**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE  ACT OF 1934

**Forthe quarterly period ended April 1, 2007**

**Or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE  ACT OF 1934

**For the transition periodfrom                to               **

**Commissionfile number: 001-33048**

**Bare Escentuals, Inc.**

(Exact name of registrantas specified in its charter)

| **Delaware**                     |   | **20-1062857**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

**71 Stevenson Street, 22****nd Floor**

**San Francisco, CA 94105**

(Address ofprincipal executive offices with zip code)

**(415) 489-5000**

(Registrant’stelephone number, including area code)

**N/A**

(Former name,former address and former fiscal year, if changed since last report)

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   YES      x   NO      o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act).   Large Accelerated Filer      o   Accelerated Filer      o     Non-Accelerated Filer      x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   YES      o  NO      x

At May 7, 2007, thenumber of shares outstanding of the registrant’s common stock, $0.001 parvalue, was 89,985,125.

 

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**Table of Contents**

**Bare Escentuals, Inc.**

**INDEX**
| **PART I—FINANCIAL  INFORMATION** |                                                                                                      |
|---------------------------------------------|-----------------------------------------------------------------------------------------------------------|
| Item 1                                 | Financial Statements  (unaudited):                                                                        |   |
|                                        | Condensed  Consolidated Balance Sheets — April 1, 2007 and December 31, 2006                         | 3 |
|                                        | Condensed  Consolidated Statements of Operations—Three Months Ended April 1, 2007 and  April 2, 2006 | 4 |
|                                        | Condensed  Consolidated Statements of Cash Flows—Three Months Ended April 1, 2007 and  April 2, 2006 | 5 |
|                                        | Notes to  Condensed Consolidated Financial Statements                                                     | 6 |
| Item 2                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations               | 20 |
| Item 3                                 | Quantitative  and Qualitative Disclosures About Market Risk                                               | 29 |
| Item 4                                 | Controls and  Procedures                                                                                  | 30 |
|                                        |                                                                                                      |   |
| **PART II—OTHER  INFORMATION**    |                                                                                                      |
| Item 1                                 | Legal Proceedings                                                                                         | 31 |
| Item 1A                                | Risk  Factors                                                                                             | 31 |
| Item 2                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                              | 32 |
| Item 3                                 | Defaults Upon  Senior Securities                                                                          | 32 |
| Item 4                                 | Submission of  Matters to a Vote of Security Holders                                                      | 32 |
| Item 5                                 | Other Information                                                                                         | 32 |
| Item 6                                 | Exhibits                                                                                                  | 32 |
| Signatures                                  |                                                                                                      | 33 |
| Exhibit Index                          |                                                                                                      |   |
| Certifications                              |                                                                                                      |   |
|                                             |                                                                                                           |  |  |

 

2

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**PART I—FINANCIAL INFORMATION**

**ITEM 1.   FINANCIAL STATEMENTS**

**BAREESCENTUALS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands,except per share data)**
| ** **                                                                                                                                                                             | ** ** | **April 1,  2007** | ** ** | **December 31,  2006 (a)** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                             | ** ** | **(unaudited)**         | ** ** | ** **                      | ** ** |
| **ASSETS**                                                                                                                                                                             |       |                    |       |                            |       |
| Current assets:                                                                                                                                                                        |       |                    |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                             |       | $                       | 39,153     |                            | $          | 20,875 |   |
| Inventories                                                                                                                                                                            |       | 59,267                  |       | 62,006                          |       |
| Accounts  receivable, net of allowances of $3,416 and $3,427 at April 1, 2007 and  December 31, 2006, respectively                                                           |       | 37,721                  |       | 30,759                          |       |
| Prepaid expenses  and other current assets                                                                                                                                             |       | 5,452                   |       | 6,249                           |       |
| Deferred tax  assets                                                                                                                                                                   |       | 7,772                   |       | 5,826                           |       |
| Total current assets                                                                                                                                                                   |       | 149,365                 |       | 125,715                         |       |
| Property and equipment,  net                                                                                                                                                           |       | 24,041                  |       | 21,111                          |       |
| Intangible assets, net                                                                                                                                                                 |       | 6,085                   |       | 6,085                           |       |
| Deferred tax assets                                                                                                                                                                    |       | 1,574                   |       | 1,092                           |       |
| Other assets                                                                                                                                                                           |       | 2,515                   |       | 1,832                           |       |
| Total assets                                                                                                                                                                           |       | $                       | 183,580    |                            | $          | 155,835 |   |
| ** **                                                                                                                                                                             |       |                    |       |                            |       |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                                                                        |       |                    |       |                            |       |
| Current liabilities:                                                                                                                                                                   |       |                    |       |                            |       |
| Current portion  of long-term debt                                                                                                                                                     |       | $                       | 17,624     |                            | $          | 17,624 |   |
| Accounts payable                                                                                                                                                                       |       | 21,178                  |       | 25,357                          |       |
| Accrued  liabilities                                                                                                                                                                   |       | 15,373                  |       | 16,123                          |       |
| Accrued  restructuring charges                                                                                                                                                         |       | 31                      |       | 172                             |       |
| Income taxes  payable                                                                                                                                                                  |       | 4,558                   |       | 101                             |       |
| Total current  liabilities                                                                                                                                                             |       | 58,764                  |       | 59,377                          |       |
|                                                                                                                                                                                   |       |                    |       |                            |       |
| Long-term debt,  less current portion                                                                                                                                                  |       | 307,376                 |       | 321,639                         |       |
| Other liabilities                                                                                                                                                                      |       | 6,243                   |       | 3,341                           |       |
|                                                                                                                                                                                   |       |                    |       |                            |       |
| Commitments and  contingencies                                                                                                                                                         |       |                    |       |                            |       |
|                                                                                                                                                                                   |       |                    |       |                            |       |
| Stockholders’ deficit:                                                                                                                                                            |       |                    |       |                            |       |
| Preferred stock;  $0.001 par value; 10,000 shares authorized; zero shares issued and  outstanding                                                                                 |       | —                  |       | —                          |       |
| Common stock;  $0.001 par value, 200,000 shares authorized; 89,940 and 89,316  shares issued and outstanding at April 1, 2007 and December  31, 2006, respectively |       | 90                      |       | 89                              |       |
| Additional paid-in  capital                                                                                                                                                            |       | 398,328                 |       | 378,063                         |       |
| Cumulative  effect on retained earnings due to change in accounting principle                                                                                                          |       | (952                    | )          | —                          |       |
| Accumulated  deficit                                                                                                                                                                   |       | (586,269                | )          | (606,674                        | )          |
| Total stockholders’  deficit                                                                                                                                                      |       | (188,803                | )          | (228,522                        | )          |
| Total liabilities and stockholders’ deficit                                                                                                                                       |       | $                       | 183,580    |                            | $          | 155,835 |   |

 

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(a)          Condensed consolidatedbalance sheet as of December 31, 2006, has been derived from the auditedconsolidated financial statements.

 

See accompanyingnotes.

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**BARE ESCENTUALS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands,except per share data)**
| ** **                                                                      | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                      | ** ** | **April 1,  2007**          | ** ** | **April 2,  2006** | ** ** |
| ** **                                                                      | ** ** | **(unaudited)**                  | ** ** |
| Sales, net                                                                      |       | $                                | 115,613    |   | $ | 89,915 |   |
| Cost of goods  sold                                                             |       | 33,450                           |       | 25,196 |   |
| Gross profit                                                                    |       | 82,163                           |       | 64,719 |   |
| Expenses:                                                                       |       |                             |       |   |   |
| Selling, general and administrative                                             |       | 39,185                           |       | 29,684 |   |
| Depreciation and amortization, relating to selling,  general and administrative |       | 940                              |       | 465 |   |
| Stock-based compensation, relating to selling,  general and administrative      |       | 1,611                            |       | 944 |   |
| Operating income                                                                |       | 40,427                           |       | 33,626 |   |
| Interest expense                                                                |       | (6,811                           | )          | (8,983 | ) |
| Interest income                                                                 |       | 341                              |       | 286 |   |
| Income before  provision for income taxes                                       |       | 33,957                           |       | 24,929 |   |
| Provision for  income taxes                                                     |       | 13,552                           |       | 10,395 |   |
| Net income                                                                      |       | $                                | 20,405     |   | $ | 14,534 |   |
|                                                                            |       |                             |       |   |   |
| Net income per share:                                                           |       |                             |       |   |   |
| Basic                                                                           |       | $                                | 0.23       |   | $ | 0.21 |   |
| Diluted                                                                         |       | $                                | 0.22       |   | $ | 0.20 |   |
|                                                                            |       |                             |       |   |   |
| Weighted-average  shares used in per share calculations:                        |       |                             |       |   |   |
| Basic                                                                           |       | 89,428                           |       | 69,145 |   |
| Diluted                                                                         |       | 92,632                           |       | 71,868 |   |

 

See accompanying notes.

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**BARE ESCENTUALS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**
| ** **                                                                              | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                              | ** ** | **April 1,  2007**          | ** ** | **April 2,  2006** | ** ** |
| ** **                                                                              | ** ** | **(unaudited)**                  | ** ** |
| **Operating  activities**                                                               |       |                             |       |   |   |
| Net income                                                                              |       | $                                | 20,405     |   | $ | 14,534 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:      |       |                             |       |   |   |
| Depreciation of property and equipment                                                  |       | 940                              |       | 465 |   |
| Amortization of debt issuance costs                                                     |       | 63                               |       | 27 |   |
| Stock-based compensation                                                                |       | 1,611                            |       | 944 |   |
| Excess tax benefit from stock option exercises and  disqualifying disposition of shares |       | (518                             | )          | (886 | ) |
| Deferred income tax benefit                                                             |       | (482                             | )          | (230 | ) |
| Changes in assets and liabilities:                                                      |       |                             |       |   |   |
| Inventories                                                                             |       | 2,739                            |       | (5,114 | ) |
| Accounts receivable                                                                     |       | (6,962                           | )          | (7,053 | ) |
| Income taxes payable                                                                    |       | 7,182                            |       | 6,205 |   |
| Prepaid expenses and other current assets                                               |       | 797                              |       | 32 |   |
| Other assets                                                                            |       | (746                             | )          | (87 | ) |
| Accounts payable and accrued liabilities                                                |       | (6,875                           | )          | 2,364 |   |
| Other liabilities                                                                       |       | (398                             | )          | 156 |   |
| Net cash  provided by operating activities                                              |       | 17,756                           |       | 11,357 |   |
|                                                                                    |       |                             |       |   |   |
| **Investing  activities**                                                               |       |                             |       |   |   |
| Purchase of  property and equipment                                                     |       | (3,870                           | )          | (1,480 | ) |
|                                                                                    |       |                             |       |   |   |
| **Financing  activities**                                                               |       |                             |       |   |   |
| Repayments on First  Lien Credit Loans                                                  |       | (14,263                          | )          | (3,166 | ) |
| Proceeds from  issuance of common stock in public offering                              |       | 18,995                           |       | — |   |
| Payment of  transaction costs in connection with the public offering                    |       | (891                             | )          | — |   |
| Excess tax  benefit from stock option exercises and disqualifying disposition of shares |       | 518                              |       | 886 |   |
| Exercise of  stock options                                                              |       | 33                               |       | 235 |   |
| Net cash  provided by (used in) financing activities                                    |       | 4,392                            |       | (2,045 | ) |
| Net increase in  cash and cash equivalents                                              |       | 18,278                           |       | 7,832 |   |
| Cash and cash  equivalents, beginning of period                                         |       | 20,875                           |       | 18,675 |   |
| Cash and cash  equivalents, end of period                                               |       | $                                | 39,153     |   | $ | 26,507 |   |
|                                                                                    |       |                             |       |   |   |
| **Supplemental  disclosure of cash flow information**                                   |       |                             |       |   |   |
| Cash paid for  interest                                                                 |       | $                                | 6,596      |   | $ | 8,765 |   |
| Cash paid for income  taxes                                                             |       | $                                | 7,858      |   | $ | 4,420 |   |

 

See accompanying notes.

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**BAREESCENTUALS, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**1.     Business**

Bare Escentuals, Inc.together with its subsidiaries (“Bare Escentuals” or the “Company”)develops, markets, and sells branded cosmetics, skin care and body careproducts under the *i.d. bareMinerals, i.d.,RareMinerals* and namesake *BareEscentuals* brands, and professional skin care products under the *md formulations* brand. The *i.d. bareMinerals*cosmetics, particularlythe core foundation products which are mineral-based, offer a highlydifferentiated, healthy alternative to conventional cosmetics. The Company usesa multi-channel distribution model consisting of infomercials, specialtybeauty retailers, Company-owned boutiques, home shopping television, andspas and salons. The Company’s international distributors are primarily locatedin Western Europe, Asia, and Australia.

**2.     Summary of Significant Accounting Policies**

***Unaudited Interim Financial Information***

The accompanyingcondensed consolidated balance sheet as of April 1, 2007, the condensedconsolidated statements of operations and cash flows for the three months endedApril 1, 2007 and April 2, 2006 are unaudited. These unaudited interimcondensed consolidated financial statements have been prepared in accordancewith U.S. generally accepted accounting principles for interim financialinformation, Form 10-Q and Article 10 of Regulation S-X. In theopinion of the Company’s management, the unaudited interim condensedconsolidated financial statements have been prepared on the same basis as theannual consolidated financial statements and include all adjustments of anormal recurring nature necessary for the fair presentation of the Company’sfinancial position as of April 1, 2007, its results of operations and cashflows for the three months ended April 1, 2007 and April 2, 2006. The resultsfor the interim periods are not necessarily indicative of the results to beexpected for any future period or for the fiscal year ending December 30,2007. The condensed consolidated balance sheet as of December 31, 2006 has beenderived from the audited consolidated balance sheet as of that date.

These unauditedinterim condensed consolidated financial statements should be read inconjunction with the Company’s consolidated financial statements and relatednotes included in the Company’s 2006 Annual Report on Form 10-K filed with theSEC on March 30, 2007.

***Principles of Consolidation***

The accompanyingcondensed consolidated financial statements include the accounts of the Companyand its wholly owned subsidiaries. All significant intercompany accounts andtransactions have been eliminated.

***Fiscal Quarter***

TheCompany’s fiscal quarters end on the Sunday closest to March 31, June 30,September 30 and December 31.  The threemonths ended April 1, 2007 and April 2, 2006 each contained 13 weeks.

***Use of Estimates***

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the balance sheet dates and the reported amounts ofrevenues and expenses for the periods presented. Actual results could differfrom those estimates, and such differences may be material to the consolidatedfinancial statements.

In determining itsquarterly provision for income taxes, the Company uses an estimated annualeffective tax rate, which is based on expected annual income, statutory taxrates and tax planning opportunities available in the various jurisdictions inwhich the Company operates.  Certainsignificant or unusual items are separately recognized in the quarter in whichthey occur and can be a source of variability in the effective tax rates fromquarter to quarter.

***Cash and CashEquivalents***

Cash equivalents areconsidered to be highly liquid investments with maturities of three months orless at the time of the purchase.

6

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***Supply andFulfillment Concentration Risks***

All of the Company’sproducts are contract manufactured or supplied by third parties. The Companyhas a long-term contract with only one of its suppliers. The term of thiscontract expires on April 30, 2011. The fact that the Company does nothave long-term contracts with all of its third-party manufacturers meansthat any of those manufacturers could cease manufacturing the Company’sproducts at any time and for any reason.

Additionally, the Companycurrently depends on one third party for the fulfillment of its infomercialsales, including inventory management, call center operation, website hostingand packing and shipping of product to customers. The Company’s contract withthis service provider expires on December 31, 2007.

***Concentration ofCredit Risk and Credit Risk Evaluation***

Financial instrumentsthat potentially subject the Company to concentrations of credit risk consistprimarily of cash and cash equivalents and accounts receivable. Cash and cashequivalents are held by or invested in various domestic financial institutionswith high credit standing. Management believes that these financialinstitutions are financially sound and, accordingly, minimal credit risk existswith respect to these balances.

Sales generated throughcredit card purchases for the three months ended April 1, 2007 and April 2,2006 were approximately 49.0% and 49.9%, respectively.  The Company uses third parties to collect itscredit card receivables and believes that its credit risks related to thesechannels of distribution are limited. The Company performs ongoing creditevaluations of its wholesale customers not paying by credit card and acquirescredit insurance for certain international customers. Generally, the Companydoes not require collateral. An allowance for doubtful accounts is determinedwith respect to those amounts that the Company has determined to be doubtful ofcollection using specific identification of doubtful accounts and an aging ofreceivables analysis based on invoice due dates. Actual collection losses maydiffer from management’s estimates, and such differences could be material tothe Company’s consolidated financial position, results of operations, and cashflows. Uncollectible receivables are written off against the allowance fordoubtful accounts when all efforts to collect them have been exhausted, andrecoveries are recognized when they are received. Generally, accountsreceivable are past due after 30 days of an invoice date unless specialpayment terms are provided.

The table below setsforth the percentage of consolidated accounts receivable, net for customers whorepresented 10% or more of consolidated accounts receivable, which are includedin the wholesale segment:

|            | ** ** | **April 1,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------|------------|-------------------------|------------|-----------------------------|------------|
| Customer A |       | 12                      | %          | 11                          | %          |
| Customer B |       | 33                      | %          | 23                          | %          |
| Customer C |       | 30                      | %          | 31                          | %          |

 

The table belowsets forth the percentage of consolidated sales, net for customers whorepresented 10% or more of consolidated net sales:

|            | ** ** | **Three months ended** | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **April 1,  2007**          | ** ** | **April 2,  2006** | ** ** |
| Customer A |       | 12                               | %          | 14 | % |
| Customer B |       | 15                               | %          | 13 | % |
| Customer C |       | 15                               | %          | 13 | % |

 

As of April 1,2007 and December 31, 2006, the Company had no off-balance sheet concentrationsof credit risk, such as option contracts or other hedging arrangements.

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***Fair Value ofFinancial Instruments***

Financial instrumentsconsist principally of cash and cash equivalents, accounts receivable, accountspayable, and long-term debt. The estimated fair value of cash, cashequivalents, accounts receivable, and accounts payable approximates theircarrying value due to the short period of time to their maturities. At April 1,2007, all of the Company’s outstanding debt is variable-rate debt. Theestimated fair value of the Company’s variable-rate debt approximates itscarrying value, since the rate of interest on the variable-rate debt isdetermined at a margin over LIBOR or the lenders’ base rate plus an applicablemargin based on a grid in which the pricing depends on the Company’sconsolidated total leverage ratio, and such rates are revised frequently, basedupon current LIBOR or the lenders’ base rate.

***Inventories***

Inventories consist offinished goods and raw materials and are stated at the lower of cost or market.Cost is determined on a weighted-average basis. The Company regularlymonitors inventory quantities on hand and records write-downs for excessand obsolete inventories based primarily on the Company’s estimated forecast ofproduct demand and production requirements. Such write-downs establish anew cost basis of accounting for the related inventory. Actual inventory lossesmay differ from management’s estimates, and such differences could be materialto the Company’s consolidated financial position, results of operations, andcash flows.

***Property andEquipment***

Property and equipmentare stated at cost, net of accumulated depreciation and amortization. Furnitureand equipment, including computers and software, are depreciated using thestraight-line method over the estimated useful lives of the various assets, whichare generally three to seven years. Fixtures and leasehold improvements areamortized using the straight-line method over the lesser of the lease term,which ranges from five to ten years, or the estimated useful lives of theassets. For leases with renewal periods at the Company’s option, the Companygenerally uses the original lease term, excluding renewal option periods, todetermine estimated useful lives.

***Impairment ofLong-Lived Assets and Long-Lived Assets to Be Disposed of***

The Company periodicallyevaluates whether changes have occurred that would require revision of theremaining useful life of equipment and improvements and purchased intangibleassets or render them not recoverable. If such circumstances arise, the Companyuses an estimate of the undiscounted sum of expected future operating cashflows during their holding period to determine whether the long-lived assetsare impaired. If the aggregate undiscounted cash flows are less than thecarrying amount of the assets, the resulting impairment charge to be recordedis calculated based on the excess of the carrying value of the assets over thefair value of such assets, with the fair value determined based on an estimateof discounted future cash flows.

***Goodwill andIntangible Assets***

Goodwill and otherpurchased intangible assets have been recorded as a result of the Company’sacquisition of Bioceutix, Inc. in December 2001. Trademarks acquiredin the acquisition relate to the Company’s exclusive rights to make, use, andsell the brands acquired and, together with goodwill, were deemed to beindefinite-lived at the acquisition date.

Goodwill and indefinite-livedintangibles are not amortized, but rather are subject to an annual impairmenttest. Other intangible assets are amortized over their estimated useful lives,generally two to three years, and were fully amortized as of January 2,2005. The Company is required to perform an annual impairment test of goodwilland indefinite-lived intangible assets. Should certain events orindicators of impairment occur between annual impairment tests, the Companyperforms the impairment test of goodwill and indefinite-lived intangibleassets at that date.  In evaluatinggoodwill, management compares the total book value of the reporting unit to thefair value of those reporting units. The fair value of the Company isdetermined using the income approach. The income approach focuses on the income-producingcapability of an asset, measuring the current value of the asset by calculatingthe present value of its future economic benefits such as cash earnings, costsavings, tax deductions, and proceeds from disposition. Value indications aredeveloped by discounting expected cash flows to their present value at a rateof return that incorporates the risk-free rate for the use of funds, theexpected rate of inflation, and risks associated with the particularinvestment. Through April 1, 2007, no impairment charge has been required.

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***Debt IssuanceCosts***

Debt issuancecosts are capitalized and amortized over the terms of the underlying debtinstruments using the effective-interest method. Debt issuance costs paiddirectly to lending institutions are recorded as a debt discount, while debtissuance costs paid to third parties are recorded as other assets.

***Stock-Based Compensation***

Statement ofFinancial Accounting Standards No. 123(R), *Share-BasedPayment*(‘‘Statement 123(R)’’) is applicable for stock-based awardsexchanged for employee services and in certain circumstances for non-employeedirectors. Pursuant to Statement 123(R), stock-based compensation cost ismeasured at the grant date, based on the fair value of the award, and isrecognized as expense over the requisite service period for awards expected tovest. The estimation of stock awards that will ultimately vest requiresjudgment, and to the extent actual results differ from the Company’s estimates,such amounts will be recorded as a cumulative adjustment in the periodestimates are revised. The Company considers several factors when estimatingexpected forfeitures, such as types of awards. Actual results may differsubstantially from these estimates.

The compensation costcharged to operations pursuant to Statement 123(R) was $1,611,000 and $944,000for the three months ended April 1, 2007 and April 2, 2006, respectively.  The Company records stock-basedcompensation on a separate operating expense line item in its statement ofoperations due to the fact that, to date, all of its stock-based awardshave been made to employees whose salaries are classified as selling, generaland administrative expenses.

***RevenueRecognition***

The Company recognizessales when merchandise is shipped from a warehouse directly to wholesalecustomers (except in the case of a consignment sale), infomercial customers,and online shopping customers or when purchased by customers at Company-ownedboutiques, each net of estimated returns. For consignment sales, which includesales to QVC and a Japanese distributor, the Company recognizes sales, net ofexpected returns from consignees, upon the consignee’s shipment to thecustomer. Postage and handling charges billed to customers are also recognizedas sales upon shipment of the related merchandise. Shipping terms are FOBshipping point, and title passes to the customer at the time and place ofshipment or purchase by customers at retail locations. For consignment sales,title passes to the consignee concurrent with the consignee’s shipment to thecustomer. The customer has no cancellation privileges after shipment or uponpurchase at retail locations, other than customary rights of return that areaccounted for in accordance with Statement 48, *RevenueRecognition When Right of Return Exists.* The Company’s standardterms for retail sales, including infomercial sales and sales at Company-ownedboutiques, limit returns to approximately 30 to 60 days after the sale ofthe merchandise. For wholesale sales, as is customary in the cosmeticsindustry, the Company allows returns from wholesale customers if properlyrequested and approved.  The Companyregularly evaluates returns and accrues for expected future returns that relateto sales prior to the balance sheet date utilizing a combination of historicaland current trends. Deferred revenue reflects amounts received from customersrelated to merchandise to be shipped in future periods.

***Payments toCustomers***

For wholesalecustomers, the Company makes payments to certain customers for cooperativeadvertising, royalties, commissions and shared employee costs. In accordancewith the provisions of EITF 01-9, *Accountingfor Consideration Given by a Vendor to a Customer (Including a Reseller of theVendor’s Products)*, these fees are recorded as a reduction of netsales in the accompanying consolidated statements of operations, unless theCompany determines it has received an identifiable benefit and can reasonablyestimate the fair value of that benefit, in which case the costs would berecorded as expenses.

***Shipping andFulfillment Costs***

Freight costs incurredrelated to shipment of merchandise from the Company’s distribution facilitiesto customers are recorded in cost of goods sold. Third-party fulfillmentcosts relating to warehousing, storage, and order processing are included inselling, general and administrative expenses.

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***Pre-OpeningCosts***

Costs incurred inconnection with the start-up and promotions of new Company-owned boutiques areexpensed as incurred.

***Operating Leases***

The Company leases retailboutiques, distribution facilities, and office space under operating leases.Most lease agreements contain rent holidays, rent escalation clauses,contingent rent provisions and/or tenant improvement allowances. For purposesof recognizing incentives and minimum rental expenses on a straight-line basisover the original terms of the leases, the Company uses the date of initialpossession to begin amortization, which is generally when the Company entersthe space and begins to make improvements in preparation of intended use. TheCompany does not assume renewals in its determination of the lease term unlessthe renewals are deemed by management to be reasonably assured at leaseinception.  For tenant improvementallowances recorded as assets, the Company also records a deferred rentliability in the consolidated balance sheets and amortizes the deferred rentover the terms of the leases as reductions to rent expense in the consolidatedstatements of income. For scheduled rent escalation clauses and rent holidaysduring the lease terms or for rental payments commencing at a date other thanthe date of initial occupancy, the Company records minimum rental expenses on astraight-line basis over the terms of the leases.  Certain leases provide for contingent rents,which are determined as a percentage of gross sales in excess of specifiedlevels. The Company records a rent liability in the consolidated balance sheetsand the corresponding rent expense when management determines that achievingthe specified levels during the fiscal year is probable.

***Research andDevelopment***

Research anddevelopment costs are charged to selling, general and administrative expenses asincurred. Major components of research and development expenses consist ofproduct formulation, testing, regulatory analysis, and compliance.

***AdvertisingCosts***

The Companypurchases commercial airtime on various television stations throughout theUnited States in order to air its direct-response program, or “infomercial.”The Company expenses costs associated with purchasing airtime as incurred.  The Company expenses production costsassociated with advertising as incurred, except for production costs for itsinfomercials, which are capitalized and amortized over their expected period offuture benefit. The capitalized production costs for each infomercial areamortized over a twelve-month period following the first airing of theinfomercial.

Other advertisingcosts such as media placements and public relations are expensed as incurred.Marketing brochures are accounted for as prepaid assets and are expensed basedon usage, or at such time that they are no longer expected to be used, in whichcase their cost is expensed at that time.

***Income Taxes***

Deferred taxassets and liabilities are recognized for the expected tax consequences oftemporary differences between the tax bases of assets and liabilities and theirreported amounts using enacted tax rates in effect for the year the differencesare expected to reverse. The Company records a valuation allowance to reducedeferred tax assets to the amount that is expected to be realized on a more-likely-than-notbasis. Deferred tax expense results from changes in net deferred tax assets orliabilities between periods.

Effective January1, 2007, the Company adopted FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes* (Note 12). In connection withthe adoption of FIN 48, the Company changed its accounting policy and nowrecognizes accrued interest and penalties related to income tax matters inincome tax expense. These amounts were previously classified in selling,general and administrative expenses.

10

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***Earnings perShare***

A calculation ofearnings per share, as reported is as follows (in thousands):

|                                                                               | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                    | ** ** | **April 1,  2007**          | ** ** | **April 2,  2006** | ** ** |
| *Numerator:*                                                                  |       |                             |       |   |   |
| Net income                                                                    |       | $                                | 20,405     |   | $ | 14,534 |   |
|                                                                          |       |                             |       |   |   |
| *Denominator:*                                                                |       |                             |       |   |   |
| Weighted average commonshares used in per share  calculations — basic    |       | 89,428                           |       | 69,145 |   |
| Add: Common stock equivalents from exercise of stock  options                 |       | 3,204                            |       | 2,723 |   |
| Weighted-average common shares used in per share  calculations — diluted |       | 92,632                           |       | 71,868 |   |
| Net income per  share:                                                        |       |                             |       |   |   |
| Basic                                                                         |       | $                                | 0.23       |   | $ | 0.21 |   |
| Diluted                                                                       |       | $                                | 0.22       |   | $ | 0.20 |   |

 

For the three months ended April 1, 2007 and April 2,2006, options to purchase 175,625 and zero shares of common stock,respectively, were excluded from the calculation of weighted average shares fordiluted net income per share as they were anti-dilutive.

***Comprehensive Income***

The Company does not haveany items of other comprehensive income; therefore, net income is equal tocomprehensive income for all periods presented.

***RecentAccounting Pronouncements***

In September 2006,the FASB issued SFAS No. 157*, FairValue Measurements*. Statement 157 defines fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurements. Statement 157 also applies under other accounting pronouncementsthat require or permit fair value measurements, but does not require any newfair value measurements. The provisions of Statement 157 are effective forfiscal years beginning after November 15, 2007. The Company will adoptStatement 157 during its fiscal year ending December 28, 2008. The Companyis currently in the process of determining the impact, if any, of adopting theprovisions of Statement 157 but it is not expected to have a material impact onthe Company’s financial position or results of operations.

In February 2007, theFASB issued SFAS No. 159, *Fair Value Option forFinancial Assets and Financial Liabilities. *Statement 159 permits entities to choose to measure many financialinstruments, and certain other items, at fair value. Statement 159 alsoestablishes presentation and disclosure requirements designed to facilitatecomparisons between entities that choose different measurement attributes forsimilar types of assets and liabilities. The provisions of Statement 159 areeffective for fiscal years beginning after November 15, 2007.  The Company will adopt Statement 159 duringits fiscal year ending December 28, 2008. The Company is currently in theprocess of determining the impact, if any, of adopting the provisions ofStatement 159 but it is not expected to have a material impact on the Company’sfinancial position or results of operations.

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# **3.****              Inventories**

Inventoriesconsisted of the following (in thousands):

|                               | ** ** | **April 1,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials and  components |       | $                       | 3,131      |                        | $          | 2,737 |   |
| Finished goods                |       | 56,136                  |       | 59,269                      |       |
|                          |       | $                       | 59,267     |                        | $          | 62,006 |   |

 

# **4.****              Propertyand Equipment, Net**

Property andequipment, net, consisted of the following (in thousands):

|                             | ** ** | **April 1,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Furniture and equipment     |       | $                       | 4,265      |                        | $          | 4,234 |   |
| Computers and software      |       | 5,940                   |       | 4,732                       |       |
| Leasehold improvements      |       | 14,058                  |       | 13,891                      |       |
|                        |       | 24,263                  |       | 22,857                      |       |
| Accumulated  depreciation   |       | (6,110                  | )          | (5,170                      | )          |
|                        |       | 18,153                  |       | 17,687                      |       |
| Construction-in-progress    |       | 5,888                   |       | 3,424                       |       |
| Property and equipment, net |       | $                       | 24,041     |                        | $          | 21,111 |   |

 

# **5.****              IntangibleAssets, Net**

Intangible assets,net, consisted of the following (in thousands):

|                                 | ** ** | **April 1,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Goodwill                        |       | $                       | 2,852      |                        | $          | 2,852 |   |
| Trademarks                      |       | 3,233                   |       | 3,233                       |       |
| Domestic customer base          |       | 939                     |       | 939                         |       |
| International  distributor base |       | 820                     |       | 820                         |       |
|                            |       | 7,844                   |       | 7,844                       |       |
| Accumulated  amortization       |       | (1,759                  | )          | (1,759                      | )          |
| Intangible assets, net          |       | $                       | 6,085      |                        | $          | 6,085 |   |

 

As of January 2,2005, the Company’s amortizable intangible assets were fully amortized.

# **6.****              OtherAssets**

Other assetsconsisted of the following (in thousands):

|                                                                                                                             | ** ** | **April 1,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Debt issuance costs,  net of accumulated amortization of $124 and $61 at April 1, 2007 and December  31, 2006, respectively |       | $                       | 994        |                        | $          | 1,057 |   |
| Other assets                                                                                                                |       | 1,521                   |       | 775                         |       |
|                                                                                                                        |       | $                       | 2,515      |                        | $          | 1,832 |   |

#  

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# **7.****              Accrued Liabilities**

Accruedliabilities consisted of the following (in thousands):

|                                             | ** ** | **April 1,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Interest                                    |       | $                       | 1,519      |                        | $          | 1,438 |   |
| Employee compensation  and benefits         |       | 4,349                   |       | 7,437                       |       |
| Gift certificates and  customer liabilities |       | 1,696                   |       | 1,975                       |       |
| Product development  costs                  |       | 136                     |       | 33                          |       |
| Sales taxes and local  business taxes       |       | 1,246                   |       | 1,339                       |       |
| Royalties                                   |       | 1,531                   |       | 1,192                       |       |
| Deferred revenue                            |       | 699                     |       | 898                         |       |
| Other                                       |       | 4,197                   |       | 1,811                       |       |
|                                        |       | $                       | 15,373     |                        | $          | 16,123 |   |

 

# **8.****              RevolvingLines of Credit**

In February 2005,the Company established a revolving credit facility of up to $15,000,000 (the “Revolver”),the proceeds of which were to provide financing for working capital and othergeneral corporate purposes of the Company. The Revolver has a term of six yearsexpiring on February 18, 2011. In June 2006, the Company increasedthe Revolver to up to $25,000,000. In December 2006, the terms of theRevolver were further amended to eliminate the requirement that the net proceedsfrom the issuance of equity securities by us or any of our subsidiaries beapplied to prepay loans under the credit agreement. The amendment also reducedthe interest rate margins applicable to LIBOR loans and base rate loans,provided for a further reduction in the interest rate margins if we achieve aspecified consolidated leverage ratio and specified debt rating, and amendedsome of the financial covenants. Amounts available under the Revolver are basedon eligible collateral that includes certain accounts receivable and inventoryand may be used for working capital and capital expenditure needs, as well asthe issuance of documentary and standby letters of credit.  At April 1, 2007, $24,613,000 was availableand $387,000 was outstanding in letters of credit. Borrowings under theRevolver bear interest at a rate equal to, at the Company’s option, either amargin over LIBOR or the lenders’ base rate, plus an applicable margin based ona grid in which the pricing depends on the Company’s consolidated totalleverage ratio (2.5% plus LIBOR or 1.5% plus lenders’ base rate; actual rate of7.82% at April 1, 2007 and 7.85% at December 31, 2006). The Company isalso required to pay commitment fees of 0.5% per annum on any unused portionsof the facility.

# **9.****              Long-TermDebt**

Long-term debtconsisted of the following (in thousands):

|                                              | ** ** | **April 1,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| First Lien Credit Loans                      |       | $                       | 325,000    |                        | $          | 339,263 |   |
| Less current portion                         |       | (17,624                 | )          | (17,624                     | )          |
| Total long-term debt, net of current portion |       | $                       | 307,376    |                        | $          | 321,639 |   |

##  

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## **First and Second Lien Credit Loans**

On June 7, 2006,the Company and its lenders agreed to restructure its existing senior securedcredit facilities to increase the Company’s borrowings by an additionalaggregate principal amount of $331,583,000 to a total of $588,759,000,comprised of additional first lien term loans (the “First Lien Term Loans”) of$118,583,000 to a total of $354,759,000, and additional second lien term loans(the “Second Lien Term Loans”) of $88,000,000 to a total of $234,000,000.  On October 4, 2006, the Company used aportion of the net proceeds received from its initial public offering to repayin full the Second Lien Term Loans and to repay a portion of the First LienTerm Loans. The First Lien Term Loans have an original term of seven yearsexpiring on February 18, 2012. The First Lien Term Loans bear interest ata rate equal to, at the Company’s option, either LIBOR or the lenders’ baserate, plus an applicable margin varying based on the Company’s consolidatedtotal leverage ratio. As of April 1, 2007 and December 31, 2006, theinterest rates on the First Lien Term Loans were accruing at 7.82% and 7.85%,respectively.  As of April 1, 2007,$325,000,000 was outstanding on the First Lien Term Loans.

On December 20,2006, the Company amended its First Lien Credit Agreement to eliminate therequirement that the net proceeds from the issuance of equity securities of theCompany or any of its subsidiaries be applied to prepay loans under the creditagreement. The amendment also reduced the interest rate margins if the Companyachieves a specified consolidated leverage ratio and specified debt rating, andeliminated the minimum cash interest ratio financial covenant and amended someof the other financial covenants. The maturity date of the First Lien Term Loanwas not adjusted.

On March 23, 2007, theCompany further amended its First Lien Credit Agreement to permit the abilityto make acquisitions of up to $30,000,000 in any one fiscal year and up to$60,000,000 in the aggregate as well as to permit additional investments inforeign subsidiaries of up to $25,000,000.

Borrowings under theRevolver (Note 8) and the First Lien Term Loans are secured by substantiallyall of the Company’s assets, including, but not limited to, all accountsreceivable, inventory, property and equipment, and intangibles. The terms ofthe senior secured credit facilities require the Company to comply withfinancial covenants, including maintaining a leverage ratio, entering intointerest rate swap or similar agreements with respect to 40% of the principalamounts outstanding under the Company’s senior secured credit facilities as ofOctober 2, 2007, and limiting capital expenditures. The secured creditfacility also contains nonfinancial covenants that restrict some of the Company’sactivities, including its ability to dispose of assets, incur additional debt,pay dividends, create liens, make investments, make capital expenditures, andengage in specified transactions with affiliates.

**ScheduledMaturities of Long-Term Debt**

At April 1, 2007,future scheduled principal payments on long-term debt were as follows (inthousands):

| Year ending:                                    |   |    |    |
|-------------------------------------------------|--------|---------|---------|
| Remainder of the year  ending December 30, 2007 |   | $       | 13,218  |   |
| December 28, 2008                               |   | 17,624  |    |
| January 3, 2010                                 |   | 17,624  |    |
| January 2, 2011                                 |   | 17,624  |    |
| January 1, 2012                                 |   | 202,676 |    |
| December 30, 2012                               |   | 56,234  |    |
|                                            |   | $       | 325,000 |   |

#  

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# **10.  Commitments and Contingencies**

## ***Lease Commitments***

TheCompany leases retail boutiques, distribution facilities, and office spaceunder noncancelable operating leases with various expiration dates throughJanuary 2018. Additionally, in connection with the Company’s restructuring(Note 16), the Company sublet part of the facilities it exited. The futureminimum annual payments and anticipated sublease income under such leases ineffect at April 1, 2007, were as follows (in thousands):

|                                                 | ** ** | **Minimum  Rental  Payments** | ** ** | **Sublease  Rental  Income** | ** ** | **Net  Minimum  Lease  Payments** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|------------------------------|------------|-----------------------------------|------------|
| Year ending:                                    |       |                          |       |                         |       |                              |       |
| Remainder of the  year ending December 30, 2007 |       | $                             | 4,171      |                         | $          | 3                                 |       | $ | 4,168 |   |
| December 28,  2008                              |       | 6,784                         |       | —                       |       | 6,784                             |       |
| January 3, 2010                                 |       | 6,824                         |       | —                       |       | 6,824                             |       |
| January 2, 2011                                 |       | 6,591                         |       | —                       |       | 6,591                             |       |
| January 1, 2012                                 |       | 6,457                         |       | —                       |       | 6,457                             |       |
| Thereafter                                      |       | 28,137                        |       | —                       |       | 28,137                            |       |
|                                            |       | $                             | 58,964     |                         | $          | 3                                 |       | $ | 58,961 |   |

 

Many of theCompany’s retail boutique leases require additional contingent rents whencertain sales volumes are reached. Total rent expense was $2,551,000 and$1,830,000 for the three months ended April 1, 2007 and April 2, 2006,respectively.  Total rent expenseincluded contingent rentals of $531,000 and $450,000 for the three months endedApril 1, 2007 and April 2, 2006, respectively. Several leases entered into by the Company include options that mayextend the lease term beyond the initial commitment period, subject to termsagreed to at lease inceptions.  As ofApril 1, 2007, under the terms of its corporate office lease, the Companyissued an irrevocable standby letter of credit of $387,000 to the lessor forthe term of the lease.

## ***Royalty Agreements***

The Company is aparty to a license agreement (the ‘‘License’’) for use of certain patentsassociated with some of the skin care products sold by the Company. The Licenserequires that the Company pay a quarterly royalty of 4% of the net sales ofcertain skin care products for an indefinite period of time. The License alsorequires minimum annual royalty payments of $600,000 from the Company. TheCompany can terminate the agreement at any time with six months written notice.The Company’s royalty expense under the License for the three months endedApril 1, 2007 and April 2, 2006 was $150,000.

The Company has obtaineda worldwide exclusive right to license, develop, commercialize, and distributecertain licensed ingredients to be used in products to be sold by the Company.This agreement requires the Company to make payments upon achievement ofcertain product milestones. In addition, this agreement requires the Company topay a royalty of 3.5% of the net sales upon successful launch of the firstproduct, subject to certain minimum annual royalty amounts. The Companylaunched commercial sales of the products containing the licensed ingredientsduring the year ended December 31, 2006. The minimum royalty amount is$400,000 for 2007 and $500,000 for 2008 after which time the Company mayrenegotiate the minimum royalties or other compensation within 120 days afterthe second anniversary of the commercial launch. The Company’s expense underthis agreement was $213,000 and $44,000 for the three months ended April 1,2007 and April 2, 2006, respectively.

***Contingencies***

The Company is involvedin various legal and administrative proceedings and claims arising in theordinary course of its business. The ultimate resolution of such claims wouldnot, in the opinion of management, have a material effect on the Company’sfinancial position or results of operation.

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# **11.  Related-Party Transactions**

On June 10, 2004,the Company entered into a Management Agreement (‘‘Berkshire Agreement’’) withBerkshire. Under the Berkshire Agreement, the Company engaged Berkshire toprovide management advisory services in connection with the general businessoperations of the Company. In compensation for such services, the Companyagreed to pay a management fee in an amount of $300,000 per annum for the termof the agreement. The Berkshire Agreement was terminated upon completion of ourinitial public offering on October 4, 2006. Total management fees plus expensesrecognized under the Berkshire Agreement for the three months ended April 2,2006 was $86,000, which was recorded as selling, general and administrativeexpenses in the accompanying consolidated statements of operations.

On June 10, 2004,the Company also entered into a Management Agreement (‘‘JHP Agreement’’) withJHP. Under the JHP Agreement, the Company engaged JHP to provide managementadvisory services in connection with the general business operations of theCompany.  In compensation for suchservices, the Company agreed to pay a management fee in an amount of $300,000per annum for the term of the JHP Agreement. The JHP Agreement was terminatedupon completion of our initial public offering on October 4, 2006. Totalmanagement fees plus expenses recognized under this Agreement for the threemonths ended April 2, 2006 was $132,000, which was recorded as selling, generaland administrative expenses in the accompanying consolidated statements of operations.

FH CapitalPartners LLC is 50%-owned by an affiliate of the Company’s former chairman, amajor stockholder. In December 2001 and May 2002, the Company entered intoagreements with FH Capital Partners LLC to rent certain computer hardware,software, and licenses under operating lease agreements. During the threemonths ended April 1, 2007, the Company purchased the equipment under theselease agreements.  Total expenserecognized relating to these arrangements for the three months ended April 1,2007 and April 2, 2006 were $16,900 and $7,500, respectively, and was recordedas selling, general and administrative expenses in the accompanyingconsolidated statements of operations.

# **12.  Income Taxes**

In June 2006, the Financial Accounting Standards Board(“FASB”) issued FASB Interpretation 48 (“FIN 48”), *Accounting for Uncertainty in Income Taxes*. FIN 48 clarifiesthe accounting for uncertainty in income taxes recognized in accordance withSFAS 109, *Accounting for Income Taxes*.FIN 48 prescribes a comprehensive model for how a company should recognize,measure, present and disclose in its financial statements uncertain taxpositions that the Company has taken or expects to take on a tax return.

The Company adopted FIN 48 on January 1, 2007.  As a result of the adoption of FIN 48, thechanges to the Company’s reserve for uncertain tax positions was accounted foras a $952,000 cumulative effect adjustment to decrease the beginning balance ofretained earnings on the Company’s balance sheet.  Upon adoption, the total amount ofunrecognized tax benefits, including related interest, was $4,135,000.  This amount includes $2,207,000 ofunrecognized tax benefits which would decrease our effective tax rate ifrecognized.

The Company believes that it is reasonably possiblethat the amount of unrecognized tax benefits could increase or decrease withinthe next twelve months and that change could be significant.  However, the Company is unable to estimatethe range of possible changes to the amount of unrecognized tax benefits withinthe next twelve months.

As of April 1,2007, the Company has approximately $817,000 of accrued interest related touncertain tax positions.The Company files United States federal income taxreturns and income tax returns in multiple state jurisdictions.  The tax years 2003-2006 remain open toexamination by the major taxing jurisdictions. The U.S. Internal Revenue Service is currently in the process ofauditing the Company’s U.S. federal income tax returns for 2004.

**13.  Stockholders’ Equity**

On March 19, 2007, the Company completed afollow-on underwritten public offering pursuant to which the Company sold575,000 shares and selling stockholders sold an additional 13,225,000 shares,which includes 1,800,000 shares sold pursuant to the exercise of theunderwriters’ over-allotment option. The Company received net proceeds ofapproximately $18.1 million, after deducting underwriting discounts andcommissions and estimated offering expenses.

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# **14.  Stock-Based Employee Compensation Plans**

As of April 1,2007, the Company had reserved 10,768,534 shares of common stock for issuance.

## **2004 EquityIncentive Plan**

On June 10, 2004,the board of directors adopted the 2004 Equity Incentive Plan (the ‘‘2004 Plan’’).  The 2004 Plan provides for the issuance ofnon-qualified stock options for common stock to employees, directors,consultants, and other associates. The options generally vest at a rate of 20%per year from the date of grant and have a maximum term of ten years.

In conjunction with theadoption of the 2006 Equity Incentive Plan in September 2006, noadditional options are permitted to be granted under the 2004 Plan. Inaddition, any outstanding options cancelled under the 2004 Plan will becomeavailable to grant under the 2006 Equity Incentive Plan.

A summary ofactivity under the 2004 Plan is set forth below. 

|                                                        | ** ** | ** **                             | ** ** | **Options Outstanding** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|------------------------------|------------|
| ** **                                             | ** ** | **Options  Available  for Grant** | ** ** | **Number of  Shares**   | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Balance at December 31,  2006                          |       | —                                 |       | 6,211,293                    |       | $ | 2.68 |   |
| Exercised                                              |       | —                                 |       | (48,956                      | )          | 0.68 |   |
| Canceled                                               |       | 67,411                                 |       | (67,411                      | )          | 4.67 |   |
| Cancellation of  remaining options available for grant |       | (67,411                                | )          | —                       |       | — |   |
| Balance at April 1, 2007                               |       | —                                 |       | 6,094,926                    |       | $ | 2.68 |   |

 

# AtApril 1, 2007, total outstanding options vested under the 2004 Plan were276,685 at a weighted-average exercise price of $1.69.

The totalintrinsic value of options exercised under the 2004 Plan for the three monthsended April 1, 2007 was $1,650,000.

**2006Equity Incentive Plan**

On September 12,2006, the stockholders of the Company approved the 2006 Equity Incentive AwardPlan (the “2006 Plan”) for executives, directors, employees and consultants ofthe Company. A total of 4,500,000 shares of the Company’s Common Stock havebeen reserved for issuance under the 2006 Plan. Awards are generally grantedwith an exercise price equal to the market price of the Company’s Common Stockat the date of grant. Those awards generally vest over a period of five yearsfrom the date of grant and have a maximum term of ten years.

A summary ofactivity under the 2006 Plan is set forth below:

|                               | ** ** | ** **                             | ** ** | **Options Outstanding** | ** ** |
|-------------------------------|------------|----------------------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | **Options  Available  for Grant** | ** ** | **Number of  Shares**   | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Balance at December 31,  2006 |       | 4,441,947                              |       | 164,250                      |       | $ | 30.95 |   |
| Rolled over from 2004  Plan   |       | 67,411                                 |       | —                       |       | — |   |
| Granted                       |       | (65,625                                | )          | 65,625                       |       | 35.10 |   |
| Canceled                      |       | 1,250                                  |       | (1,250                       | )          | 22.00 |   |
| Balance at April 1, 2007      |       | 4,444,983                              |       | 228,625                      |       | $ | 32.19 |   |

 

At April 1, 2007,there were no outstanding options vested under the 2006 Plan.

The total cashreceived from employees as a result of employee stock option exercises underall plans for the three months ended April 1, 2007 was $33,000. In connectionwith these exercises, the tax benefits realized by the Company for the threemonths ended April 1, 2007 was $518,000.

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**15.  Segment and Geographic Information**

Operatingsegments are defined as components of an enterprise engaging in businessactivities about where separate financial information is available that isevaluated regularly by the Chief Operating Decision Maker (“CODM”) in decidinghow to allocate resources and assessing performance. The Company’s ChiefExecutive Officer has been identified as the CODM as defined by Statement 131, *Disclosures about Segments of an Enterprise andRelated Information*.  TheCompany has determined that it operates in two business segments: Retail withsales to end users, and Wholesale with sales to resellers. These reportablesegments are strategic business units that are managed separately based on thefundamental differences in their operations. The Retail segment consists ofsales directly to end users through Company-owned boutiques andinfomercials. The Wholesale segment consists of sales to resellers, homeshopping television, specialty beauty retailers, spas and salons, and internationaldistributors. The following table presents certain financial information foreach segment. Operating income is the gross margin of the segment less directexpenses of the segment. Some direct expenses, such as media and advertisingspend, do impact the performance of the other segment, but these expenses arerecorded in the segment they directly relate to and are not allocated out toeach segment. The Corporate column includes unallocated selling, general andadministrative expenses, depreciation and amortization, stock-basedcompensation expenses, restructuring charges and asset impairment charges.Corporate selling, general and administrative expenses include headquartersfacilities costs, distribution center costs, product development costs, corporateheadcount costs and other corporate costs, including information technology,finance, accounting, legal and human resources costs.
| ** **                                | ** ** | **Retail** | ** ** | **Wholesale** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|------------|------------|---------------|------------|---------------|------------|-----------|------------|
| **Three Months ended April 1,  2007**     |       |       |       |          |       |          |       |      |       |
| Sales, net                                |       | $          | 51,408     |          | $          | 64,205        |       | $         | —     |   | $ | 115,613 |   |
| Cost of goods sold                        |       | 10,912     |       | 22,538        |       | —        |       | 33,450    |       |
| Gross profit                              |       | 40,496     |       | 41,667        |       | —        |       | 82,163    |       |
| Operating expenses:                       |       |       |       |          |       |          |       |      |       |
| Selling, general  and administrative      |       | 22,064     |       | 3,031         |       | 14,090        |       | 39,185    |       |
| Depreciation and  amortization            |       | 365        |       | 15            |       | 560           |       | 940       |       |
| Stock-based  compensation                 |       | —     |       | —        |       | 1,611         |       | 1,611     |       |
| Total expenses                            |       | 22,429     |       | 3,046         |       | 16,261        |       | 41,736    |       |
| Operating income (loss)                   |       | 18,067     |       | 38,621        |       | (16,261       | )          | 40,427    |       |
| Interest expense                          |       |       |       |          |       |          |       | (6,811    | )          |
| Interest income                           |       |       |       |          |       |          |       | 341       |       |
| Income before provision  for income taxes |       |       |       |          |       |          |       | 33,957    |       |
| Provision for income  taxes               |       |       |       |          |       |          |       | 13,552    |       |
| Net income                                |       |       |       |          |       |          |       | $         | 20,405     |   |
|                                           |            |            |            |               |            |               |            |           |            |  |  |  |  |

 
| ** **                                | ** ** | **Retail** | ** ** | **Wholesale** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|------------|------------|---------------|------------|---------------|------------|-----------|------------|
| **Three Months ended April 2,  2006**     |       |       |       |          |       |          |       |      |       |
| Sales, net                                |       | $          | 42,064     |          | $          | 47,851        |       | $         | —     |   | $ | 89,915 |   |
| Cost of goods sold                        |       | 8,970      |       | 16,226        |       | —        |       | 25,196    |       |
| Gross profit                              |       | 33,094     |       | 31,625        |       | —        |       | 64,719    |       |
| Operating expenses:                       |       |       |       |          |       |          |       |      |       |
| Selling, general  and administrative      |       | 18,618     |       | 2,060         |       | 9,006         |       | 29,684    |       |
| Depreciation and  amortization            |       | 158        |       | —        |       | 307           |       | 465       |       |
| Stock-based  compensation                 |       | —     |       | —        |       | 944           |       | 944       |       |
| Total expenses                            |       | 18,776     |       | 2,060         |       | 10,257        |       | 31,093    |       |
| Operating income (loss)                   |       | 14,318     |       | 29,565        |       | (10,257       | )          | 33,626    |       |
| Interest expense                          |       |       |       |          |       |          |       | (8,983    | )          |
| Interest income                           |       |       |       |          |       |          |       | 286       |       |
| Income before provision  for income taxes |       |       |       |          |       |          |       | 24,929    |       |
| Provision for income  taxes               |       |       |       |          |       |          |       | 10,395    |       |
| Net income                                |       |       |       |          |       |          |       | $         | 14,534     |   |
|                                           |            |            |            |               |            |               |            |           |            |  |  |  |  |

 

18

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The Company’slong-lived assets, excluding goodwill and intangibles, by segment were asfollows (in thousands):

|           | ** ** | **April 1,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------|------------|-------------------------|------------|-----------------------------|------------|
| Retail    |       | $                       | 9,536      |                        | $          | 8,398 |   |
| Wholesale |       | 164                     |       | 138                         |       |
| Corporate |       | 14,479                  |       | 12,715                      |       |
|      |       | $                       | 24,179     |                        | $          | 21,251 |   |

 

Long-lived assetsallocated to the retail segment consist of fixed assets and deposits for retailstores. Long-lived assets allocated to the wholesale segment consist of fixedassets located at a wholesale customer. Long-lived assets in thecorporate segment consist of fixed assets and deposits related to the Company’scorporate offices and distribution center. All of the Company’s long-lived assets are located in the UnitedStates.

Noindividual geographical area outside of the United States accounted for morethan 10% of net sales in any of the periods presented. The Company’s sales bygeographic area were as follows (in thousands):

|               | ** ** | **Three months ended** | ** ** |
|---------------|------------|----------------------------------|------------|
| ** **    | ** ** | **April 1,  2007**          | ** ** | **April 2,  2006** | ** ** |
| United States |       | $                                | 107,265    |   | $ | 85,765 |   |
| International |       | 8,348                            |       | 4,150 |   |
| Sales, net    |       | $                                | 115,613    |   | $ | 89,915 |   |

 

# **16.****       RestructuringCosts**

As a result of theCompany’s growth and a change in strategy to improve its operations, theCompany relocated both the corporate and distribution center facilities duringthe year ended January 1, 2006. Related to these relocations, the Companyexited two facilities that had operating lease commitments through June 2007.These exit costs were accounted for in accordance with Statement 146, *Accounting for Costs Associated with Exit or DisposalActivities. *Costs primarilyrepresent closure and relocation costs of the Company’s corporate headquartersand distribution center. Closure costs include payments required under leasecontracts after the properties were abandoned, less any applicable estimatedsublease income during the period after abandonment. To determine the closurecosts, certain estimates were made related to the (1) time period overwhich the relevant building would remain vacant, (2) sublease terms, and(3) sublease rates, including common area charges. The accrual is anestimate and will be adjusted in the future upon triggering events (such aschanges in estimates of time to sublease and actual sublease rates). During theyear ended December 31, 2006, the Company discontinued the use of one ofits office floors located at its former corporate facility and recordedadditional restructuring costs of $114,000. As of December 31, 2006 andApril 1, 2007, the remaining $172,000 and $31,000 accrual, respectively, oflease termination costs, net of estimated sublease income, is expected to bepaid on various dates through June 2007.

The followingtable set forth the exit activities for the three months ended April 1, 2007(in thousands):

| Accrual balance at December  31, 2006 |   | $      | 172    |   |
|---------------------------------------|--------|--------|--------|--------|
| Cost incurred and charged to expense  |   | — |   |
| Non-cash charges                      |   | — |   |
| Cash paid                             |   | (141   | )      |
| Accrual balance at  April 1, 2007     |   | $      | 31     |   |

 

# **17.****       Subsequent Event**

On April 3, 2007,the Company completed its acquisition of U.K.-based Cosmeceuticals Limited,which distributes Bare Escentuals’ *bareMinerals*, *md formulations* and *MD Forte* brandsto the European cosmetics market.  Theacquired entity has been renamed Bare Escentuals UK Ltd.  The consideration for the purchase was cash ofapproximately $19.7 million, which is subject to certain adjustments,including any changes in the value of the net tangible assets acquired on theacquisition date.

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**ITEM 2.****    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Forward-LookingStatements**

This section and other parts of this Quarterly Reporton Form 10-Q contain forward-looking statements that involve risks anduncertainties. In some cases, forward-looking statements can be identified bywords such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” andsimilar terms. Such forward-looking statements are based on currentexpectations, estimates and projections about our industry, management’s beliefsand assumptions made by management. Forward-looking statements are notguarantees of future performance and our actual results may differsignificantly from the results discussed below and in the forward-lookingstatements. Factors that might cause such differences include, but are notlimited to those discussed in Part II, Item 1A, “Risk Factors” in our AnnualReport on Form 10-K for the year ended December 31, 2006 filed with the SEC onMarch 30, 2007.  The following discussionshould be read in conjunction with the Company’s consolidated financialstatements and related notes hereto included elsewhere in this Quarterly Reporton Form 10-Q. Except as required by law, we expressly disclaim anyobligation to update publicly any forward-looking statements, whether as resultof new information, future events or otherwise.

## **ExecutiveOverview**

Founded in 1976,Bare Escentuals is one of the fastest growing prestige beauty companies inthe U.S. and a leader by sales and consumer awareness in mineral-basedcosmetics. We develop, market and sell branded cosmetics, skin care and bodycare products under our *i.d. bareMinerals,i.d., RareMinerals* and namesake *Bare Escentuals*brands, and professional skin care products under our *md formulations* brand.

We utilize a distinctivemarketing strategy and a multi-channel distribution model consisting ofinfomercials, premium wholesale, including Sephora and Ulta, company-ownedboutiques, home shopping television on QVC, spas and salons and onlineshopping. We believe that this strategy provides convenience to our consumersand allows us to reach the broadest possible spectrum of consumers.

Ourbusiness is comprised of two strategic business units constituting reportablesegments that we manage separately based on fundamental differences in theiroperations:

·                  Ourretail segment, which is characterized by sales directly to end users, includesour infomercials, which include sales through our website *www.bareminerals.com* and *www.bareescentuals.com* and company-owned boutiques,which include sales through our website *www.mdformulations.com*.We believe that our infomercial business helps us to build brand awareness,communicate the benefits of our core products and establish a base of recurringrevenue because a substantial percentage of new consumers participate in ourcontinuity program. Our company-owned boutiques enhance our ability tobuild strong consumer relationships and promote additional product use throughpersonal demonstrations and product consultations.

·                  Our wholesale segment,which is characterized by sales to resellers, includes premium wholesale; homeshopping television; spas and salons; and international distributors. Our salesthrough home shopping television help us to build brand awareness, educateconsumers through live product demonstrationsand develop close connections with our consumers. We also sell to retailersthat we believe feature our products in settings that support and reinforce ourbrand image and provide a premium in-store experience. Similarly, our spa andsalon customers provide an informative and treatment-focused environmentin which aestheticians and spa professionals can communicate the benefits ofour core products. Finally, we primarily sell our products in a number ofinternational markets through a network of third-party distributors.

We manage our businesssegments to maximize sales growth and market share. We believe that our multi-channeldistribution strategy maximizes convenience for our consumers, reinforces brandawareness, increases consumer retention rates, and drives corporate cash flowand profitability. Further, we believe that the broad diversification withinour segments provides us with expanded opportunities for growth and reduces ourdependence on any single distribution channel. Within individual distributionchannels, particularly those in our wholesale segment, financial results areoften affected by the timing of shipments as well as the impact of keypromotional events.

In evaluating ourbusiness, we also consider and use Adjusted EBITDA as a supplemental measure ofour operating performance. We use EBITDA only to assist in the reconciliationof net income to Adjusted EBITDA. We define EBITDA as net income beforeinterest, income tax, depreciation and amortization. We define Adjusted EBITDAas EBITDA adjusted for items that we do not consider reflective of our ongoingoperations. See “—Non-GAAP Measures.”

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**RecentDevelopments**

On April 3, 2007,we completed our acquisition of U.K.-based Cosmeceuticals Limited, whichdistributes Bare Escentuals’ *bareMinerals*, *md formulations* and *MD Forte* brandsto the European cosmetics market.  Theacquired entity has been renamed Bare Escentuals UK Ltd.  The consideration for the purchase was cashof approximately $19.7 million, which is subject to certain adjustments,including any changes in the value of the net tangible assets acquired on theacquisition date.

**Basis of Presentation**

We recognize revenue whenmerchandise is shipped from a warehouse to wholesale customers, infomercial customersand online shopping customers or when purchased by consumers at company-ownedboutiques, each net of estimated returns (except in the case of our consignmentsales). For our consignment sales, we recognize sales, net of estimatedreturns, upon shipment from our consignment partners to their customers. Werecognize postage and handling charges we bill to customers as revenue uponshipment of the related merchandise.

Our cost of goods soldconsists of the costs associated with the sourcing of our products, includingthe cost of the product and associated manufacturing costs, inbound freightcharges, royalties and internal transfer costs. Additionally, cost of goodssold includes postage and handling costs incurred upon shipment of merchandise.Our gross profit is dependent upon a variety of factors, including changes inthe relative sales mix between our business segments, changes in the mix ofproducts sold and fluctuations in material costs. Our gross margins differsignificantly between product lines and our business segments, with sales inour retail segment generally yielding higher gross margins than our wholesalesegment. These factors may cause gross profit and margins to fluctuate fromquarter to quarter. We anticipate that our cost of goods sold will increase inabsolute dollars as we increase our total sales but will remain generallyconsistent with historical periods on an annual basis as a percentage of netsales depending on the mix of sales among our distribution channels.

Selling, general andadministrative expenses include infomercial production and media costs,advertising costs, rent and other store operating costs and corporate costssuch as management salaries, information technology, professional fees, financeand accounting personnel, human resources personnel and other administrativefunctions. Selling, general, and administrative expenses also include all ofour distribution center and fulfillment costs, including all warehousing costsassociated with our third-party fulfillment provider and receiving andinspection costs that we do not include in cost of goods sold, which arecomprised primarily of headcount related costs at our own distribution centerand at our third-party fulfillment provider. Receiving and inspectioncosts and warehousing costs are excluded from our gross margins and, therefore,our gross margins may not be comparable to those of other companies that chooseto include certain of these costs in cost of goods sold. We are unable toprovide an estimate of these costs but we believe these costs are not material.Fluctuations in selling, general and administrative expenses result primarilyfrom changes in media and advertising expenditures, changes in fulfillmentcosts which increase proportionately with net sales, particularly infomercialsales, changes in store operating costs, which are affected by the number ofstores opened in a period, and changes in corporate costs such as for headcountand infrastructure to support our operations. We anticipate that our selling,general and administrative expenses will increase in absolute dollars as weexpect to continue to invest in corporate infrastructure and incur additionalexpenses associated with being a public company, such as increased legal andaccounting costs, investor relations costs and higher insurance premiums.

Depreciation andamortization includes charges for the depreciation of property and equipmentand the amortization of intangible assets. All of our intangible assets werefully amortized as of January 2, 2005. We anticipate that our depreciationand amortization expense will increase in absolute dollars as we continue toopen new boutiques, invest in information systems and amortize intangibleassets in connection with our recent acquisition. We record our depreciationand amortization as a separate line item in our statement of operations becauseall such expense relates to selling, general and administrative costs.

Stock-basedcompensation includes charges incurred in recognition of compensation expenseassociated with grants of stock options and stock purchases. On January 3, 2005we adopted the fair value recognition and measurement provisions of SFAS No.123(R), *Share-Based Payment*(SFAS123(R)). We record our stock-based compensation on a separate operating expenseline item in our statement of operations due to the fact that, to date, all ofour stock-based awards have been made to employees whose salaries areclassified as selling, general and administrative costs.

Interest expenseincludes interest costs associated with our credit facilities and theamortization of deferred financing costs associated with these creditfacilities. We anticipate that our interest expense in the future will decreasein absolute terms and as a percentage of net sales as we continue to makescheduled repayment of our outstanding principal.

Provision for incometaxes depends on the statutory tax rates in the countries where we sell ourproducts. Historically, we have only been subject to taxation in the UnitedStates because we have either sold to consumers in the United States or sold todistributors in the United States who resold our products here and abroad.However, in the second fiscal quarter of 2007, we will begin to sell ourproducts directly to customers located outside of the United States, and as aresult we will become subject to taxation based on the foreign statutory ratesin the countries where these sales took place and our effective tax rate couldfluctuate accordingly. For fiscal 2007, we anticipate that our effective taxrate will be approximately 40% of our income before provision for income taxes.

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## **Results of Operations**

The following is adiscussion of our results of operations for the three months ended April 1,2007 compared to the three months ended April 2, 2006.

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

|                                           | ** ** | **Three months ended**                      | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                | ** ** | **April 1,  2007**                               | ** ** | **April 2,  2006** | ** ** |
| ** **                                | ** ** | **(in thousands, except percentages)** | ** ** |
| Sales, net                                |       | $                                                     | 115,613    |   | 100.0 | % | $ | 89,915 |   | 100.0 | % |
| Cost of goods  sold                       |       | 33,450                                                |       | 28.9 |   | 25,196 |   | 28.0 |   |
| Gross profit                              |       | 82,163                                                |       | 71.1 |   | 64,719 |   | 72.0 |   |
| Expenses:                                 |       |                                                  |       |   |   |   |   |   |   |
| Selling, general and administrative       |       | 39,185                                                |       | 33.9 |   | 29,684 |   | 33.0 |   |
| Depreciation and amortization             |       | 940                                                   |       | 0.8 |   | 465 |   | 0.5 |   |
| Stock-based compensation                  |       | 1,611                                                 |       | 1.4 |   | 944 |   | 1.1 |   |
| Operating income                          |       | 40,427                                                |       | 35.0 |   | 33,626 |   | 37.4 |   |
| Interest expense                          |       | (6,470                                                | )          | (5.9 | ) | (8,983 | ) | (10.0 | ) |
| Interest income                           |       | 341                                                   |       | 0.3 |   | 286 |   | 0.3 |   |
| Income before  provision for income taxes |       | 33,957                                                |       | 29.4 |   | 24,929 |   | 27.7 |   |
| Provision for  income taxes               |       | 13,552                                                |       | 11.7 |   | 10,395 |   | 11.5 |   |
| Net income                                |       | $                                                     | 20,405     |   | 17.7 | % | $ | 14,534 |   | 16.2 | % |

 

Net sales bybusiness segment and distribution channel and percentage of net sales for thethree months ended April 1, 2007 and April 2, 2006 are as follows:

|                            | ** ** | **Three months ended**                      | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|
| ** **                 | ** ** | **April 1,  2007**                               | ** ** | **April 2,  2006** | ** ** |
| ** **                 | ** ** | **(in thousands, except percentages)** | ** ** |
| Retail                     |       |                                                  |       |   |   |   |   |   |   |
| Infomercial                |       | $                                                     | 34,274     |   | 29.7 | % | $ | 30,548 |   | 34.0 | % |
| Boutiques                  |       | 17,134                                                |       | 14.8 |   | 11,516 |   | 12.8 |   |
| Total retail               |       | 51,408                                                |       | 44.5 |   | 42,064 |   | 46.8 |   |
| Wholesale                  |       |                                                  |       |   |   |   |   |   |   |
| Premium wholesale          |       | 35,580                                                |       | 30.8 |   | 23,828 |   | 26.5 |   |
| Home shopping television   |       | 13,694                                                |       | 11.8 |   | 12,366 |   | 13.8 |   |
| Spas and salons            |       | 9,959                                                 |       | 8.6 |   | 7,506 |   | 8.3 |   |
| International distributors |       | 4,972                                                 |       | 4.3 |   | 4,151 |   | 4.6 |   |
| Total wholesale            |       | 64,205                                                |       | 55.5 |   | 47,851 |   | 53.2 |   |
| Sales, net                 |       | $                                                     | 115,613    |   | 100.0 | % | $ | 89,915 |   | 100.0 | % |

 

Gross profit andgross margin by business segment for the three months ended April 1, 2007 andApril 2, 2006 are as follows:

|                            | ** ** | **Three months ended**                      | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|
| ** **                 | ** ** | **April 1,  2007**                               | ** ** | **April 2,  2006** | ** ** |
| ** **                 | ** ** | **(in thousands, except percentages)** | ** ** |
| Retail                     |       | $                                                     | 40,496     |   | 78.8 | % | $ | 33,094 |   | 78.7 | % |
| Wholesale                  |       | 41,667                                                |       | 64.9 |   | 31,625 |   | 66.1 |   |
| Gross  profit/gross margin |       | $                                                     | 82,163     |   | 71.1 | % | $ | 64,719 |   | 72.0 | % |

 

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##### **Three months ended April 1, 2007 compared tothree months ended April 2, 2006**

##### **Sales, net**

Net sales for thethree months ended April 1, 2007 increased to $115.6 million from $89.9 millionin the three months ended April 2, 2006, an increase of $25.7 million, or28.6%. This increase was primarily attributable to continued growth in sales ofour *i.d. bareMinerals*line ofcosmetics, as we continued to broaden our distribution throughout our saleschannels and increase awareness through greater media spending. The increase inour net sales was realized within both our retail and wholesale segments.

***Retail.***Net retail sales increased22.2% to $51.4 million in the three months ended April 1, 2007 from $42.1million in the three months ended April 2, 2006. Net sales from infomercialsincreased 12.2% to $34.3 million in the three months ended April 1, 2007 from$30.5 million in the three months ended April 2, 2006, as a result of increasedmedia spending and the growth of sales in our continuity program. Net salesfrom boutiques increased 48.8% to $17.1 million in the three months ended April1, 2007 from $11.5 million in the three months ended April 2, 2006, due toimproved productivity at our existing locations as well as a net increase offive boutiques open as of April 1, 2007 compared to April 2, 2006. As of April1, 2007 and April 2, 2006, we had 33 and 28 open company owned boutiques,respectively.

***Wholesale.***Net wholesale salesincreased 34.2% to $64.2 million in the three months ended April 1, 2007 from$47.9 million in the three months ended April 2, 2006. Net sales in our premiumwholesale channel increased 49.3% to $35.6 million in the three months endedApril 1, 2007 from $23.8 million in the three months ended April 2, 2006,resulting from strong consumer demand and expansion into additional retaillocations at Ulta and Sephora, including new Sephora locations in France.  Net sales to our home shopping televisioncustomer grew by 10.7% to $13.7 million in the three months ended April 1, 2007from $12.4 million in the three months ended April 2, 2006, as a result ofincreased sales of our products through QVC’s website, catalogs and continuityprograms. Net sales to spas and salons increased 32.7% to $10.0 million in thethree months ended April 1, 2007 from $7.5 million in the three months endedApril 2, 2006, largely due to the continued growth in sales of our core *i.d. bareMinerals*cosmetics line in thischannel in which our sales historically had been concentrated in sales of our *md formulations*products. Net sales to ourinternational distributors increased by 19.8% to $5.0 million in the threemonths ended April 1, 2007 from $4.2 million in the three months ended April 2,2006, primarily as a result of the increased penetration of our *i.d. bareMinerals*cosmetics line into thisdistribution channel.

##### **Gross profit**

Gross profitincreased 27.0% to $82.2 million in the three months ended April 1, 2007 from$64.7 million in the three months ended April 2, 2006. Our retail segment grossprofit increased 22.4% to $40.5 million in the three months ended April 1, 2007from $33.1 million in the three months ended April 2, 2006, driven principallyby growth in our infomercial and boutiques sales channels. Our wholesalesegment gross profit increased 31.8% to $41.7 million in the three months endedApril 1, 2007 from $31.6 million in the three months ended April 2, 2006, dueto increases in sales across all wholesale distribution channels.

Gross margindecreased approximately 0.9% to 71.1% in the three months ended April 1, 2007from 72.0% in the three months ended April 2, 2006. This overall decrease inthe three months ended April 1, 2007 is due to a decrease in gross margins inthe wholesale segment. Within the wholesale segment, gross margin decreased to64.9% in the three months ended April 1, 2007 from 66.1% in the three monthsended April 2, 2006, primarily as a result of a change in product mix and salesbetween channels and customers. Within the retail segment, gross margin hasremained relatively constant at 78.8% in the three months ended April 1, 2007from 78.7% in the three months ended April 2, 2006.

##### **Selling,general and administrative expenses**

Selling, generaland administrative expenses increased 32.0% to $39.2 million in the threemonths ended April 1, 2007 from $29.7 million in the three months ended April2, 2006. The increase was primarily due to a significant increase in investmentin our corporate infrastructure of $5.1 million, including increased headcountcosts, headquarters facilities costs, distribution center costs and othercorporate costs, as well as increased expenses to support sales growth,including $1.2 million in increased store operating costs,  $1.1 million in increased media spending and$0.8 million in payroll and other personnel expenses. As a percentage of netsales, selling, general and administrative expenses increased 0.9% to 33.9%from 33.0%, primarily due to corporate expenses increasing at a greater ratethan net sales.

##### **Depreciationand amortization**

Depreciation andamortization expenses increased 102.2% to $0.9 million in the three monthsended April 1, 2007 from $0.5 million in the three months ended April 2, 2006.This increase was primarily attributable to higher depreciation expense as aresult of an increase in depreciable assets as we continue to increase thenumber of company-owned boutiques and invest in our corporate infrastructure.

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##### **Stock-based compensation**

Stock-basedcompensation expense increased 70.7% to $1.6 million in the three months endedApril 1, 2007 from $0.9 million in the three months ended April 2, 2006. Thisincrease resulted from the granting of additional stock options and the impactof option modifications (as to exercise price and term) in connection with theJune 2006 recapitalization.

##### **Operating income**

Operating incomeincreased 20.2% to $40.4 million in the three months ended April 1, 2007 from$33.6 million in the three months ended April 2, 2006. This increase waslargely due to increases in operating income in both our retail and wholesalesegments, reflecting growth across all sales channels, partially offset by anincreased operating loss in our corporate segment.

 Our retail segment operating income increased26.2% to $18.1 million in the three months ended April 1, 2007 from $14.3million in the three months ended April 2, 2006, which was largely driven bygrowth in all of our retail sales channels. Our increased sales in the retailsegment contributed to an increase in gross profit of $7.4 million which waspartially offset by an increase in operating expenses of $3.7 million. Theincrease in operating expenses was largely due to increased store operatingcosts of $1.2 million as a result of an increase in the number of boutiquesopen as of April 1, 2007, $1.1 million in increased media spending and $0.6million of increased fulfillment costs due to increased sales.

Our wholesalesegment operating income increased 30.6% to $38.6 million in the three monthsended April 1, 2007 from $29.6 million in the three months ended April 2, 2006,due to increased sales gains across all wholesale sales channels. Our increasedsales in the wholesale segment contributed to an increase in gross profit of$10.0 million which was partially offset by an increase in operating expense of$1.0 million.

Our corporatesegment operating loss increased 58.5% to $16.3 million in the three monthsended April 1, 2007 from $10.3 million in the three months ended April 2, 2006.This increase was largely due to an increase in corporate segment selling,general and administrative expense of $5.1 million, an increase in depreciationand amortization of $0.3 million and stock-based compensation of $0.7million.  The increase in corporateselling, general and administrative expense was as a result of the increase inthe investment in our corporate infrastructure to support sales growth andadditional expenses associated with being a public company.

##### **Interest expense**

Interest expensedecreased 24.2% to $6.8 million in the three months ended April 1, 2007 from$9.0 million in the three months ended April 2, 2006. The decrease wasattributable to decreased debt balances in the three months ended April 1,2007, primarily associated with repayment of outstanding indebtedness fromproceeds of our initial public offering completed on October 4, 2006.

##### **Interestincome**

Interest incomeremained relatively consistent at $0.3 million in the three months ended April1, 2007 and April 2, 2006 due to consistent average cash balances and interestrates.

##### **Provisionfor income taxes**

The provision forincome taxes was $13.6 million, or 39.9% of income before provision for incometaxes, in the three months ended April 1, 2007 compared to $10.4 million, or41.7% of income before provision for income taxes, in the three months endedApril 2, 2006. The increase resulted from higher income before provision forincome taxes offset by a lower effective rate in the three months ended April1, 2007 compared to the three months ended April 2, 2006. The decrease in theeffective rate is mainly due to the elimination of the non-deductible interestas a result of our repayment in full of our aggregate principal amountoutstanding of $125.0 million of our 15.0% subordinated notes dueJune 2014 on October 4, 2006.

# **Seasonality**

Because our products are largely purchased forindividual use and are consumable in nature, we are not subject to significantseasonal variances in sales. However, fluctuations in sales and operatingincome in any fiscal quarter may be affected by the timing of wholesaleshipments, home shopping television appearances and other promotional events.While we believe our overall business is not currently subject to significantseasonal fluctuations, we have experienced limited seasonality in our premiumwholesale and company-owned boutique channels as a result of increaseddemand for our products in anticipation of and during the holiday season. Tothe extent our sales to specialty beauty retailers and through our boutiquesincrease as a percentage of our net sales, we may experience increasedseasonality.

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## **Liquidityand Capital Resources**

Our primary liquidity andcapital resource needs are to service our debt, finance working capital needsand fund ongoing capital expenditures. We have financed our operations through cash flows from operations, salesof common and preferred shares, borrowings under our credit facilities andissuances of senior subordinated notes.

Our operationsprovided us cash of $17.8 million in the three months ended April 1, 2007. AtApril 1, 2007, we had working capital of $90.6 million, including cash and cashequivalents of $39.2 million, compared to working capital of $66.3 million,including $20.9 million in cash and cash equivalents, as of December 31, 2006.The $18.3 million increase in cash and cash equivalents resulted from cashprovided by financing activities of $4.4 million together with cash provided byoperations of $17.8 million, as a result of net income for the three monthsended April 1, 2007 of $20.4 million, partially offset by cash used in investmentactivities of $3.9 million related primarily to capital expenditures.  The $24.3 million increase in working capitalwas primarily driven by increases in cash and cash equivalents and accountsreceivable and a decrease in accounts payable, partially offset by an increasein income taxes payable.

Net cash used ininvesting activities was $3.9 million in the three months ended April 1, 2007,primarily attributable to the opening of five company-owned boutiques andinvestment in our corporate infrastructure. Our future capital expenditureswill depend on the timing and rate of expansion of our businesses, informationtechnology investments, new store openings, store renovations and internationalexpansion opportunities.

Our financingactivities provided us cash of $4.4 million in the three months ended April 1,2007, which related to our proceeds, net of transaction costs, of $18.1 millionfrom our follow-on underwritten public offering of common stock and an excesstax benefit of $0.5 million relating to stock option exercises, partiallyoffset by repayments of $14.3 million on our first-lien term loan.

On March 23, 2007, weamended our senior secured credit facilities to permit acquisitions of up to$30,000,000 in any one fiscal year and up to $60,000,000 in the aggregate andinvestments in foreign subsidiaries to $25,000,000.

Our revolving creditfacility of $25.0 million, of which approximately $0.4 million in letters ofcredit is outstanding as of April 1, 2007 and our first-lien term loan of$325.0 million, bear interest at a rate equal to, at our option, either LIBORor the lender’s base rate, plus an applicable variable margin based on ourconsolidated total leverage ratio. The current applicable interest margin forthe revolving credit facility and first-lien term loan ranges from 2.25% to2.5% for LIBOR loans and from 1.25% to 1.5% for base rate loans depending onour Moody’s rating. As of April 1, 2007, interest on the first-lien term loanwas accruing at 7.82%.

At all times afterOctober 2, 2007, we are required under our senior secured creditfacilities to enter into interest rate swap or similar agreements with respectto at least 40% of the outstanding principal amount of all loans under oursenior secured credit facilities, unless we satisfy specified coverage ratiotests. As of April 1, 2007, we satisfied these tests. If required, the interestrate protection must extend until February 2008. Currently, we do notengage in any hedging activities.

The terms of our seniorsecured credit facilities, require us to comply with financial covenants,including a maximum leverage ratio covenant. We are required to maintain a maximumleverage ratio (consolidated total debt to Adjusted EBITDA) of not greater than4.5 to 1.0. As of April 1, 2007, our leverage ratio was 1.82 to 1.0. If we failto comply with any of the financial covenants, the lenders may declare an eventof default under the secured credit facility. An event of default resultingfrom a breach of a financial covenant may result, at the option of lendersholding a majority of the loans, in an acceleration of repayment of theprincipal and interest outstanding and a termination of the revolving creditfacility. The secured credit facility also contains non-financial covenantsthat restrict some of our activities, including our ability to dispose ofassets, incur additional debt, pay dividends, create liens, make investmentsand engage in specified transactions with affiliates. The secured creditfacility also contains customary events of default, including defaults based onevents of bankruptcy and insolvency, nonpayment of principal, interest or feeswhen due, subject to specified grace periods, breach of specified covenants,change in control and material inaccuracy of representations and warranties. Wehave been in compliance with all financial ratio and other covenants under ourcredit facilities during all reported periods and we were in compliance withthese covenants as April 1, 2007.

Subject to specifiedexceptions, including for investment of proceeds in the case of asset saleproceeds and for permitted equity contributions for capital expenditures, weare required to prepay outstanding loans under our amended senior securedcredit facilities with the net proceeds of certain asset dispositions,condemnation settlements and insurance settlements from casualty losses,issuances of certain debt and, if our consolidated leverage ratio is 2.25 to1.0 or greater, a portion of excess cash flow.

On February 16, 2007, we filed a RegistrationStatement on Form S-1 (File No. 333-140763) with the Securities and ExchangeCommission for a follow-on underwritten public offering. As amended, theRegistration Statement provided for the sale of 12.0 million shares of ourcommon stock, consisting of 0.6 million shares sold by the Company and 11.4million shares by selling stockholders. In addition, the selling stockholdersgranted the underwriters the right to purchase up to an additional 1.8 millionshares to cover over-allotments. The over-allotment option was exercised onMarch 19, 2007 by the underwriters. The follow-on underwritten public offeringclosed on March 19, 2007. We received approximately $18.1 million in netproceeds from the offering.

On April 3, 2007, we completed our acquisition ofU.K.-based Cosmeceuticals Limited, which distributes Bare Escentuals’ *bareMinerals, md formulations*and *MD Forte*brands to the European cosmetics market. The acquired entity has been renamedBare Escentuals UK Ltd. The consideration for the purchase was cash of approximately$19.7 million, which is subject to certain adjustments, including anychanges in the value of the net tangible assets acquired on the acquisitiondate.

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# **Liquidity sources, requirementsand contractual cash requirement and commitments**

We believe thatcash flow from operations, cash on hand and amounts available under our revolvingcredit facility will provide adequate funds for our foreseeable working capitalneeds, planned capital expenditures and completion of our U.K. acquisition. Aspart of our strategy, we intend to invest in making significant improvements toour systems. We also intend to open approximately fifteen new boutiques in 2007(none of which were open as of April 1, 2007) which will require additionalcapital expenditures. Finally, we also plan to continue to invest in ourcorporate infrastructure facilities. We anticipate that our capitalexpenditures in the year ending December 30, 2007 will be approximately $18.0 million.There can be no assurance that any such capital will be available on acceptableterms or at all. Our ability to fund our working capital needs, planned capitalexpenditures and scheduled debt payments, as well as to comply with all of thefinancial covenants under our debt agreements, depends on our future operatingperformance and cash flow, which in turn are subject to prevailing economicconditions and to financial, business and other factors, some of which arebeyond our control.

# **Contractual commitments**

We lease retailstores, distribution facilities, and corporate offices under noncancelableoperating leases with various expiration dates through January 2018. As ofApril 1, 2007, the scheduled maturities of our long-term contractualobligations were as follows:
| ** **                                                             | ** ** | **Remainder of  the year  ending** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **              | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------|------------|----------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                             | ** ** | **December 30,  2007**                  | ** ** | **1 - 3  Years** | ** ** | **4 - 5  Years** | ** ** | **After 5  Years** | ** ** | **Total**  | ** ** |
| ** **                                                             | ** ** | **(amounts in millions)**          | ** ** |
| Operating leases,  net of sublease income                              |       | $                                            | 4.2        |                       | $          | 20.2                       |       | $                       | 13.1       |       | $          | 21.5 |   | $ | 59.0 |   |
| Principal  payments on long-term debt, including the current portion   |       | 13.2                                         |       | 52.9                       |       | 258.9                      |       | —                  |       | 325.0      |       |
| Interest  payments on long-term debt, including the current portion(1) |       | 18.8                                         |       | 67.5                       |       | 12.9                       |       | —                  |       | 99.2       |       |
| Minimum  royalties under licensing arrangements                        |       | 0.4                                          |       | 1.3                        |       | —                     |       | —                  |       | 1.7        |       |
| Total                                                                  |       | $                                            | 36.6       |                       | $          | 141.9                      |       | $                       | 284.9      |       | $          | 21.5 |   | $ | 484.9 |   |

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(1)             Theinterest payments on our long-term debt, including the current portion havebeen calculated using an estimated interest rate of 7.82% on the outstandingfirst-lien term loan, which were estimated based on the rate in effect as ofApril 1, 2007. A 1% change in interest rates on our variable rate debtwould result in a change of $12.7 million in our total interest payments,of which $2.4 million would be in the remainder of the year endedDecember 30, 2007, $8.6 million would be in years 1-3 and$1.7 million would be in years 4-5.

We are also partyto a sublicense agreement for use of certain patents associated with certain ofour mineral-based skin care products. The agreement requires that we paya quarterly royalty of 3.5% of the net sales of these skin care products up tothe date of the last to expire licensed patent rights. This sublicense also requiresminimum annual royalty payments of approximately $0.6 million for 2007 andthereafter. The minimum annual royalty payments have not been included in theschedule of long-term contractual obligations above as we can terminate theagreement at any time with six months written notice.

We adopted FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”)on January 1, 2007. As of the date of the adoption, we had approximately $4.1 millionof total unrecognized tax benefits, including related interest, of which $2.2million, if recognized, would affect the effective income tax rate in futureperiods. However, as we are unable to determine the timing of the potentialrealization of our unrecognized tax benefits, we have excluded the total unrecognizedtax benefits in the schedule of long-term contractual commitments above.

**Off-balance-sheet arrangements**

We do not have anyoff-balance-sheet financing or unconsolidated special purpose entities.

**Effects of inflation**

Our monetaryassets, consisting primarily of cash and receivables, are not significantlyaffected by inflation because they are short-term in nature. Our non-monetaryassets, consisting primarily of inventory, intangible assets, goodwill andprepaid expenses and other assets, are not currently affected significantly byinflation. We believe that replacement costs of equipment, furniture andleasehold improvements will not materially affect our operations. However, therate of inflation affects our cost of goods sold and expenses, such as thosefor employee compensation, which may not be readily recoverable in the price ofthe products offered by us. In addition, an inflationary environment couldmaterially increase the interest rates on our debt.

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**Non-GAAP Measures**

In evaluating ourbusiness, we consider and use Adjusted EBITDA as a supplemental measure of ouroperating performance. We use EBITDA only to assist in reconciliation toAdjusted EBITDA.  We define EBITDA as netincome before net interest expense, provision for income taxes, depreciationand amortization. We define Adjusted EBITDA as EBITDA plus expenses (minusgains) that we do not consider reflective of our ongoing operations. We useAdjusted EBITDA as a supplemental measure to review and assess our operatingperformance and also as a key profitability measure for covenant complianceunder our senior secured credit facilities. If we fail to maintain requiredlevels of Adjusted EBITDA, we could have a default under our senior securedcredit facilities, potentially resulting in an acceleration of all of ouroutstanding indebtedness.  All of theadjustments made in our calculation of Adjusted EBITDA, as described below, areadjustments that would be made in calculating our performance for purposes ofcoverage ratios under our senior secured credit facilities. In prior periods,we used an adjusted EBITDA calculation for internal purposes and forcalculation of compliance with coverage ratios that incorporated additionaladjustments not included in our calculation of Adjusted EBITDA. We also believeuse of Adjusted EBITDA facilitates investors’ use of operating performancecomparisons from period to period and company to company by backing outpotential differences caused by variations in capital structures (affectingrelative interest expense, including the impact of write-offs of deferredfinancing costs when companies refinance their indebtedness), the bookamortization of intangibles (affecting relative amortization expense) and theage and book value of facilities and equipment (affecting relative depreciationexpense). We also present Adjusted EBITDA because we believe it is frequentlyused by securities analysts, investors and other interested parties as ameasure of financial performance. The terms EBITDA and Adjusted EBITDA are notdefined under U.S. generally accepted accounting principles, or U.S. GAAP, andare not measures of operating income, operating performance or liquiditypresented in accordance with U.S. GAAP. Our EBITDA and Adjusted EBITDA havelimitations as analytical tools, and when assessing our operating performance,you should not consider EBITDA and Adjusted EBITDA in isolation, or as asubstitute for net income****(loss)or other consolidated income statement data prepared in accordance with U.S.GAAP. Some of these limitations include, but are not limited to:

·                  EBITDAand Adjusted EBITDA do not reflect our cash expenditures or future requirementsfor capital expenditures or contractual commitments;

·                  theydo not reflect changes in, or cash requirements for, our working capital needs;

·                  theydo not reflect the significant interest expense, or the cash requirementsnecessary to service interest or principal payments, on our debt;

·                  theydo not reflect income taxes or the cash requirements for any tax payments;

·                  althoughdepreciation and amortization are non-cash charges, the assets beingdepreciated and amortized often will have to be replaced in the future, andEBITDA and Adjusted EBITDA do not reflect any cash requirements for suchreplacements; and

·                  other companiesmay calculate EBITDA and Adjusted EBITDA differently than we do, limiting theirusefulness as comparative measures. We compensate for these limitations byrelying primarily on our GAAP results and using Adjusted EBITDA onlysupplementally. EBITDA and Adjusted EBITDA are calculated as follows for theperiods presented:

|                                     | ** ** | **Three months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **April 1,  2007**          | ** ** | **April 2,  2006** | ** ** |
| ** **                          | ** ** | **(in thousands)**          | ** ** |
| **Net  income**                     |       | $                                | 20,405     |   | $ | 14,534 |   |
| Plus: interest expense              |       | 6,811                            |       | 8,983 |   |
| Less: interest income               |       | (341                             | )          | (286 | ) |
| Plus: depreciation and amortization |       | 940                              |       | 465 |   |
| Plus: provision for income taxes    |       | 13,552                           |       | 10,395 |   |
| **EBITDA**                          |       | 41,367                           |       | 34,091 |   |
| Plus: management fees(1)            |       | —                           |       | 150 |   |
| Plus: stock-based compensation(2)   |       | 1,611                            |       | 944 |   |
| **Adjusted EBITDA**                 |       | $                                | 42,978     |   | $ | 35,185 |   |

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(1)             We paid transactionfees and monthly management fees to Berkshire Partners LLC and JH Partners, LLCunder management agreements each in an amount of $300,000 per annum.  These management agreements were terminatedupon completion of our initial public offering on October 4, 2006.  We paid an aggregate of $1.8 million toBerkshire Partners LLC and JH Partners, LLC as consideration for termination ofthese agreements.

(2)             Thestock-based compensation charges primarily resulted from our adoption of thefair value recognition and measurement provisions of Statement of FinancialAccounting Standards No. 123(R), or SFAS 123(R), effective January 3, 2005.

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**Critical Accounting Policies andEstimates**

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions. Predictingfuture events is inherently an imprecise activity and, as such, requires theuse of judgment. Actual results may vary from estimates in amounts that may bematerial to the financial statements. An accounting policy is deemed to becritical if it requires an accounting estimate to be made based on assumptionsabout matters that are highly uncertain at the time the estimate is made, andif different estimates that reasonably could have been used, or changes in theaccounting estimates that are reasonably likely to occur periodically, couldmaterially impact our consolidated financial statements.  Our critical accounting policies andestimates are discussed in our recently filed Annual Report on Form 10-K forthe fiscal year ended December 31, 2006, which was filed with the SEC on March 30,2007.  We believe that there have been noother significant changes during the three months ended April 1, 2007 to theitems that we disclosed in our critical accounting policies and estimates withthe exception of the adoption of FIN 48 as noted below.

We adoptedFinancial Accounting Standards Board (“FASB”) Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*,(“FIN 48”) on January 1, 2007.  FIN48 prescribes a comprehensive model for how a company should recognize,measure, present and disclose in its financial statements uncertain taxpositions that the company has taken or expects to take on a tax return.  In connection with the adoption of FIN 48, wechanged our accounting policy and now recognize accrued interest and penaltiesrelated to income tax matters in income tax expense.  These amounts were previously classified inselling, general and administrative expenses.

**New Accounting Standards**

InSeptember 2006, the FASB issued SFAS No. 157*, Fair Value Measurements*. Statement 157defines fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements. Statement 157 also appliesunder other accounting pronouncements that require or permit fair valuemeasurements, but does not require any new fair value measurements. The provisionsof Statement 157 are effective for fiscal years beginning afterNovember 15, 2007. We will adopt Statement 157 during our fiscal yearending December 28, 2008. We are currently in the process of determiningthe impact, if any, of adopting the provisions of Statement 157 but it is notexpected to have a material impact on our financial position or results ofoperations.

In February 2007,the FASB issued SFAS No. 159, *Fair Value Option forFinancial Assets and Financial Liabilities. *Statement 159 permits entities to choose to measure manyfinancial instruments, and certain other items, at fair value. Statement 159also establishes presentation and disclosure requirements designed tofacilitate comparisons between entities that choose different measurementattributes for similar types of assets and liabilities. The provisions ofStatement 159 are effective for fiscal years beginning after November 15,2007.  We will adopt Statement 159 duringour fiscal year ending December 28, 2008. We are currently in the processof determining the impact, if any, of adopting the provisions of Statement 159but it is not expected to have a material impact on our financial position orresults of operations.

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**ITEM3.****   QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

***Interest ratesensitivity***

We are exposed tointerest rate risks primarily through borrowings under our creditfacilities.  Interest on all of ourborrowings under our senior secured credit facilities is based upon variableinterest rates. Our weighted average borrowings outstanding during the threemonths ended April 1, 2007 were $338.0 million and the annual effectiveinterest rate for the period was 8.0%. Presently, we do not hedge againstinterest rate risks. Based on the foregoing, a hypothetical 1% increase ordecrease in interest rates would have resulted in a $0.8 million change to ourinterest expense in the three months ended April 1, 2007 and $3.4 millionon an annualized basis.

***Foreigncurrency risk***

All of our sales,expenses, assets, liabilities and cash holdings are currently denominated inU.S. dollars.  Although we are increasingour sale of products outside of the United States, most of these transactionswill be settled in U.S. dollars and therefore we have only minimal exposure toforeign currency exchange risks. We do not hedge against foreign currency risksand we believe that our foreign currency exchange risk is immaterial.

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**ITEM4.****   CONTROLSAND PROCEDURES**

The Companymaintains disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in its reports pursuant to the SecuritiesExchange Act of 1934, as amended, is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules, and that suchinformation is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure.Management is responsible for establishing and maintaining adequate internalcontrol over financial reporting. In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

As required by SECRule 13a-15(b), the Company carried out an evaluation, under the supervisionand with the participation of its management, including the Chief ExecutiveOfficer and the Chief Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures as of the end ofthe quarter covered by this report. Based on the foregoing, its Chief ExecutiveOfficer and Chief Financial Officer determined that disclosure controls andprocedures were effective at a reasonable assurance level.

There has been nochange in internal controls over financial reporting during the most recentfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, internal controls over financial reporting.

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**PART II—OTHER INFORMATION**

**ITEM1.****   LEGALPROCEEDINGS**

In the ordinarycourse of our business, we are subject to periodic lawsuits, investigations andclaims. Although we cannot predict with certainty the ultimate resolution oflawsuits, investigations and claims asserted against us, we do not believe thatany currently pending legal proceeding to which we are a party is likely tohave a material adverse effect on our business, results of operations, cashflows or financial condition.

**ITEM1A.****   RISKFACTORS**

*An investment in our common stock involves a highdegree of risk.  Our Annual Reporton Form 10-K for the year ended December 31, 2006 includes a detaileddiscussion of our risk factors under the heading “Part I,Item 1A—Risk Factors.” Set forth below are certain changes from the riskfactors previously disclosed in our Annual Report on Form 10-K. You shouldcarefully consider the risk factors discussed in this report and our AnnualReport on Form 10-K as well as the other information in this report, beforemaking an investment decision. If any of the following risks or the risksdiscussed in the Annual Report on Form 10-K occur, our business, financial condition, results of operations orfuture growth could suffer.*

***We do not currently own any patents on our products. If weare unable to protect our intellectual property rights, our ability to competecould be harmed.***

We regard ourtrademarks, trade dress, copyrights, trade secrets, know-how and similarintellectual property as critical to our success. Our principal intellectualproperty rights include registered trademarks on our name, “Bare Escentuals,”as well as our brands “*i.d. bareMinerals*,”“*i.d.*,” “*md formulations*,” “*Bare Escentuals*” and “*RareMinerals*,” copyrights in ourinfomercial broadcasts and website content, rights to our domain names *www.bareescentuals.com*, *www.bareminerals.com*and *www.mdformulations.com*, and tradesecrets and know-how with respect to product formulations, product sourcing,sales and marketing and other aspects of our business. As such, we rely ontrademark and copyright law, trade secret protection and confidentialityagreements with our employees, consultants, suppliers, and others to protectour proprietary rights. We have not received patent protection on any of ourproducts, though we have licenses for the proprietary formulations andingredients used in some of our *mdformulations* and *RareMinerals*products. If we are unable to protect or preserve the value of our trademarks,copyrights, trade secrets or other proprietary rights for any reason, our brandand reputation could be impaired and we could lose customers.

Although most ofour brand names are registered in the United States and in certain foreigncountries in which we operate, we may not be successful in asserting trademarkor trade name protection. In addition, the laws of certain foreign countriesmay not protect our intellectual property rights to the same extent as the lawsof the United States. The costs required to protect our trademarks and tradenames may be substantial. In addition, the relationship between regulationsgoverning domain names and laws protecting trademarks and similar proprietaryrights is unclear. Therefore, we may be unable to prevent third parties fromacquiring domain names that are similar to, infringe upon or otherwise decreasethe value of our trademarks and other proprietary rights.

Other parties mayinfringe on our intellectual property rights and may thereby dilute our brandsin the marketplace. Any such infringement of our intellectual property rightswould also likely result in a commitment of our time and resources to protectthese rights through litigation or otherwise. For example, we currently arepursuing claims in litigation against M/D Skin Care LLC and its founderDr. Dennis Gross regarding their use of the trademark “MD Skincare.”  M/D Skin Care LLC has also filed claimsagainst us in the case. In each case, we believe the competing marks infringeour trademark rights and create confusion in the marketplace. We are alsopursuing claims in litigation against L’Oréal USA, Inc. and L’Oréal S.A.regarding their use of the trademark “Bare Naturale” and for false advertisingof this brand. We have incurred and expect to incur significant legal fees andother expenses in pursuing these claims. If we receive an adverse judgment ineither of these matters or in any other cases we may bring in the future todefend our intellectual property rights, we may suffer further dilution of ourtrademarks and other rights, which could harm our ability to compete as well asour business, prospects, financial condition and results of operations.

***We maymake acquisitions and strategic investments, which will involve numerous risks.We may not be able to address these risks without substantial expense, delay orother operational or financial problems.***

Although we have alimited history of making acquisitions or strategic investments, we may acquireor make investments in related businesses or products in the future.Acquisitions or investments involve various risks, such as:

·                  higher thanexpected acquisition and integration costs;

·                  the difficultyof integrating the operations and personnel of the acquired business;

·                  the potentialdisruption of our ongoing business, including the diversion of management timeand attention;

·                  the possibleinability to obtain the desired financial and strategic benefits from theacquisition or investment;

·                  assumption ofunanticipated liabilities;

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·                  incurrence ofsubstantial debt or dilutive issuances of securities to pay for acquisitions;

·                  impairment inrelationships with key suppliers and personnel of any acquired businesses dueto changes in management and ownership;

·                  the loss of keyemployees of an acquired business; and

·                  the possibilityof our entering markets in which we have limited prior experience.

Futureacquisitions and investments could also result in substantial cashexpenditures, potentially dilutive issuance of our equity securities, ourincurring of additional debt and contingent liabilities, and amortizationexpenses related to other intangible assets that could adversely affect ourbusiness, operating results and financial condition.

***If we fail to maintain proper andeffective internal controls, our ability to produce accurate financialstatements could be impaired, which could adversely affect our operatingresults, our ability to operate our business and investors’ views of us.*****

We must ensurethat we have adequate internal financial and accounting controls and proceduresin place so that we can produce accurate financial statements on a timelybasis. We will be required to spend considerable effort on establishing andmaintaining our internal controls, which will be costly and time-consuming andwill need to be re-evaluated frequently. We have very limited experience indesigning and testing our internal controls. We are in the process ofdocumenting, reviewing and, if appropriate, improving our internal controls andprocedures, in accordance with Section 404 of the Sarbanes-Oxley Act of 2002,which will require annual management assessments of the effectiveness of ourinternal control over financial reporting. In addition, we will be required tofile a report by our independent registered public accounting firm addressingthese assessments beginning with our Annual Report on Form 10-K for the yearending December 30, 2007. Both we and our independent auditors will be testingour internal controls in anticipation of being subject to Section 404requirements and, as part of that documentation and testing, may identify areasfor further attention and improvement. Implementing any appropriate changes toour internal controls may entail substantial costs to modify our existingfinancial and accounting systems, take a significant period of time tocomplete, and distract our officers, directors and employees from the operationof our business. These changes may not, however, be effective in maintainingthe adequacy of our internal controls, and any failure to maintain thatadequacy, or a consequent inability to produce accurate financial statements ona timely basis, could increase our operating costs and could materially impairour ability to operate our business. In addition, investors’ perceptions thatour internal controls are inadequate or that we are unable to produce accuratefinancial statements may seriously affect our stock price.

**ITEM2.****   UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

None.

**ITEM3.****   DEFAULTSUPON SENIOR SECURITIES**

None.

**ITEM4.****   SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

None.

**ITEM5.****   OTHERINFORMATION**

None.

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**ITEM6.****   EXHIBITS**

Exhibits

The followingdocuments are filed as Exhibits to this report: 
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                           |
| 3.2 (1)         |       | Amended and Restated Certificate of Incorporation.                                                                                                                                             |
|            |       |                                                                                                                                                                                           |
| 3.4 (1)         |       | Amended and Restated Bylaws.                                                                                                                                                                   |
|            |       |                                                                                                                                                                                           |
| 10.48 (2)       |       | Lease between Bare Escentuals Beauty, Inc. and  Centerpoint II, LLC dated January 31, 2007.                                                                                                    |
|            |       |                                                                                                                                                                                           |
| 10.49 (2)       |       | Guaranty by Bare Escentuals, Inc. dated January 31,  2007 to Lease between Bare Escentuals Beauty, Inc. and Centerpoint II, LLC.                                                               |
|            |       |                                                                                                                                                                                           |
| 10.50 (3)       |       | First Amendment to the Amended and Restated Credit  Agreement among Bare Escentuals Beauty, Inc., Bare Escentuals, Inc.,  BNP Paribas and the lenders party thereto dated March 23, 2007. |
|            |       |                                                                                                                                                                                           |
| 31.1            |       | Certification of the Chief Executive Officer, as  required by Section 302 of the Sarbanes-Oxley Act of 2002.                                                                              |
|            |       |                                                                                                                                                                                           |
| 31.2            |       | Certification of the Chief Financial Officer, as  required by Section 302 of the Sarbanes-Oxley Act of 2002.                                                                              |
|            |       |                                                                                                                                                                                           |
| 32.1            |       | Certification of the Chief Executive Officer and the  Chief Financial Officer as required by  Section 906 of the  Sarbanes-Oxley Act of 2002.                                        |

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(1)             Incorporatedby reference from our Quarterly Report on Form 10-Q for the period endedOctober 1, 2006 filed on November 11, 2007.

(2)             Incorporatedby reference from our Current Report on Form 8-K filed on March 1, 2007.

(3)             Incorporatedby reference from our Current Report on Form  8-K filed on April 2, 2007    

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.
|                          | BARE ESCENTUALS, INC. |
|--------------------------|-----------------------|
| Date: May 14,  2007 | By:                   | /s/ LESLIE A. BLODGETT |
|                     |                  | Leslie A. Blodgett |
|                     |                  | Chief Executive Officer and Director |
|                     | By:                   | /s/ MYLES B. MCCORMICK |
|                     |                  | Myles B. McCormick |
|                     |                  | Senior Vice President, Chief Financial Officer,  Chief Operations Officer and Secretary |

 

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