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 JUNE 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 August
14, 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 June 30, 2007 and
                December 31, 2006                                              3

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

           Consolidated Statements of Cash Flows for the
                six months ended June 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                                30

Item 3.    Quantitative and Qualitative Disclosures About Market Risks        43

Item 4.    Controls and Procedures                                            44




Part II.   OTHER INFORMATION

Item 1A.   Risks Related to the Company                                       46

Item 6.    Exhibits                                                           46


SIGNATURES                                                                    47

                                      -2-
<PAGE>

<TABLE>
<CAPTION>


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

                                                                     June 30,    December 31,
                                                                       2007          2006
                                                                   ----------   -------------
                                                                                    (Note 2)

       ASSETS

Current assets:

<S>                                                                <C>          <C>
       Cash and cash equivalents                                   $     644    $      42
       Accounts receivable, less allowance for doubtful accounts
         of $1,713 in 2007 and $2,113 in 2006                         63,674       58,250
       Inventories                                                   107,411       95,062
       Deferred income taxes                                          30,430       29,995
       Assets held for sale                                              400         --
       Prepaid expenses and other current assets                       5,456        6,409
                                                                   ---------    ---------
                   Total current assets                              208,015      189,758

Property, plant and equipment, net                                    38,693       44,647
Intangibles arising from acquisitions, net                           251,412      254,037
Goodwill                                                             145,318      145,318
Other assets                                                          24,096       26,701
Deferred income taxes                                                 20,478       25,398
                                                                   ---------    ---------

                   Total assets                                    $ 688,012    $ 685,859
                                                                   =========    =========

       LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

       Current portion of long-term debt                           $     194    $     165
       Accounts payable                                               38,232       40,127
       Accrued liabilities                                            38,843       44,334
                                                                   ---------    ---------

                   Total current liabilities                          77,269       84,626

Long-term debt, less current portion                                 380,784      370,239
Long-term pension liability, less current portion                     14,419       19,943
Deferred liabilities                                                   1,305        1,492
Deferred income taxes                                                 99,905       98,455
                                                                   ---------    ---------
                   Total liabilities                                 573,682      574,755
                                                                   ---------    ---------

Shareholders' equity:

       Common stock $.01 par value, 1,000 shares authorized
         and issued                                                     --           --
       Additional paid-in capital                                    148,517      146,261
       Accumulated other comprehensive income                            747          421
       Accumulated deficit (Note 6)                                  (34,934)     (35,578)
                                                                   ---------    ---------

                   Total shareholders' equity                        114,330      111,104
                                                                   ---------    ---------


                   Total liabilities and shareholders' equity      $ 688,012    $ 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                  SIX MONTHS ENDED
                                        ----------------------------------    ------------------------------------

                                         April 1, 2007 -    April 1, 2006 -   January 1, 2007 -   January 1, 2006 -
                                          June 30, 2007     June 30, 2006      June 30, 2007       June 30, 2006
                                        ---------------     -------------      -------------       -------------
                                                             (Restated)                            (Restated)

<S>                                         <C>               <C>               <C>               <C>
Net sales                                   $ 122,037         $ 111,988         $ 226,052         $ 205,158

Cost of goods sold                             61,816            57,729           112,737           106,257
                                            ---------         ---------         ---------         ---------

Gross profit                                   60,221            54,259           113,315            98,901

Selling and administrative expenses            49,924            47,644            95,698            89,063
Gain on pension curtailment                      (162)             --              (5,582)             --
Severance expenses                                 46               328               805               474
                                            ---------         ---------         ---------         ---------

Operating income                               10,413             6,287            22,394             9,364

Other income (expense):

   Gain on sale of property                       115                41               115                41
   Interest expense, net                       (9,437)           (9,431)          (18,876)          (18,274)
   Other income, net                            1,218               283             1,222               292
                                            ---------         ---------         ---------         ---------

Earnings (loss) before income taxes             2,309            (2,820)            4,855            (8,577)
Provision for (benefit from) income taxes       1,855            (1,030)            2,922            (3,134)
                                            ---------         ---------         ---------         ---------
Net earnings (loss)                         $     454         $  (1,790)        $   1,933         $  (5,443)
                                            =========         =========         =========         =========






 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)

                                                                                   June 30,
                                                                            ----------------------
                                                                             2007         2006
                                                                             ----         ----
                                                                                        Restated

Cash flows provided by (used in) operating activities:

<S>                                                                        <C>         <C>
Net earnings (loss)                                                        $  1,933    $ (5,443)
Adjustments to reconcile net earnings (loss) to net cash
  provided by (used in) operating activities:
Depreciation and amortization                                                 8,498       7,607
Amortization of display fixtures                                              4,679       4,490
Amortization of deferred financing fees and original issue discount           1,491       1,362
Non-cash stock compensation                                                   2,851         445
Deferred income taxes                                                         5,154      (4,583)
Provision for excess and slow moving inventory                                6,829       4,595
Provision for (recovery from) doubtful accounts                                (114)        120
Gain on pension curtailment                                                  (5,582)       --
Loss on asset impairment                                                        804        --
Gain on sale of property                                                       (115)        (80)
Other non-cash operating items                                                 (550)       (271)

Changes in operating assets and liabilities:

    Accounts receivable                                                      (4,982)     (9,054)
    Inventories                                                             (18,200)      4,288
    Prepaid expenses and other current assets                                 1,159       1,518
    Other assets                                                             (3,796)     (4,700)
    Accounts payable                                                         (2,099)     (5,769)
    Accrued liabilities                                                      (3,732)      3,447
    Pension liability (net)                                                  (1,933)        235
    Deferred liability                                                         (240)        501
                                                                           --------    --------

          Net cash used in operating activities                              (7,945)     (1,292)
                                                                           --------    --------

Cash flows provided by (used in) investing activities:

    Proceeds from sale of property                                            3,439         562
    Property, plant and equipment additions                                  (3,559)     (3,351)
                                                                           --------    --------

         Net cash used in investing activities                                 (120)     (2,789)
                                                                           --------    --------

Cash flows provided by (used in) financing activities:

    Principal borrowings (payments) under revolving credit facility, net     10,000       5,000
    Principal payments under mortgage                                           (29)        (29)
    Payment of deferred financing fees                                         --          (452)
    Distribution to DLI Holding Corp. (Note 9(b))                            (2,020)       --
    Contributed capital                                                       1,425          40
    Payment of capital lease obligations                                        (64)        (63)
                                                                           --------    --------

          Net cash provided by financing activities                           9,312       4,496
                                                                           --------    --------

Effect of exchange rate changes on cash                                        (645)        115
                                                                           --------    --------

Net increase in cash and cash equivalents                                       602         530

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

Cash and cash equivalents at end of period                                 $    644    $  3,132
                                                                           ========    ========

Supplemental disclosures:
Cash paid for:

    Interest                                                               $ 17,332    $ 16,543
    Income taxes                                                           $    823    $  1,416

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 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 June 30, 2007 and December 31,
2006, reserves for future sales returns and allowances and markdowns aggregated
$44,206 and $41,566, respectively.

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 markdowns. The Company completed this re-evaluation and concluded that
immaterial adjustments were required to previously reported amounts and that it
has 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 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.

3. RESTATEMENTS

The Company's consolidated statement of operations for the three and six months
ended June 30, 2006 and consolidated statement of cash flows for the six months
ended June 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
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. 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 six months ended June 30, 2006 for the errors described above.

STATEMENT OF OPERATIONS DATA

                                            Three Months Ended June 30, 2006
                                        ----------------------------------------
                                             AS
                                         PREVIOUSLY
                                          REPORTED     ADJUSTMENTS     RESTATED
                                          --------     -----------     --------

Net sales                                $ 112,109    $    (121)(a)   $ 111,988
Selling and administrative expenses         47,944         (300)(b)      47,644
Operating income                             6,108          179           6,287
Loss before taxes                           (2,999)         179          (2,820)
Benefit from income taxes                   (1,154)         124(c)       (1,030)
Net loss                                    (1,845)          55          (1,790)


                                              Six Months Ended June 30, 2006
                                        ----------------------------------------
                                             AS
                                         PREVIOUSLY
                                          REPORTED     ADJUSTMENTS     RESTATED
                                          --------     -----------     --------


Net sales                                $ 204,234    $     924(a)    $ 205,158
Selling and administrative expenses         89,893         (830)(b)      89,063
Operating income                             7,610        1,754           9,364
Loss before taxes                          (10,331)       1,754          (8,577)
Benefit from income taxes                   (3,977)         843(c)       (3,134)
Net loss                                    (6,354)         911          (5,443)


(a)  Adjustment recorded to the reserves for future sales returns 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:

                                                          June 30,  December 31,
                                                           2007         2006
                                                         --------     --------

Raw materials                                            $ 59,018     $ 52,803
Work in process                                             8,193        5,687
Finished goods                                             82,815       80,896
                                                         --------     --------
Total gross inventories                                   150,026      139,386

Reserve for excess and slow moving inventories             42,615       44,324
                                                         --------     --------

                                                         $107,411     $ 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 $2,546
to cost of goods sold during the six months ended June 30, 2006 relating to
unabsorbed overhead costs in connection with the closure of the Little Falls
manufacturing facility (Note 10).

5. INTANGIBLES

Trade names 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. These trade names
have indefinite lives and are used in advertising and marketing of the 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 components of intangibles arising from acquisitions were as follows:

                                                   JUNE 30, 2007
                                                   -------------
                                           GROSS
                                          CARRYING     ACCUMULATED     NET BOOK
                                           VALUE       AMORTIZATION      VALUE
                                          --------       --------       --------

Trade names                               $159,100       $   --         $159,100
Customer relationships                     105,000         12,688         92,312
                                          --------       --------       --------

                                          $264,100       $ 12,688       $251,412
                                          ========       ========       ========

                                                   DECEMBER 31, 2006
                                                   -----------------
                                           GROSS
                                          CARRYING     ACCUMULATED     NET BOOK
                                           VALUE       AMORTIZATION      VALUE
                                          --------       --------       --------

Trade names                               $159,100       $   --         $159,100
Customer relationships                     105,000         10,063         94,937
                                          --------       --------       --------

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


Amortization expense was $1,313 for the three months ended June 30, 2007 and
2006 and was $2,625 for the six months ended June 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 June 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 2002. The Company's U.S. federal income tax returns for 2002
through January 27, 2005 are currently being examined. With respect to state and
local jurisdictions and countries outside of the United States, with limited
exceptions, the Company and it 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 $2,922 during the six
months ended June 30, 2007. The provision was based on the Company's expected
effective tax rate of 41.0% 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 $3,134 (restated) during the six
months ended June 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
June 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:

                                                           June 30, December 31,
                                                             2007        2006
                                                           --------   --------

8% senior subordinated notes, net of unamortized
   discount of $821 in 2007 and $897 in 2006, due in 2012   $174,179   $174,103
Senior secured floating rate notes, due in 2011              185,000    185,000
Revolving credit facility                                     20,000     10,000
Mortgage on land and buildings                                 1,275      1,194
Obligations under capital leases                                 524        107
                                                            --------   --------
                                                             380,978    370,404
Less current portion                                             194        165
                                                            --------   --------
                                                            $380,784   $370,239
                                                            ========   ========


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 June
30, 2007, the Company recorded an asset of $70 in the accompanying consolidated
balance sheet. The Company also recorded in accumulated other comprehensive
income after-tax net gains of $125 and $209 during the three months ended June
30, 2007 and 2006, respectively, and recorded after-tax net gains of $42 and
$378 during the six months ended June 30, 2007 and 2006, respectively. No hedge
ineffectiveness was recorded during the three and six months ended June 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. 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.

                                      -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
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (the "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 for the
quarter ended March 31, 2007.

In January 2007, the Company entered into a capital lease agreement 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 applied for a determination letter from the Internal Revenue Service for
approval of 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:

                          APRIL 1, 2007 - JUNE 30, 2007
                          -----------------------------

                                           EMPLOYEES'      LACROSS
                                            PENSION        PENSION
                                              PLAN          PLAN          SERP
                                            -------       -------       -------
Service cost                                 $  --         $  --         $     7
Interest cost                                    707            16           103
Expected return on plan assets                  (584)          (15)         --
Recognized net loss                             --            --              30
Curtailment adjustment                          (162)         --            --
                                             -------       -------       -------
Net periodic cost                            $   (39)      $     1       $   140
                                             =======       =======       =======



                          APRIL 1, 2006 - JUNE 30, 2006
                          -----------------------------

                                           EMPLOYEES'      LACROSS
                                            PENSION        PENSION
                                              PLAN          PLAN          SERP
                                            -------       -------       -------
Service cost                                 $ 1,016       $  --         $     3
Interest cost                                    715            15           103
Expected return on plan assets                  (718)          (16)         --
Recognized net loss                             --            --              32
                                             -------       -------       -------
Net periodic cost                            $ 1,013       $    (1)      $   138
                                             =======       =======       =======



                         JANUARY 1, 2007 - JUNE 30, 2007
                         -------------------------------

                                           EMPLOYEES'      LACROSS
                                            PENSION        PENSION
                                              PLAN          PLAN          SERP
                                            -------       -------       -------
Service cost                                 $  --         $  --         $    14
Interest cost                                  1,422            32           207
Expected return on plan assets                (1,364)          (30)         --
Recognized net loss                             --            --              60
Curtailment                                   (5,582)         --            --
                                             -------       -------       -------
Net periodic cost                            $(5,524)      $     2      $   281
                                             =======       =======       =======


                                      -13-
<PAGE>

                         JANUARY 1, 2006 - JUNE 30, 2006
                         -------------------------------

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

Service cost                                 $ 2,032       $  --         $     6
Interest cost                                  1,431            32           206
Expected return on plan assets                (1,436)          (32)         --
Recognized net loss                             --            --              64
                                             -------       -------       -------
Net periodic cost                            $ 2,027       $  --         $   276
                                             =======       =======       =======




     (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.

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 June 30, 2007 and changes
during the six months ended June 30, 2007 is presented below:

<TABLE>
<CAPTION>

                                                                     WEIGHTED-
                                                                      AVERAGE
                                                       WEIGHTED-     REMAINING     AGGREGATE
                                                        AVERAGE     CONTRACTUAL    INTRINSIC
          EXCHANGE OPTIONS             SHARES       EXERCISE 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 June 30, 2007           164,949       $   17.56      7.6 years      $ 12,833
                                      ========       =========      =========      ========
Exercisable at June 30, 2007           164,949       $   17.56      7.6 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 January 1, 2007 was developed in consultation with independent valuation
specialists. Current market value as of June 30, 2007 was determined by
utilizing an assumed initial public offering price of DLI Holding Corp. common
stock (see Note 15).

2) Options owned by William McMenemy, a director and former 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 June 30, 2007
and changes during the six months ended June 30, 2007 is presented below:

<TABLE>
<CAPTION>

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


<S>                                  <C>            <C>          <C>              <C>
Outstanding at January 1, 2007        44,417       $    35.00                      $    667
     Granted                          12,900            50.00                           585
     Exercised                          --               --                             --
     Forfeited                        (1,334)           35.00                            81
                                    ---------
Outstanding at June 30, 2007          55,983       $    38.46        8.9 years     $  3,185
                                    ========       ==========        =========     ========
Exercisable at June 30, 2007          21,678       $    35.00        8.7 years     $  1,308
                                    ========       ==========        =========     ========
</TABLE>


                                      -15-
<PAGE>

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


<S>                                <C>            <C>              <C>                <C>
Outstanding at January 1, 2007        88,833       $   35.00                      $  1,333
     Granted                          25,800           50.00                         1,170
     Exercised                          --              --                            --
     Forfeited                        (2,666)          35.00                           161
                                    --------
Outstanding at June 30, 2007         111,967       $   38.46        8.9 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 January 1, 2007 was developed in consultation with independent valuation
specialists. Current market value as of June 30, 2007 was determined by
utilizing an assumed 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 June 30, 2007 and 2006 was $54.25 and $13.06, respectively,
and during the six months ended June 30, 2007 and 2006 was $54.85 and $13.16,
respectively. The weighted-average grant-date fair value of Exit Options granted
during the three months ended June 30, 2007 and 2006 was $45.36 and $9.22,
respectively, and during the six months ended June 30, 2007 and 2006 was $45.36
and $9.61, respectively.

The Company recorded compensation expense relating to the Service Options of
$116 and $53 for the three months ended June 30, 2007 and 2006, respectively,
and $169 and $221 for the six months ended June 30, 2007 and 2006, respectively.
The Company has not recorded compensation expense relating to the Exit Options
as the Company has determined it is not probable that the performance conditions
contained in the Exit Options will be achieved. Compensation expense relating to
the fair value of the Exit Options will be measured and recorded upon the
occurrence of a change in control. As of June 30, 2007, the total unrecognized
compensation cost related to the non-vested Service Options was $785 and the
related weighted-average period over which this cost is expected to be
recognized is approximately 2.4 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 June 30, 2007 and
2006, respectively: dividend yield of 0% and 0%; expected life of 2.7 and 3.8
years; risk-free interest rates of 4.83% and 4.90%; and expected volatility of
42.5% and 45.0%. The weighted average assumptions used in the calculations for
the six months ended June 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
4.63% and 4.73%; 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 June 30, 2007 and
2006, respectively: dividend yield of 0% and 0%; expected life of 2.7 and 3.8
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 4.83% and 4.90%; and expected
volatility of 42.5% and 45.0%. The weighted average assumptions used in the
calculations for the six months ended June 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 4.63% and 4.73%; 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 June 30, 2007 and changes during
the six months ended June 30, 2007 is presented below:

<TABLE>
<CAPTION>

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

<S>                                                           <C>       <C>
Operating Units subject to forfeiture at January 1, 2007        47,717    $   14.30
     Granted                                                      --           --
     Exempt from forfeiture                                    (15,451)       14.37
     Forfeited                                                    --           --
                                                              --------
Operating Units subject to forfeiture at June 30, 2007          32,266    $   14.26
                                                              ========    =========


                                                                         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 June 30, 2007             196,323    $   13.08
                                                              ========    =========
</TABLE>

Total compensation expense recorded in connection with the Operating Units was
$110 and $169 (restated) for the three months ended June 30, 2007 and 2006,
respectively, and was $225 and $224 (restated) for the six months ended June 30,
2007 and 2006, respectively. The Company has not recorded compensation expense
relating to the Value Units as the Company has determined it is not probable
that the performance conditions contained in the Value Units will be achieved.
Compensation expense relating to the fair value of the Value Units will be
measured and recorded upon the occurrence of a change in control. As of June 30,
2007, the total unrecognized compensation cost related to Operating Units
subject to forfeiture was $384 and the related weighted-average period over
which this cost is expected to be recognized is approximately 1.1 years.

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. 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.

                                      -17-
<PAGE>


(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 director and former 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. 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 adviser purchased
a total of 40,711 shares of the common stock of DLI Holding Corp. for an
aggregate purchase price of $1,425. 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 assumed initial
public offering price of DLI Holding Corp. common stock (see Note 15) and the
price per share paid by the employees and the adviser.

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 six
months of 2007, respectively. As of June 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 several of its short-term leased warehouse facilities
in upstate New York.

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 six months ended June 30, 2007, an
adjustment of $(1) was recorded. During the six months ended June 30, 2006, a
charge of $198 was recorded for such earned benefits, in addition to an
adjustment of $(43) to the initial accrual. Also during the six months ended
June 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 June
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 June 30, 2007                $ --
                                                       =====


                                      -18-
<PAGE>



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, charges of $66 and $709 for severance costs and related
benefits were recorded during the three and six months ended June 30, 2007,
respectively, in accordance with SFAS No. 112. In addition, an adjustment of
$(19) was recorded during the three months ended June 30, 2007. 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 June 30, 2007, all employees had been terminated and $319 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                        (19)
                         Payments                          (319)
                                                          -----
             Balance at June 30, 2007                     $ 371
                                                          =====

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 provided by an independent valuation specialist. The Company has
classified the Canajoharie facility as an asset held for sale in the
accompanying consolidated balance sheet as of June 30, 2007.

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 $600 during the six months ended June 30, 2007 and 2006, respectively,
and as of June 30, 2007, the Company has accrued $2,400 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   Six Months Ended

                                                 JUNE 30,            JUNE 30,
                                                 --------            --------
                                             2007      2006      2007       2006
                                           -------   -------    -------   -------
                                                     Restated            Restated

<S>                                        <C>       <C>        <C>       <C>
Net earnings (loss)                        $   454   $(1,790)   $ 1,933   $(5,443)
Other comprehensive income
   Foreign currency translation gain           190       730        284       667
   Change in fair value of interest rate
     Collar, net of taxes                      125       209         42       378
                                           -------   -------    -------   -------

Total comprehensive income (loss)          $   769   $  (851)   $ 2,259   $(4,398)
                                           =======   =======    =======   =======
</TABLE>


                                      -19-
<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         Six Months Ended

                                            JUNE 30,                    JUNE 30,
                                            --------                    --------
                                        2007         2006          2007         2006
                                      ---------    ---------    ---------    ---------
                                                  (Restated)                 (Restated)
<S>                                   <C>          <C>          <C>          <C>
Net sales:
   Cosmetic                           $  97,266    $  89,926    $ 177,600    $ 163,192
   Pharmaceutical                        24,771       22,062       48,452       41,966
                                      ---------    ---------    ---------    ---------
   Consolidated                       $ 122,037    $ 111,988    $ 226,052    $ 205,158
                                      =========    =========    =========    =========

Operating income (1):
   Cosmetic                           $   4,603    $   3,109    $  12,103    $   4,520
   Pharmaceutical                         5,810        3,178       10,291        4,844
                                      ---------    ---------    ---------    ---------
   Consolidated                          10,413        6,287       22,394        9,364

Other income (expense):
   Gain on sale of property                 115           41          115           41
   Interest expense, net                 (9,437)      (9,431)     (18,876)     (18,274)
   Other income (expense), net            1,218          283        1,222          292
                                      ---------    ---------    ---------    ---------
Earnings (loss) before income taxes   $   2,309    $  (2,820)   $   4,855    $  (8,577)
                                      =========    =========    =========    =========

Depreciation and amortization:
  Cosmetic                            $   3,425    $   3,163    $   6,810    $   6,028
  Pharmaceutical                            853          793        1,688        1,579
                                      ---------    ---------    ---------    ---------
  Consolidated                        $   4,278    $   3,956    $   8,498    $   7,607
                                      =========    =========    =========    =========


Amortization of display fixtures:
   Cosmetic                           $   1,972    $   2,229    $   4,679    $   4,490
   Pharmaceutical                          --           --           --           --
                                      ---------    ---------    ---------    ---------
   Consolidated                       $   1,972    $   2,229    $   4,679    $   4,490
                                      =========    =========    =========    =========
</TABLE>



(1) Operating income for the three and six months June 30, 2007 includes
severance expense of $46 and $805, respectively, which was all charged to the
Cosmetic segment. Operating income for the three and six months ended June 30,
2006 includes severance expense of $328 and $474, respectively, which was all
charged to the Cosmetic segment. The pension curtailment gain of $162 and $5,582
for the three and six months ended June 30, 2007, respectively, was allocated
$128 and $4,415 to the Cosmetic segment and $34 and $1,167 to the Pharmaceutical
segment. The impairment loss of $804 related to the Canajoharie facility for the
three and six months ended June 30, 2007 was all charged to the Cosmetic
segment.

                                      -20-
<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, 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 $200,000
and that the shares of common stock are being sold by existing stockholders. It
is not anticipated that DLI Holding Corp. or the Company will receive any of the
proceeds from the sale of these shares.

                                      -21-
<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
                                                     June 30, 2007


                                                                          GUARANTOR     NON-GUARANTOR
                                                             ISSUER      SUBSIDIARIES    SUBSIDIARIES  ELIMINATIONS    CONSOLIDATED
                                                             ------      ------------    ------------  ------------    ------------
       ASSETS

Current assets:
<S>                                                         <C>            <C>            <C>            <C>            <C>
       Cash and cash equivalents                            $     761      $    (448)     $     331      $    --        $     644
       Accounts receivable                                     51,962          7,045          4,667           --           63,674
       Inventories                                             85,771          9,626         12,439           (425)       107,411
       Deferred income taxes                                   24,218          5,083          1,129           --           30,430
       Assets held for sale                                       400           --             --             --              400
       Prepaid expenses and other current assets                2,281            500          2,675           --            5,456
                                                            ---------      ---------      ---------      ---------      ---------
               Total current assets                           165,393         21,806         21,241           (425)       208,015

Property, plant and equipment, net                             33,400          1,331          3,962           --           38,693
Intercompany                                                  137,506       (115,592)       (21,914)          --             --
Intangibles arising from acquisitions, net                    166,688         84,724           --             --          251,412
Goodwill                                                       92,858         47,460          5,000           --          145,318
Other assets                                                   22,409           --            1,687           --           24,096
Note receivable                                                 6,430           --             --           (6,430)          --
Deferred income taxes                                          20,376           --              102           --           20,478
                                                            ---------      ---------      ---------      ---------      ---------
               Total assets                                 $ 645,060      $  39,729      $  10,078      $  (6,855)     $ 688,012
                                                            =========      =========      =========      =========      =========

       LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
       Current portion of long-term debt                    $     127      $    --        $      67      $    --        $     194
       Accounts payable                                        32,237          3,105          2,890           --           38,232
       Accrued liabilities                                     30,507          5,473          2,863           --           38,843
                                                            ---------      ---------      ---------      ---------      ---------
               Total current liabilities                       62,871          8,578          5,820           --           77,269

Long-term debt, less current portion                          379,577           --            1,207           --          380,784
Long-term pension liability, less current portion              14,419           --             --             --           14,419
Deferred liabilities                                            1,305           --             --             --            1,305
Deferred income taxes                                          66,566         33,191            148           --           99,905
Note payable                                                     --             --            6,430         (6,430)          --
                                                            ---------      ---------      ---------      ---------      ---------
               Total liabilities                              524,738         41,769         13,605         (6,430)       573,682
                                                            ---------      ---------      ---------      ---------      ---------

Shareholders' equity:
       Common stock $.01 par value, authorized
          1,000 shares; issued 1,000 shares                      --             --             --             --             --
       Additional paid-in capital                             148,512           --                5           --          148,517
       Accumulated other comprehensive income (loss)             (218)          --              965           --              747
       Accumulated deficit                                    (27,972)        (2,040)        (4,497)          (425)       (34,934)
                                                            ---------      ---------      ---------      ---------      ---------

               Total shareholders' equity                     120,322         (2,040)        (3,527)          (425)       114,330
                                                            ---------      ---------      ---------      ---------      ---------


               Total liabilities and shareholders' equity   $ 645,060      $  39,729      $  10,078      $  (6,855)     $ 688,012
                                                            =========      =========      =========      =========      =========

</TABLE>


                                      -22-
<PAGE>

<TABLE>
<CAPTION>

                                                CONSOLIDATING BALANCE SHEET
                                                     December 31, 2006
                                                          (Note 2)

                                                                           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                                                   134,931      (116,585)       (18,346)         --            --
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                                                  6,430          --             --          (6,430)         --
Deferred income taxes                                           25,135          --              263          --          25,398
                                                             ---------     ---------      ---------     ---------     ---------
                Total assets                                 $ 641,707     $  41,732      $   9,319     $  (6,899)    $ 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                                                      --            --            6,430        (6,430)         --
                                                             ---------     ---------      ---------     ---------     ---------
                Total liabilities                              525,639        42,791         12,755        (6,430)      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      $   9,319     $  (6,899)    $ 685,859
                                                             =========     =========      =========     =========     =========

</TABLE>


                                                           -23-
<PAGE>

<TABLE>
<CAPTION>
                                 CONSOLIDATING STATEMENT OF OPERATIONS
                                       Three Months Ended June 30, 2007


                                                            GUARANTOR   NON-GUARANTOR
                                               ISSUER      SUBSIDIARIES  SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                               ------      ------------  ------------   ------------   ------------

<S>                                          <C>            <C>           <C>            <C>            <C>
Net sales                                    $  88,282      $  23,457     $  10,298      $    --        $ 122,037

Cost of goods sold                              49,589          6,587         5,679            (39)        61,816
                                             ---------      ---------     ---------      ---------      ---------

Gross profit                                    38,693         16,870         4,619             39         60,221

Selling and administrative expenses             28,013         15,817         6,094           --           49,924
Gain on pension curtailment                       (162)          --            --             --             (162)
Severance expenses                                  46           --            --             --               46
                                             ---------      ---------     ---------      ---------      ---------

     Operating income (loss)                    10,796          1,053        (1,475)            39         10,413

Other income (expense):
     Gain on sale of property                      115           --            --             --              115
     Interest expense, net                      (9,363)           112          (186)          --           (9,437)
     Other income, net                             123             23         1,072           --            1,218
                                             ---------      ---------     ---------      ---------      ---------

Earnings (loss) before income taxes              1,671          1,188          (589)            39          2,309
Provision for (benefit from) income taxes        1,045            460           350           --            1,855
                                             ---------      ---------     ---------      ---------      ---------

     Net earnings (loss)                     $     626      $     728     $    (939)     $      39      $     454
                                             =========      =========     =========      =========      =========
</TABLE>


                                                           -24-
<PAGE>
<TABLE>
<CAPTION>
                                         CONSOLIDATING STATEMENT OF OPERATIONS
                                              Three Months Ended June 30, 2006
                                                          Restated

                                                               GUARANTOR     NON-GUARANTOR
                                               ISSUER         SUBSIDIARIES   SUBSIDIARIES    ELIMINATIONS    CONSOLIDATED
                                               ------         ------------   ------------    ------------    ------------

<S>                                            <C>             <C>            <C>                 <C>          <C>
Net sales                                      $  81,599       $  20,672      $   9,717           $--          $ 111,988

Cost of goods sold                                45,591           6,064          6,074            --             57,729
                                               ---------       ---------      ---------         ---------      ---------

Gross profit                                      36,008          14,608          3,643            --             54,259

Selling and administrative expenses               32,220          10,699          4,725            --             47,644
Severance expenses                                   328            --             --              --                328
                                               ---------       ---------      ---------         ---------      ---------

     Operating income (loss)                       3,460           3,909         (1,082)           --              6,287

Other income (expense):
     Gain on sale of property                         41            --             --              --                 41
     Interest expense, net                        (9,363)           --              (68)           --             (9,431)
     Other income (expense), net                     (34)              9            308            --                283
                                               ---------       ---------      ---------         ---------      ---------

Earnings (loss) before income taxes               (5,896)          3,918           (842)           --             (2,820)
Provision for (benefit from) income taxes         (2,430)          1,640           (240)           --             (1,030)
                                               ---------       ---------      ---------         ---------      ---------

     Net earnings (loss)                       $  (3,466)      $   2,278      $    (602)          $--          $  (1,790)
                                               =========       =========      =========         =========      =========
</TABLE>


                                                           -25-
<PAGE>
<TABLE>
<CAPTION>

                                           CONSOLIDATING STATEMENT OF OPERATIONS
                                               Six Months Ended June 30, 2007


                                                                GUARANTOR       NON-GUARANTOR
                                                 ISSUER        SUBSIDIARIES     SUBSIDIARIES  ELIMINATIONS    CONSOLIDATED
                                                 ------        ------------     ------------  ------------    ------------

<S>                                             <C>             <C>             <C>             <C>             <C>
Net sales                                       $ 159,469       $  46,036       $  20,547       $    --         $ 226,052

Cost of goods sold                                 89,364          13,307          10,110             (44)        112,737
                                                ---------       ---------       ---------       ---------       ---------

Gross profit                                       70,105          32,729          10,437              44         113,315

Selling and administrative expenses                51,546          32,913          11,239            --            95,698
Gain on pension curtailment                        (5,582)           --              --              --            (5,582)
Severance expenses                                    805            --              --              --               805
                                                ---------       ---------       ---------       ---------       ---------

     Operating income (loss)                       23,336            (184)           (802)             44          22,394

Other income (expense):
     Gain on sale of property                         115            --              --              --               115
     Interest expense, net                        (18,654)            225            (447)           --           (18,876)
     Other income, net                                 62              22           1,138            --             1,222
                                                ---------       ---------       ---------       ---------       ---------

Earnings (loss) before income taxes                 4,859              63            (111)             44           4,855
Provision for (benefit from) income taxes           2,635              23             264            --             2,922
                                                ---------       ---------       ---------       ---------       ---------

     Net earnings (loss)                        $   2,224       $      40       $    (375)      $      44       $   1,933
                                                =========       =========       =========       =========       =========
</TABLE>


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

                                           CONSOLIDATING STATEMENT OF OPERATIONS
                                               Six Months Ended June 30, 2006
                                                          Restated

                                                               GUARANTOR     NON-GUARANTOR
                                                ISSUER        SUBSIDIARIES   SUBSIDIARIES  ELIMINATIONS   CONSOLIDATED
                                                ------        ------------   ------------  ------------   ------------

<S>                                            <C>             <C>            <C>               <C>        <C>
Net sales                                      $ 146,362       $  39,467      $  19,329         $--        $ 205,158

Cost of goods sold                                83,767          11,997         10,493          --          106,257
                                               ---------       ---------      ---------      ---------     ---------

Gross profit                                      62,595          27,470          8,836          --           98,901

Selling and administrative expenses               54,586          25,135          9,342          --           89,063
Severance expenses                                   474            --             --            --              474
                                               ---------       ---------      ---------      ---------     ---------

     Operating income (loss)                       7,535           2,335           (506)         --            9,364

Other income (expense):
     Gain on sale of property                         41            --             --            --               41
     Interest expense, net                       (18,140)           --             (134)         --          (18,274)
     Other income (expense), net                      (6)              7            291          --              292
                                               ---------       ---------      ---------      ---------     ---------

Earnings (loss) before income taxes              (10,570)          2,342           (349)         --           (8,577)
Provision for (benefit from) income taxes         (4,134)          1,099            (99)         --           (3,134)
                                               ---------       ---------      ---------      ---------     ---------

     Net earnings (loss)                       $  (6,436)      $   1,243      $    (250)        $--        $  (5,443)
                                               =========       =========      =========      =========     =========

</TABLE>


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

                                           CONSOLIDATING STATEMENT OF CASH FLOWS
                                               Six Months Ended June 30, 2007

                                                                           GUARANTOR     NON-GUARANTOR
                                                             ISSUER      SUBSIDIARIES    SUBSIDIARIES  ELIMINATIONS  CONSOLIDATED
                                                             ------      ------------    ------------  ------------  ------------
<S>                                                        <C>              <C>             <C>         <C>         <C>
Cash flows from operating activities:
Net earnings (loss)                                         $  2,224        $     40      $   (325)     $     (6)     $  1,933
Adjustments to reconcile net earnings
  (loss) to net cash provided by (used in)
  operating activities:
Depreciation and amortization                                  6,582           1,734           166            16         8,498
Amortization of display fixtures                               3,891            --             788          --           4,679
Amortization of deferred financing
  fees and original issue discount                             1,491            --            --            --           1,491
Non-cash stock compensation                                    2,851            --            --            --           2,851
Deferred income taxes                                          5,298            (314)          170          --           5,154
Provision for excess and slow moving inventory                 5,410             707           712          --           6,829
Recovery from doubtful accounts                                 (114)           --            --            --            (114)
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                                  --              --            (550)         --            (550)
Changes in operating assets and liabilities:
      Accounts receivable                                     (5,969)          2,649        (1,662)         --          (4,982)
      Inventories                                            (14,736)         (1,578)       (1,842)          (44)      (18,200)
      Prepaid expenses and other current assets                1,176              (6)          (11)         --           1,159
      Other assets                                            (3,782)              1           (15)         --          (3,796)
      Accounts payable                                        (1,667)           (641)          209          --          (2,099)
      Accrued liabilities                                     (2,665)         (1,216)           99            50        (3,732)
      Pension liability (net)                                 (1,933)           --            --            --          (1,933)
      Deferred liabilities                                      (240)           --            --            --            (240)
      Intercompany receivables / payables                     (2,001)           (993)        2,366           628          --
                                                            --------        --------      --------      --------      --------

        Net cash provided by (used in)
                operating activities                          (9,077)            383           105           644        (7,945)
                                                            --------        --------      --------      --------      --------

Cash flows provided by (used in) investing activities:
      Proceeds from sale of property                           3,439            --            --            --           3,439
      Property, plant and equipment additions                 (3,285)           (232)          (42)         --          (3,559)
                                                            --------        --------      --------      --------      --------

        Net cash provided by (used in)
                investing activities                             154            (232)          (42)         --            (120)
                                                            --------        --------      --------      --------      --------

Cash flows provided by (used in) financing activities:
      Principal borrowings under revolving
                credit facility, net                          10,000            --            --            --          10,000
      Principal payments under mortgage                         --              --             (29)         --             (29)
      Distribution to DLI Holding Corp.                       (2,020)           --            --            --          (2,020)
      Contributed capital                                      1,425            --            --            --           1,425
      Payment of capital lease obligations                       (64)           --            --            --             (64)
                                                            --------        --------      --------      --------      --------

        Net cash provided by (used in)
                financing activities                           9,341            --             (29)         --           9,312
                                                            --------        --------      --------      --------      --------

Effect of exchange rate changes on cash                         --              --              (1)         (644)         (645)
                                                            --------        --------      --------      --------      --------

Net increase in cash and cash equivalents                        418             151            33          --             602

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

Cash and cash equivalents at end of period                  $    761        $   (448)     $    331      $   --        $    644
                                                            ========        ========      ========      ========      ========
</TABLE>


                                                           -28-
<PAGE>

<TABLE>
<CAPTION>

                                           CONSOLIDATING STATEMENT OF CASH FLOWS
                                               Six Months Ended June 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)                                        $(6,436)       $ 1,243        $  (250)       $  --          $(5,443)
Adjustments to reconcile net earnings
  (loss) to net cash  provided by
  (used in) operating activities:
Depreciation and amortization                                5,776          1,625            205              1          7,607
Amortization of display fixtures                             4,200           --              290           --            4,490
Amortization of deferred financing fees and
  original issue discount                                    1,362           --             --             --            1,362
Non-cash stock compensation                                    445           --             --             --              445
Deferred income taxes                                       (4,583)          --             --             --           (4,583)
Provision for excess and slow moving inventory               2,609            801          1,185           --            4,595
Provision for doubtful accounts                                120           --             --             --              120
Gain on sale of property                                       (80)          --             --             --              (80)
Other non-cash operating items                                --             --             (271)          --             (271)
Changes in operating assets and liabilities:
      Accounts receivable                                   (8,926)           659           (787)          --           (9,054)
      Inventories                                            5,805           (447)        (1,070)          --            4,288
      Prepaid expenses and other current assets              2,219            256           (957)          --            1,518
      Other assets                                          (4,293)            (1)          (406)          --           (4,700)
      Accounts payable                                      (6,345)          (245)           821           --           (5,769)
      Accrued liabilities                                    1,201          1,594            652           --            3,447
      Pension liability (net)                                  235           --             --             --              235
      Deferred liability                                       501           --             --             --              501
      Intercompany receivables / payables                    4,190         (5,036)           772             74           --
                                                           -------        -------        -------        -------        -------

        Net cash provided by (used in)
                operating activities                        (2,000)           449            184             75         (1,292)
                                                           -------        -------        -------        -------        -------

Cash flows provided by (used in) investing activities:
      Proceeds from sale of property                           562           --             --             --              562
      Property, plant and equipment additions               (3,181)          (139)           (31)          --           (3,351)
                                                           -------        -------        -------        -------        -------

        Net cash used in investing activities               (2,619)          (139)           (31)          --           (2,789)
                                                           -------        -------        -------        -------        -------

Cash flows provided by (used in) financing activities:
      Principal borrowings under revolving
                credit facility, net                         5,000           --             --             --            5,000
      Principal payments under mortgage                       --             --              (29)          --              (29)
      Payment of deferred financing fees                      (452)          --             --             --             (452)
      Contributed capital                                       40           --             --             --               40
      Payment of capital lease obligations                     (63)          --             --             --              (63)
                                                           -------        -------        -------        -------        -------

        Net cash provided by (used in)
                financing activities                         4,525           --              (29)          --            4,496
                                                           -------        -------        -------        -------        -------

Effect of exchange rate changes on cash                       --             --              190            (75)           115
                                                           -------        -------        -------        -------        -------

Net increase (decrease) in cash and cash equivalents           (94)           310            314           --              530

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

Cash and cash equivalents at end of period                 $ 1,768        $  (124)       $ 1,488        $  --          $ 3,132
                                                           =======        =======        =======        =======        =======
</TABLE>

                                                           -29-
<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 80% of net sales in the first half 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 20% of net sales in the first half 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.

As reported by ACNielsen or Information Resources, Inc. ("IRI"), many of the
Company's brands have leading market positions in their product categories. 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 information below for the three months and six months ended June 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 markdowns. The Company completed this re-evaluation and concluded that
immaterial adjustments were required to previously reported amounts and that it
has 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, 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 not anticipated that DLI Holding Corp. or the Company will
receive any of the proceeds from the sale of these shares.

STOCK PURCHASE

On May 18, 2007, certain of the Company's key employees and an adviser purchased
a total of 40,711 shares of the common stock of DLI Holding Corp. for an
aggregate purchase price of $1.4 million. As a result of the proposed initial
public offering of common stock by DLI Holding Corp., 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 assumed initial public offering price of DLI Holding Corp.
common stock and the price per share paid by the employees and the adviser.

                                      -30-
<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 our 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. The Company is currently
listing the Canajoharie Plant for sale. During the second quarter of 2007, the
Company recorded an impairment loss of $0.8 million related to the Canajoharie
facility. Pursuant to the Company's formal severance policy, a charge of $0.8
million for severance costs and related benefits was recorded during the first
half 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. Cash payouts are expected to be completed by the end of 2007. As of June
30, 2007, all employees have been terminated and $0.3 million in severance
benefits have been paid.

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., or 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
anticipates incremental annualized cost savings in 2007 of approximately $6.0
million. The Company has 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.

                                      -31-
<PAGE>


In the fourth quarter of 2006, the Company recorded a $25.1 million charge to
cost of goods sold to increase its reserves for excess and slow moving
inventory. The $25.1 million change in estimate is a result of the execution of
various initiatives designed to enhance the value of the Company's brands;
specifically SALLY HANSEN and ORAJEL. These initiatives are consistent with the
Company's revised strategic plan which was approved by senior management and
certain members of the Board of Directors in December 2006. 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. A significant portion of the additional reserve resulted from 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.

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.

RESULTS OF OPERATIONS

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

The following table sets forth the Company's results of operations for the three
months ended June 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 June 30,
                                                          2007           2006
                                                       ---------      ---------
                                                                     (Restated)
                                                                 ($000)

Net Sales
      Cosmetic segment                                 $  97,266      $  89,926
      Pharmaceutical segment                              24,771         22,062
                                                       ---------      ---------
Total net sales                                          122,037        111,988

Cost of goods sold                                        61,816         57,729
                                                       ---------      ---------

Gross profit                                              60,221         54,259

Selling and administrative expenses                       49,924         47,644
Gain on pension curtailment                                 (162)          --
Severance expenses                                            46            328
                                                       ---------      ---------

Operating income                                          10,413          6,287

Other income (expense):
   Gain on sale of property                                  115             41
    Interest expense, net                                 (9,437)        (9,431)
    Other income, net                                      1,218            283
                                                       ---------      ---------

Earnings (loss) before income taxes                        2,309         (2,820)
Provision for (benefit from) income taxes                  1,855         (1,030)
                                                       ---------      ---------
Net earnings (loss)                                    $     454      $  (1,790)
                                                        ========      =========

The Company's net sales for the three months ended June 30, 2007 were $122.0
million, an increase of $10.0 million, or 9.0% compared to net sales of $112.0
million for the three months ended June 30, 2006.

                                      -32-
<PAGE>

The Cosmetic segment of the business generated net sales for the three months
ended June 30, 2007 of $97.2 million, an increase of $7.3 million, or 8.2%
compared to net sales of $89.9 million for the three months ended June 30, 2006.
Net sales increased primarily due to higher shipments of the SALLY HANSEN nail
color, nail treatment and lip product lines, as well as higher international net
sales (a 24.7% increase over 2006), partially offset by lower shipments in
non-core product lines and higher promotional allowances. As reported by IRI,
the SALLY HANSEN brand remains the number one brand in the mass market nail care
category with a 24.5% share of market for the quarter. In nail color, the SALLY
HANSEN brand has the number one market share position with a 40.7% share of
market. SALLY HANSEN has the number one market share position in nail treatment
with a 44.5% share of market for the quarter, down from 48.7% in the prior year
comparable quarter. This decrease is primarily attributable to the significant
growth in the anti-fungal category in which the Company does not aggressively
participate. The Company has the number one market share position in bleaches
and depilatories with a 31.2% share of market for the quarter. SALLY HANSEN/LA
CROSS has the number two market share position in nail and beauty implements
with a 14.4% share of market for the quarter.

The over-the-counter Pharmaceutical segment of the business generated net sales
for the three months ended June 30, 2007 of $24.8 million, an increase of $2.7
million, or 12.3% compared to net sales of $22.1 million for the three months
ended June 30, 2006. Net sales increased primarily due to higher shipments of
the ORAJEL oral analgesics and children's toothpaste product lines as well as
higher shipments of Gentle Naturals infant care products. As reported by IRI,
ORAJEL, the core brand of the Pharmaceutical segment maintained its leadership
position in the oral analgesics category with a 35.2% share of market for the
quarter.

Cost of goods sold for the three months ended June 30, 2007 was $61.8 million,
or 50.7% of net sales compared to $57.7 million or 51.5% of net sales for the
three months ended June 30, 2006. This decrease as a percentage of net sales
reflects cost savings achieved as a result of continued operational improvements
offset by an increase in the provision for excess and slow moving inventory, and
the impact of increased promotional allowances on net sales. Cost of goods sold
for the three months ended June 30, 2006 included approximately $1.5 million, or
1.3% 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.

Selling and administrative expenses for the three months ended June 30, 2007
were $49.9 million, or 40.9% of net sales compared to $47.6 million or 42.5% of
net sales for the three months ended June 30, 2006. Included in selling and
administrative expenses for the second quarter of 2007 is $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 an asset impairment charge of $0.8 million
relating to the Canajoharie facility. Included in selling and administrative
expenses for the three months ended June 30, 2006 was $0.9 million of consulting
fees and expenses associated with Synergetics.

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

Net interest expense for the three months ended June 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 June 30, 2007 of $1.9 million was
based on the Company's expected effective tax rate of 41.0% 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 three months ended June 30, 2006 of $1.0 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.

                                      -33-
<PAGE>

SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO SIX MONTHS ENDED JUNE 30, 2006
(RESTATED)

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

                                                       Six Months Ended June 30,
                                                         2007            2006
                                                       ---------      ---------
                                                                      (Restated)
                                                                ($000)

Net Sales
      Cosmetic segment                                $ 177,600      $ 163,192
      Pharmaceutical segment                             48,452         41,966
                                                      ---------      ---------
Total net sales                                         226,052        205,158

Cost of goods sold                                      112,737        106,257
                                                      ---------      ---------

Gross profit                                            113,315         98,901

Selling and administrative expenses                      95,698         89,063
Gain on pension curtailment                              (5,582)          --
Severance expenses                                          805            474
                                                      ---------      ---------

Operating income                                         22,394          9,364

Other income (expense):
    Gain on sale of property                                115             41
    Interest expense, net                               (18,876)       (18,274)
    Other income, net                                     1,222            292
                                                      ---------      ---------

Earnings (loss) before income taxes                       4,855         (8,577)
Provision for (benefit from) income taxes                 2,922         (3,134)
                                                      ---------      ---------
Net earnings (loss)                                   $   1,933      $  (5,443)
                                                       =========      =========

The Company's net sales for the six months ended June 30, 2007 were $226.1
million, an increase of $21.1 million, or 10.2% compared to net sales of $205.2
million for the six months ended June 30, 2006.

The Cosmetic segment of the business generated net sales for the six months
ended June 30, 2007 of $177.6 million, an increase of $14.4 million, or 8.8%
compared to net sales of $163.2 million for the six months ended June 30, 2006.
Net sales increased primarily due to higher shipments of the SALLY HANSEN nail
color, nail treatment and lip product lines, as well as higher international net
sales (a 26.0% increase over 2006), partially offset by lower shipments in
non-core product lines and higher promotional allowances. As reported by IRI,
the SALLY HANSEN brand remains the number one brand in the mass market nail care
category with a 24.4% share of market, year to date through June 17, 2007. In
nail color, the SALLY HANSEN brand has the number one market share position with
a 41.1% share of market. SALLY HANSEN has the number one market share position
in nail treatment with a 46.0% share of market for the period, down from 49.8%
in the prior year comparable period. This decrease is primarily attributable to
the significant growth in the anti-fungal category in which the Company does not
aggressively participate. The Company has the number one market share position
in bleaches and depilatories with a 33.9% share of market. SALLY HANSEN/LA CROSS
has the number two market share position in nail and beauty implements with a
14.6% share of market.

The over-the-counter Pharmaceutical segment of the business generated net sales
for the six months ended June 30, 2007 of $48.5 million, an increase of $6.5
million, or 15.5% compared to net sales of $42.0 million for the six months
ended June 30, 2006. Net sales increased primarily due to higher shipments of
the ORAJEL oral analgesics and children's toothpaste product lines as well as
higher shipments of Gentle Naturals infant care products. As reported by IRI,
ORAJEL, the core brand of the Pharmaceutical segment maintained its leadership
position in the oral analgesics category with a 33.3% share of market, year to
date through June 17, 2007.

                                      -34-
<PAGE>


Cost of goods sold for the six months ended June 30, 2007 was $112.7 million, or
49.9% of net sales compared to $106.3 million or 51.8% of net sales for the six
months ended June 30, 2006. This decrease as a percentage of net sales reflects
cost savings achieved as a result of continued operational improvements offset
by an increase in the provision for excess and slow moving inventory and the
impact of increased promotional allowances on net sales. Cost of goods sold for
the six months ended June 30, 2006 included approximately $2.5 million, or 1.2%
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.

Selling and administrative expenses for the six months ended June 30, 2007 were
$95.7 million, or 42.3% of net sales compared to $89.1 million or 43.4% of net
sales for the six months ended June 30, 2006. Included in selling and
administrative expenses for the six months ended June 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, $1.9 million of higher advertising costs, and an
asset impairment charge of $0.8 million relating to the Canajoharie facility,
partially offset by lower employee benefit costs. Included in selling and
administrative expenses for the six months ended June 30, 2006 was $1.6 million
of consulting fees and expenses associated with Synergetics.

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

Net interest expense for the six months ended June 30, 2007 and 2006 of $18.9
million and $18.3 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 six months ended June 30, 2007 of $2.9 million was
based on the Company's expected effective tax rate of 41.0% 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 six months ended June 30, 2006 of $3.1 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.

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").

                                      -35-
<PAGE>


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.

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.

                                      -36-
<PAGE>


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.

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 June 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 June 30, 2007) based on the
Company's borrowing base availability. The terms of the ABL Credit Facility
include a commitment fee of .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 June 30, 2007, the
Company had $20.0 million of senior debt and $1.0 million of letters of credit
outstanding under the ABL Credit Facility, $64.0 million of unutilized
commitments and $64.0 million of availability thereunder. As of August 10, 2007,
the Company had $22.0 million of senior debt and $1.0 million of letters of
credit outstanding under the ABL Credit Facility, $62.0 million of unutilized
commitments and $62.0 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 June 30, 2007, the Company recorded an asset of $70 in the
accompanying consolidated balance sheet. The Company also recorded in
accumulated other comprehensive income after-tax net gains of $125 and $209 for
the three months ended June 30, 2007 and 2006, respectively, and recorded
after-tax net gains of $42 and $378 during the six months ended June 30, 2007
and 2006, respectively. No hedge ineffectiveness was recorded during the three
and six months ended June 30, 2007 and 2006.

                                      -37-
<PAGE>


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.

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. 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 fixed charge coverage ratio financial
covenant that is effective if the minimum excess availability under the ABL
Credit Facility is less than specified levels. Under the terms of the ABL Credit
Facility, the minimum fixed charge coverage ratio test would not have applied as
of June 30, 2007 as borrowing availability under the ABL Credit Facility would
have exceeded the specified threshold. The minimum fixed charge coverage ratio
test requires the Company to comply with a minimum coverage ratio of
consolidated EBITDA to fixed charges of at least 1:1 whenever excess
availability is less than $10.0 million (which amount will be increased in
proportion to any increase in commitments under 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 will depend on its
compliance with the covenants under the credit agreement. Failure to comply with
these covenants 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.

                                      -38-
<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. 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.

<TABLE>
<CAPTION>

                                              Qtr 3      Qtr 4       Qtr 1        Qtr 2
                                              2006        2006        2007         2007     TOTAL
                                            --------    --------    --------    --------   --------
                                            Restated

                                                                   ($000)

<S>                                         <C>         <C>         <C>         <C>        <C>
Net earnings (loss)                         $    225    $(13,914)   $  1,479    $    454   $(11,756)
Income tax expense (benefit)                     129      (8,013)      1,067       1,855     (4,962)
Interest expense, net                          9,385       9,473       9,439       9,437     37,734
Depreciation and amortization                  6,689       7,307       6,927       6,250     27,173
Losses related to inventory impairment(1)       --         5,000        --          --        5,000
Little Falls facility closure costs (2)        1,830        --          --          --        1,830
Synergetics fees and expenses                    708         929        --          --        1,637
Non-cash stock compensation charges              161         164         168       2,683      3,176
Unusual, non-recurring and other (3)            (250)        983      (4,279)         43     (3,503)
                                            --------    --------    --------    --------   --------
Credit Agreement EBITDA (1)(4)              $ 18,877    $  1,929    $ 14,801    $ 20,722   $ 56,329
                                            ========    ========    ========    ========   ========
</TABLE>



(1) The Company recorded a $25.1 million provision for excess and slow moving
inventory in the fourth quarter of 2006. The credit agreement limits the
add-back of losses related to disposition of excess, surplus or obsolete
inventory to $5.0 million for each fiscal year and $15.0 million in the
aggregate, commencing with the fourth quarter of 2005. Credit Agreement EBITDA
for the fourth quarter of 2006 and the latest twelve months ended June 30, 2007
would have been $21,983 and $76,383, respectively, if they had been adjusted for
the additional $20.1 million fourth quarter 2006 provision for excess and slow
moving inventory that is not added back to net earnings (loss) pursuant to the
terms of the credit agreement.

(2) Represents unabsorbed overhead costs charged to cost of goods sold, in
accordance with SFAS No. 151.

(3) Represents unusual or non-recurring items, and other permitted add-backs or
adjustments pursuant to the terms of the credit agreement, including severance
payments, non-cash foreign exchange gains, Kelso advisory fees and a benefit of
$5,420 and $162 recorded during the first and second quarters of 2007,
respectively, relating to the curtailment of the Employees' Pension Plan.

(4) Credit Agreement EBITDA (restated) for the three months ended March 31, 2006
and June 30, 2006 was $11,578 and $16,068, respectively.

                                      -39-
<PAGE>


OPERATING ACTIVITIES

Net cash used in operating activities for the six months ended June 30, 2007 of
$7.9 million was principally the result of $23.0 million in cash generated
(pre-tax earnings of $4.9 million plus depreciation and amortization of $8.5
million, amortization of display fixtures of $4.7 million, non-cash stock
compensation of $2.9 million, the provision for excess and slow moving inventory
of $6.8 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 $3.7 million, an increase in accounts receivable of $5.0 million,
an increase in inventories of $18.2 million and an increase in other assets of
$3.8 million. Accrued liabilities decreased due to the timing of payments and
purchases of material. Accounts receivable increased principally due to the
timing of shipments during the first half of 2007. Inventories increased due to
the purchase of materials to support higher sales levels and build safety stock
to support customer service levels. Other assets increased primarily due to the
purchase and shipment of display fixtures to customers.

Net cash used in operating activities for the six months ended June 30, 2006 of
$1.3 million was principally the result of $6.7 million in cash generated (net
loss of $5.4 million plus depreciation and amortization of $7.6 million and
amortization of display fixtures of $4.5 million) and a decrease in inventories
of $4.3 million and a decrease in prepaid expenses and other current assets of
$1.5 million, offset by increases in accounts receivable of $9.1 million and
other assets of $4.7 million. Inventories decreased due to the implementation by
the Company of an inventory reduction program. The increase in accounts
receivable was due to the timing of shipments during the first half of 2006.
Other assets increased primarily due to the purchase and shipment of display
fixtures to customers.

INVESTING ACTIVITIES

Net cash used in investing activities of $0.1 million for the six months ended
June 30, 2007 was primarily related to $3.5 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 $2.8 million for the six months ended
June 30, 2006 was primarily related to $3.4 million of capital spending for
tooling, plates and dies, and manufacturing machinery and equipment, offset by
net proceeds of $0.6 million from the sale of the property.

FINANCING ACTIVITIES

Net cash provided by financing activities for the six months ended June 30, 2007
of $9.3 million was primarily due to borrowings under the Company's ABL Credit
Facility of $10.0 million to support seasonal working capital requirements 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 six months ended June 30, 2007 was $17.3 million. The
Company anticipates that its debt service requirements in 2007 will be
approximately $34.6 million.

Net cash provided by financing activities for the six months ended June 30, 2006
of $4.5 million was primarily due to borrowings 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.

                                      -40-
<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.

                                      -41-
<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 rates affecting the Company;

                                      -42-
<PAGE>



     o    regulatory requirements and government regulatory action;

     o    failure to maintain satisfactory compliance with good manufacturing
          practice 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 June 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.

                                      -43-
<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 June 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 June 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.

The Company is currently in the process of developing and implementing
remediation plans to address its material weaknesses. Specific remedial actions
that have or will be taken for each of the material weaknesses described above
are as follows:

                                      -44-
<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.

The Company continues its efforts to remediate these material weaknesses through
ongoing process improvements, the implementation of enhanced policies and
controls and the re-assessing of the technical accounting capabilities of its
personnel in fiscal 2007. Specifically, the Company:

(1)  Engaged outside consultants to assist the Company in performing the systems
     and process evaluations and the testing of its internal control over
     financial reporting.

(2)  Established a cross functional team and engaged outside consultants to
     facilitate and assist in the implementation of an ERP initiative to
     strengthen the current IT environment.

The remediation activities, outlined above, are expected to continue during the
balance of fiscal 2007. Accordingly, these material weaknesses are not yet
remediated. Further, no material weakness will be considered remediated until
the remediated 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.

                                      -45-
<PAGE>


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
June 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.

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.



                                      -46-
<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:   AUGUST 14, 2007                   /S/ CHARLES J. HINKATY
  --------------------------                ----------------------
                                            Charles J. Hinkaty
                                            President and
                                            Chief Executive Officer

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


                                      -47-