsidiaries    Eliminations   Consolidated
                                                            ------       ------------    ------------    ------------   ------------
     ASSETS

Current assets:
<S>                                                        <C>             <C>             <C>             <C>            <C>
     Cash and cash equivalents                             $   2,437       $  (1,103)      $     899       $    --        $   2,233
     Accounts receivable                                      42,990          10,356           6,482            --           59,828
     Inventories                                              84,289           8,942          12,725            (323)       105,633
     Deferred income taxes                                    24,056           5,077           1,659            --           30,792
     Assets held for sale                                        400            --              --              --              400
     Prepaid expenses and other current assets                 3,221             598           2,051            --            5,870
                                                           ---------       ---------       ---------       ---------      ---------
              Total current assets                           157,393          23,870          23,816            (323)       204,756

Property, plant and equipment, net                            33,253           1,223           4,170            --           38,646
Intercompany                                                 124,620        (106,483)        (18,137)           --             --
Intangibles arising from acquisitions, net                   165,973          84,127            --              --          250,100
Goodwill                                                      92,858          47,460           5,000            --          145,318
Other assets                                                  22,141            --             2,093            --           24,234
Note receivable                                               11,430            --              --           (11,430)          --
Deferred income taxes                                         19,712            --              --              --           19,712
                                                           ---------       ---------       ---------       ---------      ---------
              Total assets                                 $ 627,380       $  50,197       $  16,942       $ (11,753)     $ 682,766
                                                           =========       =========       =========       =========      =========

     LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Current portion of long-term debt                     $     124       $    --         $      73       $    --        $     197
     Accounts payable                                         31,878           3,029           2,711            --           37,618
     Accrued liabilities                                      23,404           9,822           3,991            --           37,217
                                                           ---------       ---------       ---------       ---------      ---------
              Total current liabilities                       55,406          12,851           6,775            --           75,032

Long-term debt, less current portion                         374,584            --             1,275            --          375,859
Long-term pension liability, less current portion             14,204            --              --              --           14,204
Deferred liabilities                                           1,342            --              --              --            1,342
Deferred income taxes                                         66,304          33,109             205            --           99,618
Note payable                                                    --              --            11,430         (11,430)          --
                                                           ---------       ---------       ---------       ---------      ---------
              Total liabilities                              511,840          45,960          19,685         (11,430)       566,055
                                                           ---------       ---------       ---------       ---------      ---------

Shareholders' equity:
     Common stock $.01 par value, authorized
        1,000 shares; issued 1,000 shares                       --              --              --              --             --
     Additional paid-in capital                              148,737            --                 5            --          148,742
     Accumulated other comprehensive income (loss)              (417)           --             1,414            --              997
     Accumulated deficit                                     (32,780)          4,237          (4,162)           (323)       (33,028)
                                                           ---------       ---------       ---------       ---------      ---------

              Total shareholders' equity                     115,540           4,237          (2,743)           (323)       116,711
                                                           ---------       ---------       ---------       ---------      ---------


              Total liabilities and shareholders' equity   $ 627,380       $  50,197       $  16,942       $ (11,753)     $ 682,766
                                                           =========       =========       =========       =========      =========
</TABLE>

                                                                -23-
<PAGE>

<TABLE>
<CAPTION>

                                                     CONSOLIDATING BALANCE SHEET
                                                          December 31, 2006


                                                                          Guarantor      Non-Guarantor
                                                            Issuer       Subsidiaries    Subsidiaries    Eliminations   Consolidated
                                                            ------       ------------    ------------    ------------   ------------
       ASSETS

Current assets:
<S>                                                      <C>              <C>              <C>              <C>           <C>
       Cash and cash equivalents                         $     343        $    (599)       $     298        $    --       $      42
       Accounts receivable, net                             45,880            9,694            2,676             --          58,250
       Inventories                                          76,445            8,755           10,331             (469)       95,062
       Deferred income taxes                                24,008            4,955            1,032             --          29,995
       Prepaid expenses and other current assets             3,457              494            2,458             --           6,409
                                                         ---------        ---------        ---------        ---------     ---------
                Total current assets                       150,133           23,299           16,795             (469)      189,758

Property, plant and equipment, net                          39,262            1,638            3,747             --          44,647
Intercompany                                               129,931         (116,585)         (13,346)            --            --
Intangibles arising from acquisitions, net                 168,118           85,919             --               --         254,037
Goodwill                                                    92,858           47,460            5,000             --         145,318
Other assets                                                24,840                1            1,860             --          26,701
Note receivable                                             11,430             --               --            (11,430)         --
Deferred income taxes                                       25,135             --                263             --          25,398
                                                         ---------        ---------        ---------        ---------     ---------
                Total assets                             $ 641,707        $  41,732        $  14,319        $ (11,899)    $ 685,859
                                                         =========        =========        =========        =========     =========

       LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
       Current portion of long-term debt                 $     105        $    --          $      60        $    --       $     165
       Accounts payable                                     33,904            3,746            2,477             --          40,127
       Accrued liabilities                                  35,126            6,689            2,519             --          44,334
                                                         ---------        ---------        ---------        ---------     ---------
                Total current liabilities                   69,135           10,435            5,056             --          84,626

Long-term debt, less current portion                       369,105             --              1,134             --         370,239
Long-term pension liability, less current portion           19,943             --               --               --          19,943
Deferred liabilities                                         1,492             --               --               --           1,492
Deferred income taxes                                       65,964           32,356              135             --          98,455
Note payable                                                  --               --             11,430          (11,430)         --
                                                         ---------        ---------        ---------        ---------     ---------
                Total liabilities                          525,639           42,791           17,755          (11,430)      574,755
                                                         ---------        ---------        ---------        ---------     ---------

Shareholders' equity:
       Common stock $.01 par value, authorized
          1,000 shares; issued 1,000 shares                   --               --               --               --            --
       Additional paid-in capital                          146,256             --                  5             --         146,261
       Accumulated other comprehensive income (loss)          (260)            --                681             --             421
       Accumulated deficit                                 (29,928)          (1,059)          (4,122)            (469)      (35,578)
                                                         ---------        ---------        ---------        ---------     ---------

           Total shareholders' equity                      116,068           (1,059)          (3,436)            (469)      111,104
                                                         ---------        ---------        ---------        ---------     ---------


           Total liabilities and shareholders' equity    $ 641,707        $  41,732        $  14,319        $ (11,899)    $ 685,859
                                                         =========        =========        =========        =========     =========
</TABLE>


                                                                -24-
<PAGE>
<TABLE>
<CAPTION>

                                                CONSOLIDATING STATEMENT OF OPERATIONS
                                                Three Months Ended September 30, 2007


                                                               Guarantor      Non-Guarantor
                                               Issuer         Subsidiaries    Subsidiaries      Eliminations      Consolidated
                                               ------         ------------    ------------      ------------      ------------

<S>                                           <C>               <C>              <C>               <C>               <C>
Net sales                                     $  77,134         $  26,001        $  13,672         $    --           $ 116,807

Cost of goods sold                               43,470             6,997            7,680              (102)           58,045
                                              ---------         ---------        ---------         ---------         ---------

Gross profit                                     33,664            19,004            5,992               102            58,762

Selling and administrative expenses              32,225             8,829            5,900              --              46,954
Severance expenses                                  (94)             --               --                --                 (94)
                                              ---------         ---------        ---------         ---------         ---------

     Operating income                             1,533            10,175               92               102            11,902

Other income (expense):
     Interest expense, net                       (9,327)              112             (190)             --              (9,405)
     Other income, net                               93                38              558              --                 689
                                              ---------         ---------        ---------         ---------         ---------

Earnings (loss) before income taxes              (7,701)           10,325              460               102             3,186
Provision for (benefit from) income taxes        (2,893)            4,048              125              --               1,280
                                              ---------         ---------        ---------         ---------         ---------

     Net earnings (loss)                      $  (4,808)        $   6,277        $     335         $     102         $   1,906
                                              =========         =========        =========         =========         =========
</TABLE>


                                                                -25-
<PAGE>

<TABLE>
<CAPTION>

                                                CONSOLIDATING STATEMENT OF OPERATIONS
                                                Three Months Ended September 30, 2006
                                                              Restated

                                                               Guarantor         Non-Guarantor
                                               Issuer         Subsidiaries       Subsidiaries       Eliminations      Consolidated
                                               ------         ------------       ------------       ------------      ------------

<S>                                            <C>              <C>                <C>                <C>                <C>
Net sales                                      $  76,976        $  21,915          $  12,585          $    (576)         $ 110,900

Cost of goods sold                                46,479            6,282              5,897               (402)            58,256
                                               ---------        ---------          ---------          ---------          ---------

Gross profit                                      30,497           15,633              6,688               (174)            52,644

Selling and administrative expenses               21,967           16,282              5,510               --               43,759
Gain on pension curtailment                         (994)            --                 --                 --                 (994)
Severance expenses                                   183             --                 --                 --                  183
                                               ---------        ---------          ---------          ---------          ---------

     Operating income (loss)                       9,341             (649)             1,178               (174)             9,696

Other income (expense):
     Interest expense, net                        (9,331)            --                  (54)              --               (9,385)
     Other income, net                                21                1                 21               --                   43
                                               ---------        ---------          ---------          ---------          ---------

Earnings (loss) before income taxes                   31             (648)             1,145               (174)               354
Provision for (benefit from) income taxes         (1,668)            (522)             2,319               --                  129
                                               ---------        ---------          ---------          ---------          ---------

     Net earnings (loss)                       $   1,699        $    (126)         $  (1,174)         $    (174)         $     225
                                               =========        =========          =========          =========          =========
</TABLE>


                                                                -26-
<PAGE>
<TABLE>
<CAPTION>

                                                CONSOLIDATING STATEMENT OF OPERATIONS
                                                Nine Months Ended September 30, 2007

                                                              Guarantor         Non-Guarantor
                                               Issuer         Subsidiaries       Subsidiaries     Eliminations      Consolidated
                                               ------         ------------       ------------     ------------      ------------

<S>                                           <C>               <C>              <C>               <C>               <C>
Net sales                                     $ 236,603         $  72,037        $  34,219         $    --           $ 342,859

Cost of goods sold                              132,834            20,304           17,790              (146)          170,782
                                              ---------         ---------        ---------         ---------         ---------

Gross profit                                    103,769            51,733           16,429               146           172,077

Selling and administrative expenses              83,771            41,742           17,139              --             142,652
Gain on pension curtailment                      (5,582)             --               --                --              (5,582)
Severance expenses                                  711              --               --                --                 711
Gain on sale of property                           (115)             --               --                --                (115)
                                              ---------         ---------        ---------         ---------         ---------

     Operating income (loss)                     24,984             9,991             (710)              146            34,411

Other income (expense):
     Interest expense, net                      (27,981)              337             (637)             --             (28,281)
     Other income, net                              155                60            1,696              --               1,911
                                              ---------         ---------        ---------         ---------         ---------

Earnings (loss) before income taxes              (2,842)           10,388              349               146             8,041
Provision for (benefit from) income taxes          (258)            4,071              389              --               4,202
                                              ---------         ---------        ---------         ---------         ---------

     Net earnings (loss)                      $  (2,584)        $   6,317        $     (40)        $     146         $   3,839
                                              =========         =========        =========         =========         =========
</TABLE>


                                                                -27-
<PAGE>
 <TABLE>
<CAPTION>

                                                CONSOLIDATING STATEMENT OF OPERATIONS
                                                Nine Months Ended September 30, 2006
                                                              Restated

                                                              Guarantor         Non-Guarantor
                                               Issuer         Subsidiaries       Subsidiaries     Eliminations      Consolidated
                                               ------         ------------       ------------     ------------      ------------

<S>                                         <C>                <C>               <C>                <C>                <C>
Net sales                                   $ 223,338          $  61,382         $  31,914          $    (576)         $ 316,058

Cost of goods sold                            130,246             18,279            16,390               (402)           164,513
                                            ---------          ---------         ---------          ---------          ---------

Gross profit                                   93,092             43,103            15,524               (174)           151,545

Selling and administrative expenses            76,553             41,417            14,852               --              132,822
Gain on pension curtailment                      (994)              --                --                 --                 (994)
Severance expenses                                657               --                --                 --                  657
Gain on sale of property                          (41)              --                --                 --                  (41)
                                            ---------          ---------         ---------          ---------          ---------

     Operating income (loss)                   16,917              1,686               672               (174)            19,101

Other income (expense):
     Interest expense, net                    (27,471)              --                (188)              --              (27,659)
     Other income, net                             15                  8               312               --                  335
                                            ---------          ---------         ---------          ---------          ---------

Earnings (loss) before income taxes           (10,539)             1,694               796               (174)            (8,223)
Provision for (benefit from) income taxes      (5,802)               577             2,220               --               (3,005)
                                            ---------          ---------         ---------          ---------          ---------

     Net earnings (loss)                    $  (4,737)         $   1,117         $  (1,424)         $    (174)         $  (5,218)
                                            =========          =========         =========          =========          =========
</TABLE>


                                                                -28-
<PAGE>

<TABLE>
<CAPTION>


                                                CONSOLIDATING STATEMENT OF CASH FLOWS
                                                Nine Months Ended September 30, 2007


                                                                   Guarantor        Non-Guarantor
                                                    Issuer        Subsidiaries      Subsidiaries     Eliminations      Consolidated
                                                    ------        ------------      ------------     ------------      ------------
<S>                                               <C>               <C>             <C>             <C>              <C>
Cash flows from operating activities:
Net earnings (loss)                                $ (2,584)        $  6,317         $    (40)        $    146         $  3,839
Adjustments to reconcile net earnings
  (loss) to net cash provided by (used in)
  operating activities:
Depreciation and amortization                         9,452            2,510              239               40           12,241
Amortization of display fixtures                      6,450             --              1,167             --              7,617
Amortization of deferred financing fees
  and original issue discount                         2,220             --               --               --              2,220
Non-cash stock compensation                           3,077             --               --               --              3,077
Deferred income taxes                                 5,968             (390)             (80)            --              5,498
Provision for excess and slow
  moving inventory                                    9,020            1,093            1,356             --             11,469
Recovery from doubtful accounts                         (14)            --               --               --                (14)
Gain on pension curtailment                          (5,582)            --               --               --             (5,582)
Loss on asset impairment                                804             --               --               --                804
Gain on sale of property                               (115)            --               --               --               (115)
Other non-cash operating items                         --               --             (1,348)            --             (1,348)
Changes in operating assets and liabilities:
      Accounts receivable                             2,904             (662)          (3,138)            --               (896)
      Inventories                                   (16,863)          (1,280)          (2,128)            (146)         (20,417)
      Prepaid expenses and other current assets         236             (104)             548             --                680
      Other assets                                   (7,321)               1             (479)            --             (7,799)
      Accounts payable                               (2,027)            (717)            (127)            --             (2,871)
      Accrued liabilities                            (9,431)           3,133              938             --             (5,360)
      Pension liability (net)                        (2,526)            --               --               --             (2,526)
      Deferred liabilities                             (203)            --               --               --               (203)
      Intercompany receivables / payables             6,175          (10,102)           3,707              220             --
                                                   --------         --------         --------         --------         --------

        Net cash provided by (used in)
            operating activities                       (360)            (201)             615              260              314
                                                   --------         --------         --------         --------         --------

Cash flows provided by (used in)
  investing activities:
      Proceeds from sale of property                  3,439             --               --               --              3,439
      Property, plant and equipment additions        (5,293)            (303)             (52)            --             (5,648)
                                                   --------         --------         --------         --------         --------

        Net cash used in investing activities        (1,854)            (303)             (52)            --             (2,209)
                                                   --------         --------         --------         --------         --------

Cash flows provided by (used in)
  financing activities:
      Principal borrowings under revolving
            credit facility, net                      5,000             --               --               --              5,000
      Principal payments under mortgage                --               --                (44)            --                (44)
      Distribution to DLI Holding Corp.              (2,020)            --               --               --             (2,020)
      Contributed capital                             1,425             --               --               --              1,425
      Payment of capital lease obligations              (97)            --               --               --                (97)
                                                   --------         --------         --------         --------         --------

        Net cash provided by (used in)
            financing activities                      4,308             --                (44)            --              4,264
                                                   --------         --------         --------         --------         --------

Effect of exchange rate changes on cash                --               --                 82             (260)            (178)
                                                   --------         --------         --------         --------         --------

Net increase (decrease) in cash and
  cash equivalents                                    2,094             (504)             601             --              2,191

Cash and cash equivalents at
  beginning of period                                   343             (599)             298             --                 42
                                                   --------         --------         --------         --------         --------

Cash and cash equivalents at
  end of period                                    $  2,437         $ (1,103)        $    899         $   --           $  2,233
                                                   ========         ========         ========         ========         ========
</TABLE>


                                                                -29-
<PAGE>

<TABLE>
<CAPTION>

                                                CONSOLIDATING STATEMENT OF CASH FLOWS
                                                Nine Months Ended September 30, 2006
                                                              Restated

                                                                  Guarantor        Non-Guarantor
                                                    Issuer        Subsidiaries      Subsidiaries     Eliminations      Consolidated
                                                    ------        ------------      ------------     ------------      ------------
<S>                                               <C>               <C>             <C>             <C>              <C>
Cash flows provided by (used in)
  operating activities:
Net earnings (loss)                              $ (4,737)        $  1,117         $ (1,424)        $   (174)        $ (5,218)
Adjustments to reconcile net earnings
  (loss) to net cash
 provided by (used in) operating activities:
Depreciation and amortization                       8,656            2,451              293               (1)          11,399
Amortization of display fixtures                    6,962             --                425             --              7,387
Amortization of deferred financing fees and
  original issue discount                           2,057             --               --               --              2,057
Non-cash stock compensation                           606             --               --               --                606
Deferred income taxes                              (4,470)             739             --               --             (3,731)
Provision for excess and slow
  moving inventory                                  6,483              811            1,385             --              8,679
Provision for doubtful accounts                        69              (64)            --               --                  5
Gain on pension curtailment                          (994)            --               --               --               (994)
Gain on sale of property                              (97)            --               --               --                (97)
Other non-cash operating items                       --               --               (266)            --               (266)
Changes in operating assets and liabilities:
      Accounts receivable                             921              209           (2,182)            --             (1,052)
      Inventories                                   5,808             (585)             666              174            6,063
      Prepaid expenses and other current assets        92              (95)           1,004             --              1,001
      Other assets                                 (7,702)              (1)          (1,061)            --             (8,764)
      Accounts payable                             (6,356)            (352)           1,202             --             (5,506)
      Accrued liabilities                             400             (244)             647             --                803
      Pension liability (net)                        (607)            --               --               --               (607)
      Deferred liability                              463             --               --               --                463
      Intercompany receivables / payables           4,045           (4,105)             (56)             116             --
                                                 --------         --------         --------         --------         --------

        Net cash provided by (used in)
            operating activities                   11,599             (119)             633              115           12,228
                                                 --------         --------         --------         --------         --------

Cash flows provided by (used in)
  investing activities:
      Proceeds from sale of property                  707             --               --               --                707
      Property, plant and equipment additions      (4,486)            (247)             (41)            --             (4,774)
                                                 --------         --------         --------         --------         --------

        Net cash used in investing activities      (3,779)            (247)             (41)            --             (4,067)
                                                 --------         --------         --------         --------         --------

Cash flows provided by (used in)
  financing activities:
      Principal borrowings under revolving
            credit facility, net                   (5,000)            --               --               --             (5,000)
      Principal payments under mortgage              --               --                (44)            --                (44)
      Payment of deferred financing fees             (758)            --               --               --               (758)
      Contributed capital                              40             --               --               --                 40
      Payment of capital lease obligations            (95)            --               --               --                (95)
                                                 --------         --------         --------         --------         --------

        Net cash used in financing activities      (5,813)            --                (44)            --             (5,857)
                                                 --------         --------         --------         --------         --------

Effect of exchange rate changes on cash              --               --                244             (115)             129
                                                 --------         --------         --------         --------         --------

Net increase (decrease) in cash and
  cash equivalents                                  2,007             (366)             792             --              2,433

Cash and cash equivalents at
  beginning of period                               1,862             (434)           1,174             --              2,602
                                                 --------         --------         --------         --------         --------

Cash and cash equivalents at
  end of period                                  $  3,869         $   (800)        $  1,966         $   --           $  5,035
                                                 ========         ========         ========         ========         ========
</TABLE>


                                                                -30-
<PAGE>





Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

OVERVIEW

The Company is a leading developer, manufacturer and marketer of cosmetics and
OTC pharmaceuticals. The Company operates in two segments: cosmetics and
pharmaceuticals. The Company's cosmetic business, which accounted for
approximately 78% of net sales for the first nine months of 2007, is principally
focused on nail color, nail treatment, bleaches and depilatories, beauty
implements and value cosmetics. The Company's OTC pharmaceuticals business,
which accounted for approximately 22% of net sales for the first nine months of
2007, is principally focused on oral analgesics, children's toothpaste and sore
throat relief and specialty OTC products.

The Company's product portfolio comprises several market leading brands,
including SALLY HANSEN nail care and bleaches and depilatories products, SALLY
HANSEN/LA CROSS beauty implements, N.Y.C. NEW YORK COLOR value cosmetics and
ORAJEL oral treatment products. The Company also has other OTC pharmaceutical
brands that are leaders in their respective product categories, including its
DERMAREST brand for psoriasis and eczema and its GENTLE NATURALS brand of
naturally-based creams and lotions targeted at specialty infant healthcare
needs.

In the United States, the Company primarily sells its products to mass
merchandisers such as Wal-Mart and Target, major drug store chains such as
Walgreens, CVS and Rite-Aid, and select food retailers. Internationally, the
Company has direct operations in Canada, the United Kingdom, Puerto Rico and
Mexico and sells its products through distributors, licensees and joint venture
relationships in approximately 60 countries. The Company's international
business accounted for approximately 17.5% of net sales in the first nine months
of 2007.

The information below for the three months and nine months ended September 30,
2006 has been adjusted to reflect the restatement of the Company's financial
results which is more fully described in Note 3, "Restatements" in the Notes to
the Consolidated Financial Statements.

As previously disclosed, the Company was unable to file its Quarterly Report on
Form 10-Q for the quarter ended March 31, 2007 by the required filing date of
May 15, 2007 as the Company determined that it was necessary to re-evaluate its
customer liabilities pertaining to reserves required for future sales returns
and allowances and markdowns. The Company completed this re-evaluation and
concluded that immaterial adjustments were required to previously reported
amounts and made such corrections through an adjustment (increase) to its
customer liability reserves of $0.2 million in the quarter ended March 31, 2007.


RECENT DEVELOPMENTS

PROPOSED INITIAL PUBLIC OFFERING

On August 10, 2007, as amended on September 27, 2007, DLI Holding Corp., the
Company's indirect parent company, filed a registration statement on Form S-1 in
respect of an offering by existing stockholders of shares of DLI Holding Corp.'s
common stock. The registration statement provides for a proposed maximum
aggregate offering price of $200 million and that the shares of common stock are
being sold by existing stockholders. It is currently anticipated that neither
DLI Holding Corp. nor the Company will receive any of the proceeds from the sale
of these shares.

                                      -31-
<PAGE>

         The Form S-1 registration statement for DLI Holding Corp.'s proposed
public offering is being reviewed by the Staff of the SEC (the "SEC Staff").
Comments made by the SEC Staff on the Form S-1, including with respect to the
accounting matter described below, may require the Company to restate or
reclassify its historical consolidated financial statements previously filed
with the SEC and this Quarterly Report on Form 10-Q.

In 2007, the Company reclassified reserves for future markdowns and other
related reserves for customer liabilities previously included in accrued
liabilities in the Company's consolidated balance sheets as a reduction of
accounts receivable to be consistent with the classification of reserves for
future sales returns and certain other reserves for customer liabilities. The
SEC Staff has asked for a confirmation that the classification of such reserves
complies with FASB Interpretation No. 39. While the Company believes that its
accounting is correct, if the Company is required to change the classification
of these reserves as a result of the SEC Staff's comment, the Company would need
to restate or reclassify its historical consolidated balance sheets to reflect
these reserves as liabilities instead of as a reduction of accounts receivable.
As of September 30, 2007 and December 31, 2006, reserves for customer
liabilities aggregated $41.3 million and $41.6 million, respectively.

STOCK PURCHASE

On May 18, 2007, certain of the Company's key employees and an advisor purchased
a total of 40,711 shares of the common stock of DLI Holding Corp. for an
aggregate purchase price of $1.4 million or $35 per share. The Company recorded
a non-cash compensation charge of $2.5 million relating to these transactions
during the second quarter of 2007. The charge was calculated using the
difference between an estimated initial public offering price of DLI Holding
Corp. common stock and the price per share paid by the employees and the
advisor. The following named executive officers purchased shares: Charles J.
Hinkaty (5,714 shares); Joseph Sinicropi (4,286 shares); Cary C. Newman (2,858
shares); and Shawn Smith (3,000 shares).

The Company determined the fair value of its common stock, for option valuation
purposes, utilizing a combination of a market approach and an income approach.
The market approach employed a market multiple methodology as well as a
comparable transaction methodology, both of which were based on multiples of
adjusted EBITDA. The income approach employed a discounted cash flow methodology
which included assumptions about future operating performance, and appropriate
discount rates and growth rates. The final valuation was calculated by a
weighting of the three methodologies with the equity value being determined
primarily on the basis of the discounted cash flow methodology. As of December
31, 2005 and 2006, the fair market value of the Company's common stock was
determined to be $35 and $50 per share, respectively. The price paid per share
by the employees and the advisor of $35 per share was based on the estimated
fair market value of $50 per share as of December 31, 2006 discounted for a lack
of control and marketability. The estimated initial public offering price of DLI
Holding common stock of $95.36 per share was determined utilizing a forward
looking market multiple methodology.

OPERATIONAL INITIATIVES

In addition to the Company's focus on realizing cost savings, the Company is
committed to improving the efficiency of its operations. In mid-2005, the
Company engaged Synergetics Installations Worldwide, Inc. ("Synergetics"), a
leading management consulting firm specializing in providing supply chain
management advice to manufacturing companies, to assist the Company in realizing
previously identified cost savings as well as identifying and implementing
additional cost saving opportunities. The Company has substantially completed
the implementation of sales and operational process initiatives designed to
improve sales forecasting, demand planning and production scheduling, the
efficiency level of the manufacturing facilities, and the process of
identifying, evaluating and selling promotional products. The Company
anticipated incremental annual cost savings in 2007 of approximately $6.0
million, which have been achieved as of September 30, 2007. The Company incurred
consulting fees and implementation costs associated with its 2005 and 2006 cost
savings activities of approximately $1.2 million and $3.7 million, respectively.


                                      -32-
<PAGE>


In December 2006, senior management and certain members of the Board of
Directors approved a revised strategic plan for the Company. This plan was
designed to enhance the value of the Company's SALLY HANSEN and ORAJEL brands,
including the hiring of an outside advertising agency for the cosmetic segment
(previously an in-house function) and a corresponding plan to increase national
advertising and marketing expenditures for both brands. The strategic plan also
focused on increasing the cosmetic segment's international business through the
addition of new distributors primarily in Europe and Asia and increasing
ORAJEL'S share of the children's category through incremental innovative product
launches and the use of licensed children's characters. Lastly, the plan focused
on realizing additional cost savings through the closing of the Canajoharie
facility and the amendment of the Employees' Pension Plan, as discussed below.

The Company incurred higher advertising and marketing related expenses of
approximately $4.0 million during the nine months ended September 30, 2007 to
enhance brand value. The Company believes that these increased expenditures
contributed to the Company's increase in sales for both the cosmetic and
pharmaceutical segments as well as the growth in market share of the SALLY
HANSEN and ORAJEL brands. The Company's increased focus on the cosmetic
segment's international business resulted in an increase in international net
sales of $6.7 million or 13.9% compared to the prior year comparable period. The
Company estimates that cost savings attributable to the closure of the
Canajoharie facility will approximate $0.5 million annually, beginning in the
fourth quarter of 2007. The Company estimates that costs savings achieved as a
result of the amendment of the Employees' Pension Plan, as discussed below, were
approximately $1.7 million for the nine months ended September 30, 2007.

In connection with these initiatives, the Company undertook a process to
evaluate its product mix, required inventory levels to support the service level
demands of its customers and the appropriateness of its inventory reserves, in
relation to the revised strategic plan. This evaluation addressed the usage of
existing inventory either within current products, or through the production and
sale of promotional inventory or special products. As a result, in the fourth
quarter of 2006, the Company recorded a $25.1 million charge to cost of goods
sold to reflect the change in estimate of its reserves for excess and slow
moving inventory. In determining the amount of the additional reserve,
management considered a number of factors, including, in particular, the impact
of the Company (i) exiting non-core product lines, (ii) refining its sales
forecasting and demand planning activities, (iii) increasing the volume of
finished goods produced at third parties which hindered the usefulness of
existing inventory components, (iv) incurring increasing losses on the
disposition of certain slow moving products and (v) experiencing changes in
market conditions for close-out inventory product offerings.

Provisions for excess and slow moving inventories for the three months ended
September 30, 2007 and 2006 were $4.6 million and $4.1 million, respectively.
Provisions for excess and slow moving inventories for the nine months ended
September 30, 2007 and 2006 were $11.5 million and $8.7 million, respectively.
Inventory reserves are estimates, which could vary significantly, either
favorably or unfavorably, from actual requirements if future economic
conditions, the timing of new product introductions, customer inventory levels,
retailer consolidations, fashion - oriented color cosmetic trends or competitive
conditions differ from expectations. However, once established, a reserve is not
reduced or eliminated until the related inventory has been disposed of.

                                      -33-
<PAGE>


RETIREMENT PLAN AMENDMENTS

Effective April 1, 2007 (approved and adopted January 15, 2007 by the Board of
Directors of the Company), the Company amended the Employees' Pension Plan, a
defined benefit plan, and redesigned the 401(k) Plan. The Company believes these
changes will help address the volatility of the defined benefit plan expenses by
providing it with the more predictable cost structure of a defined contribution
plan and will also provide employees with a retirement program more in line with
current trends. The changes included:

(a) The amendment of the Employees' Pension Plan, which closed the Employees'
Pension Plan to new employees and discontinued the accrual of future benefits to
current employees after April 1, 2007. All retirement benefits that employees
earned as of April 1, 2007 were fully preserved. Employees' ongoing service with
the Company will continue to be credited for vesting purposes.

(b) The redesigning of the 401(k) Plan, effective on April 2, 2007, including
the following material changes: (i) automatic enrollment for all eligible
employees; (ii) Company matching contributions of 100% of an employee's
contributions up to 3% of eligible compensation, and 50% of the next 2%
contributed; and (iii) an additional automatic contribution of 3% of eligible
compensation for employees who as of April 1, 2007, were at least 50 years of
age and had 10 or more years of vesting service.

The amendment to the Employees' Pension Plan resulted in a curtailment of the
plan. As a result of this curtailment, the Company recorded a reduction in the
benefit obligation of $10.3 million, a reduction in the unrecognized net
actuarial loss of $4.9 million and a benefit of $5.4 million during the first
quarter of 2007. The curtailment gain was subsequently adjusted by an
incremental $0.2 million during the second quarter of 2007.


CLOSING OF THE MANUFACTURING ACTIVITIES AT THE CANAJOHARIE FACILITY

On February 12, 2007, the Company announced plans to transfer the manufacturing
activities performed at its facility in Canajoharie, New York to independent
contractors in North Carolina. The transfer resulted in the termination of
approximately 71 employees, which was conducted in phases which began in mid
April 2007, and was completed as of June 30, 2007. During the second quarter of
2007, the Company recorded an impairment loss of $0.8 million related to the
Canajoharie facility and is currently listing the facility for sale. Pursuant to
the Company's formal severance policy, a charge of $0.6 million for severance
costs and related benefits was recorded during the first nine months of 2007 in
accordance with SFAS No. 112. Additional severance benefits earned for future
services by employees being terminated were recognized as a charge in the
consolidated financial statements as such severance benefits were earned. As of
September 30, 2007, all employees have been terminated and $0.6 million in
severance benefits have been paid.

                                      -34-
<PAGE>

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2006 (RESTATED)

The following table sets forth the Company's results of operations for the three
months ended September 30, 2007 and 2006. See Note 3 to the Notes to the
Consolidated Financial Statements for additional information related to the
restatements.

                                                Three months ended September 30,
                                                        2007             2006
                                                     ---------        ---------
                                                                      (Restated)
                                                               ($000)
Net Sales
      Cosmetic segment                               $  89,103        $  88,139
      Pharmaceutical segment                            27,704           22,761
                                                     ---------        ---------
Total net sales                                        116,807          110,900

Cost of goods sold                                      58,045           58,256
                                                     ---------        ---------

Gross profit                                            58,762           52,644

Selling and administrative expenses                     46,954           43,759
Gain on pension curtailment                               --               (994)
Severance expenses                                         (94)             183
                                                     ---------        ---------


Operating income                                        11,902            9,696

Other income (expense):
    Interest expense, net                               (9,405)          (9,385)
    Other income, net                                      689               43
                                                     ---------        ---------

Earnings before income taxes                             3,186              354
Provision for income taxes                               1,280              129
                                                     ---------        ---------
Net earnings                                         $   1,906        $     225
                                                     =========        =========

The Company's net sales for the three months ended September 30, 2007 were
$116.8 million, an increase of $5.9 million, or 5.3% compared to net sales of
$110.9 million for the three months ended September 30, 2006.

The cosmetic segment of the business generated net sales for the three months
ended September 30, 2007 of $89.1 million, an increase of $1.0 million, or 1.1%
compared to net sales of $88.1 million for the three months ended September 30,
2006. Excluding the impact of foreign currency translation, net sales in the
cosmetic segment would have increased $0.4 million or 0.4%. Net sales increased
primarily due to higher shipments of SALLY HANSEN nail color, bleaches and
depilatories and implements of $8.3 million, partially offset by lower
international net sales of $0.7 million (a 3.7% decrease from 2006) and higher
returns and promotional allowances of $4.6 million. International sales were
impacted by declining volume at a major Canadian customer and the timing of
shipments to international distributors. The increase in returns and allowances
primarily reflects a change in the estimate for future anticipated customer
deductions of approximately $2.4 million.



                                      -35-
<PAGE>

As reported by IRI, the SALLY HANSEN brand remains the number one brand in the
mass market nail care category with a 24.1% share of market for the twelve weeks
ended October 7, 2007 up from 22.5% in the prior year comparable period. In nail
color, the SALLY HANSEN brand has the number one market share position with a
41.8% share of market. SALLY HANSEN has the number one market share position in
nail treatment with a 43.6% share of market. The Company has the number one
market share position in bleaches and depilatories with a 33.0% share of market.
SALLY HANSEN/LA CROSS has the number two branded market share position in nail
and beauty implements with a 14.3% share of market. Prior to 2007, the Company's
market positions and market share data for the cosmetics business were derived
from information reported by the AC Nielsen business of the Nielsen Company
B.V., or "ACNielsen." Beginning in 2007, the Company began to derive its market
positions and market share data from information provided by IRI in order to use
one consistent source of information for the Company's cosmetics and
pharmaceuticals businesses, and the Company also refined the cosmetic category
segment definitions. Accordingly, market share data for the cosmetics business
for periods prior to 2007 has been changed from previously reported amounts.

The OTC pharmaceutical segment of the business generated net sales for the three
months ended September 30, 2007 of $27.7 million, an increase of $4.9 million,
or 21.7% compared to net sales of $22.8 million for the three months ended
September 30, 2006. Net sales increased primarily due to higher shipments of the
ORAJEL oral analgesics and children's toothpaste product lines of $1.4 million,
higher shipments of GENTLE NATURALS infant care products of $0.5 million, higher
shipments of niche product lines of $0.6 million and a decrease in returns and
other deductions of $2.4 million. The decrease in returns and allowances
primarily reflects a change in the estimate for future anticipated customer
deductions of approximately $2.2 million. The impact of foreign currency
translation on the OTC pharmaceutical segment's net sales was not material. As
reported by IRI, ORAJEL, the core brand of the OTC pharmaceutical segment,
increased its leadership position in the oral analgesics category to a 37.8%
share of market for the twelve weeks ended October 7, 2007, up from 34.3% for
the comparable prior year period.

Cost of goods sold for the three months ended September 30, 2007 was $58.0
million, or 49.7% of net sales compared to $58.3 million or 52.5% of net sales
for the three months ended September 30, 2006. This decrease as a percentage of
net sales reflects estimated cost savings of $2.9 million achieved as a result
of continued operational improvements and an estimated $1.9 million benefit
relating to the mix of products sold, offset by the impact of increased returns
and promotional allowances on net sales and an increase of $0.5 million in the
provision for excess and slow moving inventory. Cost of goods sold for the three
months ended September 30, 2006 included approximately $1.8 million, or 1.7% of
net sales related to unabsorbed overhead costs in connection with the closure of
the Little Falls manufacturing facility which were recorded according to the
provisions of SFAS No. 151.

Gross margin for three months ended September 30, 2007 was $58.8 million or
50.3% of net sales, an increase of $6.2 million, or 11.6% compared to gross
margin of $52.6 million or 47.5% of net sales for the three months ended
September 30, 2006. The cosmetic segment of the business generated a gross
margin of $38.5 million or 43.2% of net sales for the three months ended
September 30, 2007, an increase of $2.3 million, or 6.1% compared to a gross
margin of $36.2 million or 41.1% of net sales for the three months ended
September 30, 2006. Gross margin increased primarily due to higher sales volume,
improved product mix, lower promotional activity and operational cost savings as
discussed above, partially offset by the impact of increased returns and
promotional allowances on net sales. The pharmaceutical segment of the business
generated a gross margin of $20.3 million or 73.3% of net sales for the three
months ended September 30, 2007, an increase of $3.9 million or 23.7% compared
to a gross margin of $16.4 million or 72.1% of net sales for the three months
ended September 30, 2006. The increase in gross margin was due primarily to
higher net sales and operational cost savings as discussed above.

                                      -36-
<PAGE>

Selling and administrative expenses for the three months ended September 30,
2007 were $47.0 million, or 40.2% of net sales compared to $43.8 million or
39.5% of net sales for the three months ended September 30, 2006. The increase
in selling and administrative expenses for 2007 as compared to 2006 is primarily
due to $1.1 million of fees and expenses related to the Form S-1 filings, $1.8
million of increased advertising and other marketing related expenses incurred
to enhance brand value and general increases in administrative and distribution
expenses of $0.9 million to support the increase in sales volume, partially
offset by $0.7 million of non-recurring consulting fees and expenses associated
with Synergetics incurred in 2006.

Included in selling and administrative expenses for the three months ended
September 30, 2007 and 2006 is compensation expense of $115 and $45,
respectively, relating to the granting of service options. The weighted-average
grant date fair value of service options granted during the three months ended
September 30, 2007 and 2006 was $32.48 and $12.39, respectively. The fair value
of each service option was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions in the calculations for the three months ended September 30, 2007
and 2006, respectively: dividend yield 0% and 0%; expected life of 3.0 and 3.5
years; risk free rate 4.90% and 4.85%; and expected volatility of 42.5% and 45%.
Service options granted during the three months ended September 30, 2007 and
2006 were granted at an exercise price of $95.36 per share and $35 per share,
respectively.

Severance expenses for the three months ended September 30, 2007 primarily
represent adjustments recorded to the initial accrual related to the cessation
of manufacturing activities at the Canajoharie facility.

Operating income for the three months ended September 30, 2007 was $11.9 million
or 10.2% of net sales, an increase of $2.2 million, or 22.7% compared to
operating income of $9.7 million or 8.7% of net sales for the three months ended
September 30, 2006. The cosmetic segment of the business generated operating
income of $3.6 million or 4.0% of net sales for the three months ended September
30, 2007, a decrease of $0.3 million or 8.1% compared to operating income of
$3.9 million or 4.4% of net sales for the three months ended September 30, 2006.
Operating income decreased despite an increased gross margin, due to higher
advertising costs incurred to drive brand value and costs incurred in connection
with the Form S-1 filings of which $0.6 million were charged to the cosmetic
segment. The pharmaceutical segment of the business generated operating income
of $8.3 million or 30.0% of net sales for the three months ended September 30,
2007, an increase of $2.5 million, or 43.6% compared to operating income of $5.8
million or 25.4% of net sales for the three months ended September 30, 2006.
Operating income increased primarily due to higher gross margin as discussed
above, partially offset by higher selling and administrative expenses.

Net interest expense for the three months ended September 30, 2007 and 2006 of
$9.4 million was primarily attributable to interest incurred on the Senior
Secured Notes (as defined herein), the Senior Subordinated Notes (as defined
herein) and the ABL Credit Facility.

Other income primarily represents foreign currency gains on U.S. dollar
denominated intercompany balances due principally to the strengthening of the
Canadian dollar.

Income tax expense for the three months ended September 30, 2007 of $1.3 million
was based on the Company's expected effective tax rate of 40.3% for the year
ending December 31, 2007. Income tax expense for the three months ended
September 30, 2006 of $0.1 million was based on the Company's effective tax rate
of 36.5% for year ended December 31, 2006. The increase in the effective income
tax rate is primarily due to a greater impact of projected permanent items on
foreign book income as compared to the previous year.

                                      -37-
<PAGE>

NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2006 (RESTATED)

The following table sets forth the Company's results of operations for the nine
months ended September 30, 2007 and 2006. See Note 3 to the Notes to the
Consolidated Financial Statements for additional information related to the
restatements.

                                                 Nine months ended September 30,
                                                          2007           2006
                                                       ---------      ---------
                                                                      (Restated)
                                                                 ($000)
Net Sales
      Cosmetic segment                                 $ 266,703      $ 251,331
      Pharmaceutical segment                              76,156         64,727
                                                       ---------      ---------
Total net sales                                          342,859        316,058

Cost of goods sold                                       170,782        164,513
                                                       ---------      ---------

Gross profit                                             172,077        151,545

Selling and administrative expenses                      142,652        132,822
Gain on pension curtailment                               (5,582)          (994)
Severance expenses                                           711            657
Gain on sale of property                                    (115)           (41)
                                                       ---------      ---------

Operating income                                          34,411         19,101

Other income (expense):
    Interest expense, net                                (28,281)       (27,659)
    Other income, net                                      1,911            335
                                                       ---------      ---------

Earnings (loss) before income taxes                        8,041         (8,223)
Provision for (benefit from) income taxes                  4,202         (3,005)
                                                       ---------      ---------
Net earnings (loss)                                    $   3,839      $  (5,218)
                                                       =========      =========

The Company's net sales for the nine months ended September 30, 2007 were $342.9
million, an increase of $26.8 million, or 8.5% compared to net sales of $316.1
million for the nine months ended September 30, 2006.

The Cosmetic segment of the business generated net sales for the nine months
ended September 30, 2007 of $266.7 million, an increase of $15.4 million, or
6.1% compared to net sales of $251.3 million for the nine months ended September
30, 2006. Excluding the impact of foreign currency translation, net sales in the
cosmetic segment would have increased $14.8 million or 5.9%. Net sales increased
primarily due to higher shipments of SALLY HANSEN nail color and bleaches and
depilatories of $16.8 million and higher international net sales of $6.7 million
(a 13.9% increase over 2006), partially offset by higher sales returns,
promotional allowances and other deductions of $8.8 million, primarily
reflecting higher sales volume and incremental allowances.

As reported by IRI, the SALLY HANSEN brand remains the number one brand in the
mass market nail care category with a 24.3% share of market, year to date
through October 7, 2007, up from 22.7% in the prior year comparable period. In
nail color, the SALLY HANSEN brand has the number one market share position with
a 41.5% share of market. SALLY HANSEN has the number one market share position
in nail treatment with a 45.2% share of market. The Company has the number one
market share position in bleaches and depilatories with a 33.4% share of market.
SALLY HANSEN/LA CROSS has the number two branded market share position in nail
and beauty implements with a 14.4% share of market.

                                      -38-
<PAGE>

The OTC pharmaceutical segment of the business generated net sales for the nine
months ended September 30, 2007 of $76.2 million, an increase of $11.5 million,
or 17.7% compared to net sales of $64.7 million for the nine months ended
September 30, 2006. Net sales increased primarily due to higher shipments of the
ORAJEL oral analgesics and children's toothpaste product lines of $5.5 million,
higher shipments of GENTLE NATURALS infant care products of $2.3 million, higher
shipments in niche product lines of $0.6 million and lower sales returns and
other deductions of $2.7 million. The impact of foreign currency translation on
the OTC pharmaceutical segment's net sales was not material. As reported by IRI,
ORAJEL, the core brand of the pharmaceutical segment, increased its leadership
position in the oral analgesics category to a 35.4% share of market, year to
date through October 7, 2007, up from 33.1% in the prior year comparable period.

Cost of goods sold for the nine months ended September 30, 2007 was $170.8
million, or 49.8% of net sales compared to $164.5 million or 52.1% of net sales
for the nine months ended September 30, 2006. This decrease as a percentage of
net sales reflects estimated cost savings of $6.1 million achieved as a result
of continued operational improvements and an estimated $3.7 million benefit
relating to the mix of products sold, offset by an increase in the provision for
excess and slow moving inventory of $2.8 million, primarily within the cosmetic
segment, and the impact of promotional allowances and other deductions on net
sales. Cost of goods sold for the nine months ended September 30, 2006 included
approximately $4.4 million, or 1.4% of net sales related to unabsorbed overhead
costs in connection with the closure of the Little Falls manufacturing facility
which were recorded according to the provisions of SFAS No. 151.

Gross margin for nine months ended September 30, 2007 was $172.1 million or
50.2% of net sales, an increase of $20.6 million, or 13.5% compared to gross
margin of $151.6 million or 47.9% of net sales for the nine months ended
September 30, 2006. The cosmetic segment of the business generated a gross
margin of $117.1 million or 43.9% of net sales for the nine months ended
September 30, 2007, an increase of $11.4 million, or 10.8% compared to a gross
margin of $105.7 million or 42.0% of net sales for the nine months ended
September 30, 2006. Gross margin increased primarily due to higher sales volume
and operational cost savings as discussed above, offset by an increase in the
reserve for excess and slow moving inventory and the impact of increased
returns, promotional allowances and other deductions on net sales. The
pharmaceutical segment of the business generated a gross margin of $55.0 million
or 72.2% of net sales for the nine months ended September 30, 2007, an increase
of $9.1 million or 19.8% compared to a gross margin of $45.9 million or 70.9% of
net sales for the nine months ended September 30, 2006. The increase in gross
margin was due primarily to higher sales volume, lower sales returns and other
deductions, and operational cost savings, as discussed above.

Selling and administrative expenses for the nine months ended September 30, 2007
were $142.7 million, or 41.6% of net sales compared to $132.8 million or 42.0%
of net sales for the nine months ended September 30, 2006. Included in selling
and administrative expenses for the nine months ended September 30, 2007 was
$2.5 million of additional non-cash stock compensation charges relating to the
purchase of 40,711 shares of common stock of DLI Holding Corp. by certain of the
Company's key employees and an advisor and $1.1 million of fees and expenses
related to the Form S-1 filings. The increase in selling and administrative
expenses, in addition to these factors, relates primarily to $4.0 million of
higher advertising and other marketing related expenses incurred to enhance
brand value, an increase in distribution expenses of $2.4 million to support the
increase in sales volume and to improve customer service levels, an increase in
professional fees of $2.4 million associated with the restatements and the
delayed filings of the 2006 Annual Report on Form 10-K and the First Quarter
Form 10-Q and charges associated with compliance with the Sarbanes-Oxley Act and
an asset impairment charge of $0.8 million relating to the Canajoharie facility,
partially offset by lower employee benefit costs of $1.7 million and $2.3
million of non-recurring consulting fees and expenses associated with
Synergetics that were incurred in 2006.

                                      -39-
<PAGE>

Included in selling and administrative expenses for the nine months ended
September 30, 2007 and 2006 is compensation expense of $284 and $266,
respectively, relating to the granting of service options. The weighted-average
grant date fair value of service options granted during the nine months ended
September 30, 2007 and 2006 was $49.55 and $13.11, respectively. The fair value
of each service option was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions in the calculations for the nine months ended September 30, 2007 and
2006, respectively: dividend yield 0% and 0%; expected life of 2.9 and 3.9
years; risk free rate 4.69% and 4.74%; and expected volatility of 42.5% and 45%.
Service options granted through June 30, 2007 were granted at an exercise price
of $50 per share while service options granted during the three months ended
September 30, 2007 were granted at an exercise price of $95.36 per share. All
service options granted during the nine months ended September 30, 2006 were
granted at an exercise price of $35 per share.

Severance expenses for the nine months ended September 30, 2007 primarily
represent charges recorded in connection with the cessation of manufacturing
activities at the Canajoharie facility.

Operating income for the nine months ended September 30, 2007 was $34.4 million
or 10.0% of net sales, an increase of $15.3 million, or 80.2% compared to
operating income of $19.1 million or 6.0% of net sales for the nine months ended
September 30, 2006. The cosmetic segment of the business generated operating
income of $15.8 million or 5.9% of net sales for the nine months ended September
30, 2007, an increase of $7.3 million or 86.7% compared to operating income of
$8.5 million or 3.4% of net sales for the nine months ended September 30, 2006.
Operating income increased primarily due to a higher gross margin and the
pension curtailment gain, of which $4.4 million was recorded in the cosmetic
segment, offset by higher advertising and general and administrative costs, as
discussed above. The pharmaceutical segment of the business generated operating
income of $18.6 million or 24.4% of net sales for the nine months ended
September 30, 2007, an increase of $8.0 million, or 75.0% compared to operating
income of $10.6 million or 16.4% of net sales for the nine months ended
September 30, 2006. Operating income increased primarily due to an increase in
gross margin and the pension curtailment gain, of which $1.2 million was
recorded in the pharmaceutical segment, partially offset by higher selling and
administrative expenses.

Net interest expense for the nine months ended September 30, 2007 and 2006 of
$28.3 million and $27.7 million, respectively, was primarily attributable to
interest incurred on the Senior Secured Notes, the Senior Subordinated Notes and
the ABL Credit Facility. The increase in net interest expense was primarily
attributable to an increase in interest rates.

Other income primarily represents foreign currency gains on U.S. dollar
denominated intercompany balances due principally to the strengthening of the
Canadian dollar.

Income tax expense for the nine months ended September 30, 2007 of $4.2 million
was based on the Company's expected effective tax rate of 40.3% for the year
ending December 31, 2007 and an incremental provision of $0.9 million relating
to the impact of the $2.5 million non-cash stock compensation charge recorded
during the second quarter of 2007 which is not deductible for income tax
purposes. The income tax benefit for the nine months ended September 30, 2006 of
$3.0 million was based on the Company's effective tax rate of 36.5% for year
ended December 31, 2006. The increase in the effective income tax rate is
primarily due to a greater impact of projected permanent items on foreign book
income as compared to the previous year.

                                      -40-
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES


The Company's liquidity needs arise primarily from debt service on its
substantial indebtedness and from funding of capital expenditures, ongoing
operating costs and working capital.

In connection with the Merger in January 2005, substantially all of the
Company's then outstanding indebtedness was redeemed, repurchased or otherwise
repaid and replaced. The Company issued $175.0 million of senior subordinated
notes due 2012 (the "Senior Subordinated Notes"), and closed on the prior senior
credit facilities which provided for aggregate maximum borrowings of $250.0
million, consisting of a prior term loan facility of $200.0 million and a prior
revolving credit facility of $50.0 million. On October 28, 2005, the Company
refinanced and terminated the prior senior credit facilities through the
issuance of $185.0 million of senior secured floating rate notes due November 1,
2011 (the "Senior Secured Notes"), and a $75.0 million credit agreement. This
agreement was used as interim financing until December 29, 2005, when it was
replaced with an $85.0 million asset-based revolving credit facility, as
subsequently amended (the "ABL Credit Facility").

Principal and interest payments under the Senior Secured Notes, the ABL Credit
Facility and the Senior Subordinated Notes will represent significant liquidity
requirements for the Company. The Company expects that cash flow from operating
activities and expected available borrowings under the ABL Credit Facility will
provide sufficient working capital to operate the Company's business, to fund
expected capital expenditures and to meet foreseeable liquidity requirements,
including debt service on the Company's outstanding debt. The Company's ability
to borrow under the ABL Credit Facility is subject to a borrowing base
consisting of a percentage of eligible accounts receivable and eligible
inventory. No assurance can be given, however, that the Company's business will,
in fact, generate sufficient cash flows or that future borrowings will, in fact,
be available in an amount sufficient to enable the Company to service its debt
or to fund its other liquidity needs.

THE SENIOR SUBORDINATED NOTES AND SENIOR SECURED NOTES

The Senior Subordinated Notes bear interest at 8% and are guaranteed by certain
of the existing and future domestic subsidiaries of the Company. The Senior
Subordinated Notes and guarantees are unsecured senior subordinated obligations
and rank equally with all future subordinated indebtedness and are subordinated
to the current and future senior indebtedness and other liabilities of the
Company and its subsidiaries. Interest on the Senior Subordinated Notes is
payable semi-annually on February 1 and August 1.

The Senior Subordinated Notes contain covenants that, among other things, limit
the issuance of additional indebtedness, the incurrence of liens, the payment of
dividends or other distributions, the distributions from certain subsidiaries,
the issuance of preferred stock, the sale of assets and subsidiary stock,
transactions with affiliates and consolidations, mergers and transfers of
assets. All of these limitations and prohibitions, however, are subject to a
number of important qualifications, set forth in the Senior Subordinated Notes
Indenture.

                                      -41-
<PAGE>

The Senior Secured Notes bear interest at a rate per annum equal to three-month
LIBOR plus 5.0%. The Senior Secured Notes are guaranteed by certain of the
existing and future domestic subsidiaries of the Company. The Senior Secured
Notes and guarantees are secured by a first priority security interest in
substantially all of the Company's and guarantors' assets, other than inventory,
receivables, equity interest in the Company's subsidiaries and other specified
excluded assets and by a second priority security interest in substantially all
the Company's and guarantors' inventory, receivables and other specified liquid
assets. The Senior Secured Notes and guarantees rank equally with all existing
and future senior indebtedness and rank senior to all existing and future
subordinated indebtedness, including the Senior Subordinated Notes and related
guarantees. Interest on the Senior Secured Notes is payable quarterly on
February 1, May 1, August 1 and November 1.

The Senior Secured Notes contain covenants that, among other things, limit the
issuance of additional indebtedness, the incurrence of liens, the payment of
dividends or other distributions, distributions from certain subsidiaries, the
issuance of preferred stock, the sale of assets and subsidiary stock,
transactions with affiliates and consolidations, mergers and transfers of
assets. All of these limitations and prohibitions, however, are subject to a
number of important qualifications, set forth in the Senior Secured Notes
Indenture.

On June 20, 2007, the Company received notices of default from the Trustees.
Under Section 4.03(a) of the Indentures, the Company was required to file its
First Quarter Form 10-Q for the quarter ended March 31, 2007 within the time
period specified by the SEC's rules and regulations. The Trustee for each
Indenture provided the notice of default to notify the Company that it was in
violation of Section 4.03(a) of the respective Indenture as a result of the
delay in the filing of the First Quarter Form 10-Q, as described above under
"Overview" and in Note 2 to the Consolidated Financial Statements, and to demand
that the Company remedy the default.

Each Indenture provides that the Company has 30 days from receipt of a notice of
default to cure such default before an event of default occurs under the
Indenture. If an event of default occurs, the respective Trustee or the Holders
of 25% in aggregate principal amount of the Senior Subordinated Notes or the
Senior Secured Notes, as the case may be, may declare the applicable Notes to be
due and payable immediately. The Company cured the default with respect to each
Indenture as of July 6, 2007 by filing its First Quarter Form 10-Q for the
quarter ended March 31, 2007.

As of September 30, 2007, the Company was in compliance with the covenants
contained in the indentures for the Senior Secured Notes and the Senior
Subordinated Notes.


THE ABL CREDIT FACILITY

The ABL Credit Facility, which was subsequently amended on February 23, 2006 and
November 29, 2006, matures on December 29, 2010 and provides for aggregate
maximum borrowings of $85.0 million. The ABL Credit Facility is guaranteed by
DLI Holding II Corp. and by certain of the Company's existing and future
domestic subsidiaries. The ABL Credit Facility is an asset-based facility with a
first priority security interest in substantially all accounts receivable and
inventory and a second priority security interest in substantially all tangible
and intangible assets. The ABL Credit Facility is also secured on a first
priority basis by the capital stock of the Company's domestic subsidiaries.
Also, the guarantee by DLI Holding II Corp., is secured by a pledge of all of
its assets. The Company and the subsidiary guarantors, the credit facility
collateral agent and the Trustee for the Senior Secured Notes and the note
collateral agent entered into an Intercreditor Agreement.

                                      -42-
<PAGE>

Borrowings under the ABL Credit Facility are determined by a formula which
provides eligibility of up to 85% of the net book value of domestic accounts
receivable and a range of 35% to 65% of domestic inventory. Borrowings under the
ABL Credit Facility bear interest at the Company's option at either: (i) an
alternate base rate which is equal to the higher of 0.50% per year above the
federal funds effective rate and the base rate announced by the ABL Credit
Facility's administrative agent as its prime rate plus an applicable margin
ranging from 0.25% to 0.75% (0.25% at September 30, 2007) based on the Company's
borrowing base availability, or (ii) an Adjusted LIBOR rate plus an applicable
margin ranging from 1.25% to 1.75% (1.25% at September 30, 2007) based on the
Company's borrowing base availability. The terms of the ABL Credit Facility
include a commitment fee of 0.375% based on unused commitments of the lenders,
letter of credit fees on the aggregate face amount of outstanding letters of
credit and underwriting and administrative fees.

The ABL Credit Facility includes covenants, that among other things, limit or
restrict the Company's and its subsidiaries abilities to dispose of assets,
incur additional indebtedness, incur guarantee obligations, prepay other
indebtedness, make dividends, create liens, make investments, make acquisitions,
modify the terms of the documents governing the indebtedness, engage in mergers
or make capital expenditures or engage in certain transactions with affiliates.
The ABL Credit Facility also requires the Company to comply with a minimum
coverage ratio of Consolidated EBITDA to fixed charges whenever excess borrowing
availability is less than $10.0 million on any day. As of September 30, 2007,
the Company had $15.0 million of senior debt and $1.0 million of letters of
credit outstanding under the ABL Credit Facility, $69.0 million of unutilized
commitments and $67.7 million of availability thereunder. As of November 12,
2007, the Company had $14.0 million of senior debt and $1.0 million of letters
of credit outstanding under the ABL Credit Facility, $70.0 million of unutilized
commitments and $68.7 million of availability thereunder.

The ABL Credit Facility requires the Company to enter into interest rate
protection agreements to provide interest rate protection for a minimum of 45%
of the Company's consolidated funded indebtedness for two years. Effective
February 1, 2006, the Company entered into a cap/floor collar agreement (the
"Collar") with JPMorgan Chase Bank, N.A. to provide the required interest rate
protection and to manage its exposure to changes in LIBOR. The Collar is for a
notional amount of $100.0 million expiring on February 1, 2009 and has a cap
rate of 5.5% and a floor rate of 4.29%. The Collar has been designated as a cash
flow hedge of the variability of the cash flows due to changes in LIBOR and has
been deemed to be highly effective. Accordingly, the Company records the fair
value of the Collar as an asset or liability on its consolidated balance sheet,
and any unrealized gain or loss is included in accumulated other comprehensive
income. As of September 30, 2007, the Company recorded a liability of $251
thousand in the accompanying consolidated balance sheet. The Company also
recorded in accumulated other comprehensive income after-tax net losses of $199
thousand and $157 thousand for the three and nine months ended September 30,
2007, respectively, and recorded after-tax net losses of $419 thousand and $41
thousand during the three and nine months ended September 30, 2006,
respectively. No hedge ineffectiveness was recorded during the three and nine
months ended September 30, 2007 and 2006.



FINANCIAL COVENANTS

Borrowings under the ABL Credit Facility are subject to certain conditions and
limitations described above. The indentures governing the Senior Subordinated
Notes and the Senior Secured Notes contain significant financial and operating
covenants, including prohibitions on the Company's ability to incur certain
additional indebtedness or to pay dividends. The ABL Credit Facility contains
borrowing conditions and customary events of default, including nonpayment of
interest, violation of covenants, inaccuracy of representations and warranties,
cross-defaults to other indebtedness, bankruptcy and other insolvency events.

                                      -43-
<PAGE>

On March 31, 2007, the Company entered into a Waiver and Consent to the ABL
Credit Facility. Among other things, the Waiver and Consent (i) waived certain
defaults or events of default relating to any potential restatement or revision
of the Company's consolidated financial statements delivered prior to the date
of the Waiver and Consent, and (ii) extended the date on which audited financial
statements with respect to the fiscal year ended December 31, 2006, and certain
other documents under the ABL Credit Facility, were required to be delivered to
April 30, 2007 from March 31, 2007. The Company delivered its audited financial
statements for the fiscal year ended December 31, 2006 and all other required
documents under the ABL Credit Facility to its lenders on April 30, 2007.

On May 15, 2007 and June 15, 2007, the Company entered into a Second Waiver and
Consent and Third Waiver and Consent to the ABL Credit Facility, respectively.
Among other things, these waivers and consents (i) waived certain defaults or
events of default relating to any potential restatement or revision of the
Company's consolidated financial statements delivered prior to the date of such
waivers and consents, and (ii) extended the date on which unaudited financial
statements for the three months ended March 31, 2007, and certain other
documents under the ABL Credit Facility, were required to be delivered to June
15, 2007 from May 15, 2007 and subsequently from June 15, 2007 to July 10, 2007.
The Company delivered its unaudited financial statements for the three months
ended March 31, 2007 and all other required documents under the ABL Credit
Facility to it lenders on July 6, 2007.

The ABL Credit Facility has a minimum Consolidated Fixed Charge Coverage Ratio
financial covenant that is effective if the minimum excess availability under
the ABL Credit Facility is less than $10.0 million, as calculated on the basis
of the last four fiscal quarters. The ABL Credit Facility's Consolidated Fixed
Charge Coverage Ratio covenant is the Company's only financial maintenance
covenant. Under the terms of the ABL Credit Facility, the minimum Consolidated
Fixed Charge Coverage Ratio test would not have applied as of September 30, 2007
as borrowing availability under the ABL Credit Facility exceeded the specified
threshold. The minimum Consolidated Fixed Charge Coverage Ratio test, if
applicable, requires the Company to comply with a minimum coverage ratio of
Consolidated EBITDA to Consolidated Fixed Charges (each as defined below) of at
least 1:1 whenever excess availability under the ABL credit facility is less
than $10.0 million (which amount will be increased in proportion to any increase
in commitments under the ABL Credit Facility). The Company's Consolidated Fixed
Charge Coverage Ratio was 1.37:1 and 1.31:1 for the three months ended September
30, 2007 and 2006, respectively and was 1.53:1 and 1.31:1 for the nine months
ended September 30, 2007 and 2006, respectively. The Company's Consolidated
Fixed Charge Coverage Ratio for the four quarters ended September 30, 2007 was
1.30:1. Excess availability under the ABL credit facility did not fall below
$10.0 million in any of these periods.

As of September 30, 2007, the Company was in compliance with the covenants
contained in the credit agreement for the ABL credit facility.

Borrowings under the ABL Credit Facility are a key source of the Company's
liquidity, and the Company's ability to borrow thereunder is material to the
Company's liquidity and operations. Failure to comply with the minimum
Consolidated Fixed Charge Coverage Ratio test when excess availability is less
than the designated minimum would result in a violation of the credit agreement
which, absent a waiver or an amendment, would permit the lenders to accelerate
repayment of borrowings thereunder and could result in a default under the
Indentures. The Indentures provide for payment cross-default and
cross-acceleration to specified other indebtedness. If the debt under the ABL
Credit Facility and indentures is accelerated, there can be no assurance that
the Company would have sufficient assets to pay amounts due under the ABL Credit
Facility, the Senior Secured Notes or the Senior Subordinated Notes or have
access to other sources of funding.

Consolidated Fixed Charges, as defined the ABL Credit Facility, means, for any
period, the sum of (a) consolidated interest expense for such period, (b) all
taxes and alternative taxes paid in cash in such period based upon the income
and profits of the Company and (c) the aggregate amount actually paid by the
Company and its subsidiaries in cash during such period on account of capital
expenditures (subject to certain exclusions).


                                      -44-
<PAGE>

Credit Agreement EBITDA as presented herein is a financial measure that is used
in the credit agreement for the Company's ABL Credit Facility. Credit Agreement
EBITDA is not a defined term under U.S. GAAP and should not be considered as an
alternative to operating income or net income, as a measure of operating results
or cash flows or as a measure of liquidity. Credit Agreement EBITDA differs from
the term "EBITDA" as it is commonly used. Credit Agreement EBITDA as used in
this report, means "Consolidated EBITDA", as that term is defined in the ABL
Credit Facility and used as part of the calculation of the term "Consolidated
Fixed Charge Coverage Ratio" which is used in the ABL Credit Facility's
financial condition covenant and affects the Company's ability to incur
additional indebtedness in specified circumstances as described above. Credit
Agreement EBITDA consists of consolidated net income, adjusted to exclude income
tax expense, interest expense, and depreciation and amortization, as well as
certain other items and expenses, including amortization of intangibles,
extraordinary, unusual or non-recurring gains or losses, consultation fees and
expense reimbursements associated with implementing process improvements and
cost reductions developed by the Company in conjunction with the Synergetics
Installations Worldwide, Inc. consulting group, certain non-cash charges or
expenses deducted in determining net income, certain cash restructuring charges,
loss or gain associated with the sale or write down of assets not in the
ordinary course of business, the amount of any net minority expense, certain
losses relating to the disposition of excess, surplus or obsolete inventory, and
certain sponsor monitoring fees.

         The calculation of Credit Agreement EBITDA for the periods indicated is
set forth below.

                                                    Three Months    Nine Months
                                                        Ended           Ended
                                                     September 30, September 30,
                                                         2007            2007
                                                       --------       --------


Net earnings                                            $  1,906       $  3,839
Income tax expense                                         1,280          4,202
Interest expense, net                                      9,405         28,281
Depreciation and amortization                              6,681         19,858
Non-cash stock compensation charges                          226          3,077
Unusual, non-recurring and other (1)                         984         (3,252)
                                                        --------       --------
Credit Agreement EBITDA (2)                             $ 20,482       $ 56,005
                                                        ========       ========


(1) Represents unusual or non-recurring items, and other permitted add-backs or
adjustments pursuant to the terms of the credit agreement, including among other
items, severance payments of $2 and $995, non-cash foreign exchange gains of
$431 and $1,465 and Kelso advisory fees of $300 and $900 for the three and nine
months ended September 30, 2007, respectively, a benefit of $5,582 relating to
the curtailment of the Employees' Pension Plan recorded during the six months
ended June 30, 2007 and $1,113 of fees and expenses relating to the Form S-1
filings recorded during the third quarter of 2007.

(2) Credit Agreement EBITDA (restated) for the three months ended September 30,
2006 and year-to-date September 30, 2006 was $18,877 and $46,523, respectively.
Credit Agreement EBITDA for the four consecutive quarters ended September 30,
2007 was $57,934.


                                      -45-
<PAGE>

OPERATING ACTIVITIES

Net cash provided by operating activities for the nine months ended September
30, 2007 of $0.3 million was principally the result of $33.5 million in cash
generated (net earnings of $3.8 million plus depreciation and amortization of
$12.3 million, amortization of display fixtures of $7.6 million, non-cash stock
compensation of $3.1 million, the provision for excess and slow moving inventory
of $11.5 million and the loss on asset impairment of $0.8 million, less the
pension curtailment gain of $5.6 million), offset by a decrease in accrued
liabilities of $5.4 million, an increase in inventories of $20.4 million and an
increase in other assets of $7.8 million. Accrued liabilities decreased
principally due to a decrease in accrued interest due to the timing of interest
payments. Inventories increased due to the purchase of materials to support
higher sales levels and safety stock to support customer service levels. Other
assets increased primarily due to the purchase and shipment of display fixtures
to customers.

Net cash provided by operating activities for the nine months ended September
30, 2006 of $12.2 million was principally the result of $13.6 million in cash
generated (net loss of $5.2 million plus depreciation and amortization of $11.4
million and amortization of display fixtures of $7.4 million) and a decrease in
inventories of $6.1 million and a decrease in prepaid expenses and other current
assets of $1.0 million, offset by an increase in other assets of $8.8 million.
Inventories decreased due to the implementation by the Company of an inventory
reduction program. Other assets increased primarily due to the purchase and
shipment of display fixtures to customers.


INVESTING ACTIVITIES

Net cash used in investing activities of $2.2 million for the nine months ended
September 30, 2007 was primarily related to $5.6 million of capital spending for
tooling, plates and dies, and manufacturing machinery and equipment, offset by
net proceeds of $3.4 million from the sale of the property. The Company
currently expects that total expenditures for capital and display fixtures for
2007 will be approximately $22.0 million.

Net cash used in investing activities of $4.1 million for the nine months ended
September 30, 2006 was primarily related to $4.8 million of capital spending for
tooling, plates and dies, and manufacturing machinery and equipment, offset by
net proceeds of $0.7 million from the sale of the property.


FINANCING ACTIVITIES

Net cash provided by financing activities for the nine months ended September
30, 2007 of $4.3 million was primarily due to borrowings under the Company's ABL
Credit Facility of $5.0 million to support increased inventories related to
higher sales levels and increased safety stock to support customer service
levels and $1.4 million of contributed capital, offset by a $2.0 million
distribution to DLI Holding Corp. used for the repurchase of its options and
stock. Cash paid for interest during the nine months ended September 30, 2007
was $29.5 million. The Company anticipates that its debt service requirements in
2007 will be approximately $34.6 million.

Net cash used in financing activities for the nine months ended September 30,
2006 of $5.9 million was primarily due to repayments under the Company's ABL
Credit Facility.

The Company does not use any off-balance sheet financing arrangements. The
Company anticipates that it may, from time to time, purchase its debt securities
through the open market or otherwise.

                                      -46-
<PAGE>

DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company makes estimates and assumptions in the preparation of its financial
statements in conformity with U.S. generally accepted accounting principles.
Actual results could differ significantly from those estimates under different
assumptions and conditions. The Company's most critical accounting policies
relate to business acquisitions, revenue recognition, promotional allowance and
co-operative advertising, accounts receivable, inventories, property, plant and
equipment and other long-lived assets, pension benefits and income taxes.
Further information regarding these policies appears within "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the Company's 2006 Annual Report on Form 10-K. Since December 31,
2006, there have been no significant changes to the Company's critical
accounting policies or to the related assumptions and estimates involved in
applying these policies, except as described in the following paragraph.

In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES - AN
INTERPRETATION OF FASB NO. 109" ("FIN No. 48"). FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "ACCOUNTING FOR INCOME TAXES." FIN No. 48 prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN No. 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The Company adopted the provisions of FIN No. 48 effective January
1, 2007. As a result of the adoption of FIN No. 48, the Company recorded a $1.3
million increase in the net liability for unrecognized tax benefits, which as
required, was accounted for as an increase to the January 1, 2007 accumulated
deficit.

NEW ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES
INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115" ("SFAS No. 159"). SFAS No. 159
permits entities to choose to measure many financial instruments and certain
other items at fair value. The provisions of SFAS No. 159 are effective as of
the beginning of the first fiscal year that begins after November 15, 2007. The
Company is currently evaluating the impact, if any, that the adoption of SFAS
No. 159 will have on its consolidated financial statements.

In November 2006, the FASB issued Emerging Issues Task Force ("EITF") Issue No.
06-10, "ACCOUNTING FOR DEFERRED COMPENSATION AND POSTRETIREMENT BENEFIT ASPECTS
OF COLLATERAL ASSIGNMENT SPLIT-DOLLAR LIFE INSURANCE ARRANGEMENTS" ("EITF No.
06-10"), which is effective for calendar year companies on January 1, 2008. The
Task Force concluded that an employer should recognize a liability for the
postretirement benefit related to a collateral assignment split-dollar life
insurance arrangement in accordance with either SFAS No. 106 "EMPLOYERS'
ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS" or Accounting
Principles Board Opinion No. 12 based on the substantive agreement with the
employee. The Task Force also concluded that an employer should recognize and
measure an asset based on the nature and substance of the collateral assignment
split-dollar life insurance arrangement. The Company is currently evaluating the
impact, if any, that the adoption of EITF No. 06-10 will have on its
consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "FAIR VALUE MEASUREMENTS" ("SFAS No. 157"). SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS No. 157 applies under other accounting pronouncements that require or
permit fair value measurements, the FASB having previously concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, this statement does not require any new fair value measurements.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is currently evaluating the impact, if any, that the adoption
of SFAS No. 157 will have on its consolidated financial statements.


                                      -47-
<PAGE>


In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 158, "EMPLOYERS' ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER
POSTRETIREMENT PLANS AN AMENDMENT OF FASB STATEMENTS NO. 87, 88, 106 AND 132(R)"
("SFAS No. 158"). SFAS No. 158 requires an employer to recognize the over-funded
or under-funded status of a defined benefit postretirement plan as an asset or
liability in its statement of financial position, measure a plan's assets and
its obligations as of the end of the employer's fiscal year-end and recognize
changes in the funded status in the year in which the changes occur through
comprehensive income. SFAS No. 158 is effective for financial statements of
employers without publicly traded equity securities as of the year of the fiscal
year ending after June 15, 2007. Had the Company adopted SFAS No. 158 as of
December 31, 2006, the effect would have been to decrease the recorded pension
liability by approximately $2.6 million, increase net deferred tax liabilities
by approximately $1.0 million and to increase shareholders' equity through the
accumulated other comprehensive income account by approximately $1.6 million.



FORWARD-LOOKING STATEMENTS

Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Quarterly Report on Form 10-Q include
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, (the "Exchange Act"). All statements other than statements of
historical facts included in this Quarterly Report on Form 10-Q, including,
without limitation, statements regarding the Company's liquidity, future
financial results, economic conditions, trends, certain risks and uncertainties,
expected efficiency improvements, and expected cost savings are forward-looking
statements. Forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "expect," "intend," "estimate,"
"anticipate," "seek", "should," "look forward to," "indications," "plan,"
"momentum," "believe" or "continue" or the negative thereof or variations
thereon or similar terminology. Many factors could affect our actual financial
results and could cause actual results to differ materially from those expressed
in the forward-looking statements. Important factors that could cause actual
results to differ materially from the Company's expectations, or "cautionary
statements," include, without limitation:


     o    our substantial amount of debt;

     o    delays in introducing new products or failure of consumers to accept
          new products;

     o    actions by competitors which may result in mergers, technology
          improvement or new product introductions;

     o    the Company's ability to realize cost savings and operational
          improvements;

     o    the Company's estimates of required inventory reserves if future
          economic conditions, the timing of new product introductions, customer
          inventory levels, retailer consolidations, fashion-oriented color
          cosmetic trends or competitive conditions differ from expectations;

     o    the Company's dependence on certain national chain drug stores, food
          stores and mass merchandiser relationships due to the concentration of
          sales generated by such chains;

     o    changes in fashion-oriented color cosmetic trends;

     o    the effect on sales of lower retailer inventory targets;

     o    the effect on sales of political and/or economic conditions;

     o    the Company's estimates of costs and benefits, cash flow from
          operations and capital expenditures;

     o    interest rate changes affecting the Company;


                                      -48-


<PAGE>


     o    regulatory requirements and government regulatory action;

     o    failure to maintain satisfactory compliance with good manufacturing
          practice or requirements;

     o    changes in product mix to products which are less profitable;

     o    shipment delays;

     o    depletion of inventory and increased production costs resulting from
          disruptions of operations at any of the Company's manufacturing or
          distribution facilities;

     o    foreign currency fluctuations affecting the Company's results of
          operations and the value of its foreign assets and liabilities;

     o    the relative prices at which the Company sells its products and its
          competitors sell their products in the same market;

     o    the Company's operating and manufacturing costs outside of the United
          States;

     o    changes in the laws, regulations and policies, including changes in
          accounting standards, that affect, or will affect, the Company in the
          United States and/or abroad; and/or

     o    trends in the general economy.


Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis, judgment, belief or expectation
only as of the date hereof. The Company undertakes no obligation to update or
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof. In addition to the disclosure
contained herein, readers should carefully review any disclosure of risks and
uncertainties contained in other documents the Company files or has filed from
time to time with the Securities and Exchange Commission pursuant to the
Exchange Act.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


The market risk inherent in the Company's market risk sensitive instruments is
the potential loss arising from material adverse changes in interest rates and
foreign currency exchange rates.

INTEREST RATE RISK

The Company's borrowings at September 30, 2007 under the Senior Secured Notes
and the ABL Credit Facility expose earnings to changes in short-term interest
rates. Interest rates on the underlying obligations are either variable or fixed
for such a short period of time as to effectively become variable. Effective
February 1, 2006, the Company entered into a Collar with JPMorgan Chase Bank,
N.A. for a notional amount of $100.0 million to hedge its exposure to changes in
interest rates on a portion of the Senior Secured Notes.


FOREIGN EXCHANGE RISK

The Company is subject to risk from changes in the foreign exchange rate for the
Company's foreign subsidiaries which use foreign currency as their functional
currency and is translated into United States dollars. Such changes result in
cumulative translation adjustments which are included in shareholders' equity
and in the determination of other comprehensive income (loss). Intercompany
transactions between the Company and its foreign subsidiaries are recorded by
the foreign subsidiaries in their functional currency.

                                      -49-
<PAGE>

Item 4. CONTROLS AND PROCEDURES


The Company maintains disclosure controls and procedures that are designed to
provide reasonable assurance that information required to be disclosed in
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified by the SEC's rules and forms, and that such information
is accumulated and communicated to its management team, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow for
timely decisions regarding required disclosure. As of September 30, 2007, the
Company's management, under the supervision and with the participation of its
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the Company's disclosure controls and procedures (as defined in Exchange Act
Rule 15d-15(e)). Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of that date, the Company's
disclosure controls and procedures were not effective at a reasonable assurance
level due to the material weaknesses in the Company's internal control over
financial reporting described below.



In connection with the preparation of its annual financial statements for the
year ended December 31, 2006 and the related audit by its independent registered
public accounting firm, KPMG LLP, the Company identified the following material
weaknesses in its internal control over financial reporting as of December 31,
2006 which continued as of September 30, 2007.


(1) The Company did not maintain sufficient personnel with an appropriate level
of technical accounting knowledge, experience and training in the application of
generally accepted accounting principles commensurate with the Company's
financial accounting and reporting requirements. This deficiency resulted in a
material error in the accounting for income taxes in accordance with SFAS No.
109, "ACCOUNTING FOR INCOME TAXES." In addition, the Company did not effectively
perform and document procedures to annually test goodwill and indefinite long
lived assets for impairment in accordance with SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS".

(2) The Company did not maintain effective policies and procedures relating to
the computation of the sales return reserve. Specifically, the Company's
policies and procedures did not provide for sufficient review and validation of
the underlying assumptions and methodologies utilized in determining the
adequacy of the reserve.

(3) The Company had inadequate review controls over the accounting for and
reporting of non-routine transactions and complex accounting matters. This
deficiency resulted in the recording of an audit adjustment to the 2006
consolidated financial statements in connection with the computation of the
fourth quarter inventory reserve.

These deficiencies caused and have the potential to cause a material
misstatement and/or inadequate disclosures in the Company's consolidated
financial statements.

The material weaknesses identified in (1) and (2) above resulted in a
restatement of the Company's prior consolidated financial statements as
previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 2006 and caused a delay in the filing of the Company's Form
10-Q for the quarter ended March 31, 2007.

In response to these three identified material weaknesses and as reported in our
previous Form 10-Q filing for the quarter ended June 30, 2007, the Company
developed remediation plans and took a number of substantial actions to address
the material weaknesses described above.

In the first and second quarters of 2007, the Company began the process of
implementing the remediation plans. Specific remediation actions that had been
or were being taken for each of the material weaknesses described above was as
follows:

                                      -50-
<PAGE>


(1) Technical accounting knowledge, experience and training in the application
of generally accepted accounting principles, including:

o    Engaged outside tax experts, under the supervision of the Chief Financial
     Officer and Treasurer, to assist with the preparation of the tax provision
     in accordance with SFAS No. 109 and to supplement the Company's overall
     level of tax expertise.
o    Implementing new policies and procedures to ensure that the tax provision
     is properly prepared and reviewed on a timely basis.
o    Assessing the technical accounting capabilities of its personnel to ensure
     the right complement of knowledge, skills and training.

(2) Computation of the sales return reserve, including:

o    Created an enhanced database that more closely measures sales returns to
     the periods of original sale.
o    Implemented new policies and procedures requiring a detailed and
     comprehensive review of the underlying information supporting the amounts
     and estimates used to compute the reserve.
o    Enhanced communication and collaboration between the accounting department
     and the sales department.
o    Hired a financial analyst within the sales department to focus on customer
     liabilities relating to the cosmetic business segment.
o    Assigned monitoring and control activities to the Treasurer and upgraded
     the accounting function through the hiring of additional accountants and
     consultants with relevant experience.

(3) Review controls over the accounting for and reporting of non-routine
transactions and complex accounting matters, including:

o    Hired additional technical accounting personnel to address complex
     accounting and financial reporting requirements.
o    Assessing the technical accounting capabilities of its personnel to ensure
     the right complement of knowledge, skills and training.
o    Implementing a process that ensures the timely review and approval of
     complex accounting transactions by qualified accounting personnel.
o    Requiring analyses of all significant non-routine transactions be reviewed
     by senior management.
o    Developing improved monitoring controls in the accounting department.

In the third quarter of 2007, the Company continued the process of implementing
the remediation plans to address its material weaknesses. Specific remedial
actions taken or being taken were as follows:

(1) Ongoing process improvements:

o    Engaged outside consultants to assist in the Sarbanes-Oxley implementation
     process including a detailed review and enhancement of existing systems and
     processes, and continued evaluation and testing of internal control over
     financial reporting.
o    Established a cross functional team and engaged outside consultants to
     facilitate and assist in the evaluation of an implementation of an
     enterprise resource planning initiative to strengthen the current
     information technology environment.
o    Evaluating the establishment of a co-sourced internal audit function.

(2) Re-assessed the technical accounting capabilities of personnel:

o    Upgraded personnel, where appropriate, to ensure the right complement of
     knowledge and skills in the application of GAAP.


                                      -51-
<PAGE>

(3) Implementation of enhanced policies and controls for non-routine
transactions and complex accounting matters:

o    Completed a detailed documentation of significant business processes and
     general computer controls.
o    Improved the review and approval process for all financial reports.
o    Subscribed to an online accounting research tool for all GAAP and SEC
     related matters.
o    Created formal policies and procedure guidelines for all non-routine
     transactions and significant reserve estimations/calculations to ensure a
     sufficient review and validation of the underlying assumptions and
     methodologies used.

The Company will continue to take further steps to strengthen its control
processes and procedures in order to remediate these material weaknesses through
ongoing process improvements, the implementation of additional enhanced policies
and controls and the ongoing re-assessment of the technical accounting
capabilities of its personnel in fiscal 2007. This is an ongoing effort to which
the Company will be devoting significant resources and which will need to be
maintained and updated over time. The Company believes that the foregoing
actions have improved and will continue to improve its internal control over
financial reporting, as well as its disclosure controls and procedures.

The remediation activities, outlined above, are expected to continue during the
balance of fiscal 2007. Accordingly, these material weaknesses are not yet fully
remediated. Further, no material weakness will be considered remediated until
the remediation procedures have operated for an appropriate period, have been
tested, and management has concluded that they are operating effectively.

To compensate for these material weaknesses, the Company performed additional
analysis and other procedures in order to prepare its unaudited quarterly
consolidated financial statements in accordance with generally accepted
accounting principles. Accordingly, management believes that the consolidated
financial statements included in this Quarterly Report on Form 10-Q fairly
present, in all material respects, our financial condition, results of
operations and cash flows for the periods presented.

Other than the foregoing measures, which have not been fully implemented to
remediate the material weaknesses described above, there has been no change in
the Company's internal control over financial reporting during the quarter ended
September 30, 2007, that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.

The certifications of the Company's Chief Executive Officer and Chief Financial
Officer included as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q
include, in paragraph 4 of such certifications, information concerning the
Company's disclosure controls and procedures and internal control over financial
reporting. Such certifications should be read in conjunction with the
information contained in this Item 4 Controls and Procedures, for a more
complete understanding of the matters covered by such certifications.

The Company is continuing to perform the systems and process evaluation testing
of its internal control over financial reporting, as required by Section 404 of
the Sarbanes-Oxley Act, in order to allow management to report on the internal
control over financial reporting which will be required for the fiscal year
ending December 31, 2007.


                                      -52-
<PAGE>


PART II - OTHER INFORMATION

Item 1A. RISKS RELATED TO THE COMPANY

There have been no material changes from the risk factors previously disclosed
in the Company's Annual Report on Form 10-K for the year ended December 31,
2006.

Item 6. EXHIBITS

Exhibit 31.1    Certification of Chief Executive Officer.

Exhibit 31.2    Certification of Chief Financial Officer.

Exhibit 32.1    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
                Section 1350.

Exhibit 32.2    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
                Section 1350.


                                      -53-
<PAGE>


                                                    SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                                DEL LABORATORIES, INC.
                                                ----------------------
                                                (Registrant)



           DATE:   NOVEMBER 14, 2007            /S/ CHARLES J. HINKATY
                   -----------------            ----------------------
                                                Charles J. Hinkaty
                                                President and
                                                Chief Executive Officer








           DATE:   NOVEMBER 14, 2007            /S/ JOSEPH SINICROPI
                   -----------------            ---------------------
                                                Joseph Sinicropi
                                                Executive Vice President and
                                                Chief Financial Officer



                                      -54-