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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

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FORM 10-Q

[X]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarter ended December 31, 2007

[ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period fromto

Commission File Number 1-5893

FREDERICK’S OF HOLLYWOOD GROUP INC.

(Exact name of Registrant as specified in its charter)

New York


13-5651322(State or other jurisdiction of
incorporation or organization)


(I.R.S. Employer
Identification Number)1115 Broadway, New York, NY


10010(Address of principal executive offices)


(Zip Code)


Registrant’s telephone number, including area code (212) 798-4700

MOVIE STAR, INC.

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes[X]No[ ]

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

Large accelerated filer[ ]


Accelerated filer[ ]


Non-accelerated filer[X]


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes[ ]No[X]

The number of common shares outstanding on January 27, 2008 was 16,487,567.

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FREDERICK’S OF HOLLYWOOD GROUP INC.
(formerly MOVIE STAR, INC.)
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

PagePART I.


Financial InformationItem 1.


Financial StatementsConsolidated Condensed Balance Sheets at December 31, 2007 (Unaudited),June 30, 2007 (Audited) December 31, 2006 (Unaudited)




1Consolidated Statements of Operations (Unaudited) for the Three and Six Months
Ended December 31, 2007 and 2006




2Consolidated Condensed Statements of Cash Flows (Unaudited) for the Six Months
Ended December 31, 2007 and 2006




3Notes to Consolidated Condensed Unaudited Financial Statements




4-8Item 2.


Management’s Discussion and Analysis of Financial Condition and
Results of Operations




9-20Item 3.


Quantitative and Qualitative Disclosures About Market Risk




21Item 4.


Controls and Procedures




21PART II.


Other InformationItem 1A.


Risk Factors




22Item 4.


Submission of Matters to a Vote of Security Holders




22Item 6.


Exhibits




24Signatures




25


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PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements

FREDERICK’S OF HOLLYWOOD GROUP INC.
(formerly MOVIE STAR, INC.)
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands, Except Share Data)

December 31,
2007


June 30,
2007*


December 31,
2006(Unaudited)





(Unaudited)AssetsCurrent AssetsCash



$
215




$
53




$
90Receivables, net




10,018





8,266





10,090Inventory




10,729





6,816





10,168Deferred income taxes




1,322





1,518





1,728Prepaid expenses and other current assets




223





291





244Total current assets




22,507





16,944





22,320Property, plant and equipment, net




1,156





943





1,028Deferred income taxes




4,096





3,438





2,915Goodwill




537





537





537Other assets




646





476





453Total assets



$
28,942




$
22,338




$
27,253Liabilities and Shareholders’ EquityCurrent LiabilitiesNote payable



$
11,328




$
4,126




$
7,651Current maturity of capital lease obligation




58





57





55Accounts payable and other current liabilities




3,213





3,171





4,074Total current liabilities




14,599





7,354





11,780Long-term liabilities




304





379





434Commitments and Contingencies




—





—





—Shareholders’ equity **Common stock, $.01 par value – authorized 30,000,000 shares; issued 18,502,000 shares at December 31, 2007, 18,440,000 shares at June 30, 2007 and 17,960,000 shares at December 31, 2006




185





184





180Additional paid-in capital




5,640





5,552





5,180Retained earnings




11,838





12,507





13,305Accumulated other comprehensive loss




(6
)




(20
)




(8
)Treasury stock, at cost – 2,017,000 shares




(3,618
)




(3,618
)




(3,618
)Total shareholders’ equity




14,039





14,605





15,039Total liabilities and shareholders’ equity



$
28,942




$
22,338




$
27,253


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|* | Derived from audited financial statements.
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|** | All share data contained in this Report does not reflect the one-for-two reverse stock split effected by the Company on January 28, 2008.
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See notes to consolidated condensed unaudited financial statements.

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FREDERICK’S OF HOLLYWOOD GROUP INC.
(formerly MOVIE STAR, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)

Three Months Ended
December 31,


Six Months Ended
December 31,2007


2006


2007


2006Net sales



$
17,735




$
17,524




$
29,674




$
36,214Cost of sales




11,780





11,462





20,357





24,329Gross profit




5,955





6,062





9,317





11,885Selling, general and administrative expenses




4,704





4,580





9,206





9,067Merger related fees




559





803





917





1,342(Gain) on sale of property, plant and equipment




—





(496
)




—





(496
)Income (loss) from operations




692





1,175





(806
)




1,972Interest expense




197





212





309





399Income (loss) before provision for (benefit from) income
taxes




495





963





(1,115
)




1,573Provision for (benefit from) income taxes




198





385





(446
)




629Net income (loss)



$
297




$
578




$
(669
)



$
944BASIC NET INCOME (LOSS) PER SHARE*



$
.02




$
.04




$
(.04
)



$
.06DILUTED NET INCOME (LOSS) PER SHARE*



$
.02




$
.04




$
(.04
)



$
.06Basic weighted average number of shares outstanding*




16,447





15,810





16,439





15,786Diluted weighted average number of shares outstanding*




16,924





16,232





16,439





16,090


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|* | All share and per share data contained in this Report does not reflect the one-for-two reverse stock split effected by the Company on January 28, 2008.
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See notes to consolidated condensed unaudited financial statements.

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FREDERICK’S OF HOLLYWOOD GROUP INC.
(formerly MOVIE STAR, INC.)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)

Six Months Ended
December 31,2007


2006CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income



$
(669
)



$
944Adjustments to reconcile net (loss) income to net cash used in
operating activities:Gain on sale of property, plant and equipment




—





(496
)Depreciation and amortization




202





170Provision for sales allowances and doubtful accounts




361





512Stock-based compensation expense




61





187Deferred income taxes




(462
)




567Deferred lease liability




26





(9
)Issuance of common stock for directors’ fees




6





42(Increase) decrease in operating assets:Receivables




(2,109
)




(4,527
)Inventory




(3,913
)




(1,187
)Prepaid expenses and other current assets




68





537Other assets




(214
)




17(Decrease) in operating liabilities:Accounts payable and other liabilities




(22
)




(156
)Net cash used in operating activities




(6,665
)




(3,399
)CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment




(371
)




(208
)Proceeds from insurance recovery




—





26Proceeds from sale of property, plant and equipment




—





698Net cash (used in) provided by investing activities




(371
)




516CASH FLOWS FROM FINANCING ACTIVITIES:Repayments of capital lease obligation




(28
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(32
)Proceeds from revolving line of credit, net




7,202





2,696Proceeds from conversion of warrants




22





—Proceeds from exercise of employee stock options




—





119Net cash provided by financing activities




7,196





2,783Effect of exchange rate changes on cash




2





(13
)NET INCREASE (DECREASE) IN CASH




162





(113
)CASH, beginning of period




53





203CASH, end of period



$
215




$
90SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during period for:Interest



$
271




$
339Income taxes



$
5




$
9SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES:Acquisition of equipment, software and maintenance contract throughassumption of capital lease obligation



$
—




$
170


See notes to consolidated condensed unaudited financial statements.

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FREDERICK’S OF HOLLYWOOD GROUP INC.
(formerly MOVIE STAR, INC.)
NOTES TO CONSOLIDATED CONDENSED UNAUDITED FINANCIAL STATEMENTS

1.    Interim Financial Statements

In the opinion of Frederick’s of Hollywood Group Inc. (formerly Movie Star, Inc.) (the ‘‘Company’’), the accompanying consolidated condensed unaudited financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of December 31, 2007 and the results of operations and cash flows for the six months ended December 31, 2007 and 2006.

The consolidated condensed unaudited financial statements and notes are presented as required by Form 10-Q and do not contain certain information included in the Company’s year-end financial statements. The June 30, 2007 consolidated condensed balance sheet was derived from the Company’s audited financial statements. The results of operations for the three and six months ended December 31, 2007 are not necessarily indicative of the results to be expected for the full year. This Form 10-Q should be read in conjunction with the Company’s financial statements and notes included in the 2007 Annual Report on Form 10-K.

Presentation

This Form 10-Q has been prepared by the Company to report the Company’s financial results for the period ended prior to the merger of Fred Merger Corp., the Company’s wholly-owned subsidiary, with FOH Holdings, Inc. (‘‘FOH Holdings’’), which was consummated on January 28, 2008 (the ‘‘Merger’’), pursuant to the terms of an Agreement and Plan of Merger and Reorganization, dated as of December 18, 2006, as amended, by and among the Company, Fred Merger Corp. and FOH Holdings (‘‘Merger Agreement’’). Because this Form 10-Q only reports the results of operations and financial position of the Company prior to the Merger and does not include the results of operations and financial position of FOH Holdings, the results of operations and financial position of the Company as reported herein are not an indication of the future results of the combined company.

2.    Stock Options

The Company accounts for its stock-based employee compensation arrangements under SFAS No. 123 (revised 2004), ‘‘Share Based Payment’’ (‘‘SFAS No. 123R’’), which requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements.

There were no stock options granted during the six months ended December 31, 2007.

During the three months ended December 31, 2006, the Company granted to three of its officers options to purchase an aggregate of 700,000 shares of common stock under the 1988 Stock Option Plan at an exercise price of $1.00 per share. Of these shares, 500,000 shares vest over two years, 25% on the grant date, 25% six months after grant and 25% on the first and second anniversary. The other 200,000 shares vest 20% each year over five years.

The Company also granted options to other employees to purchase an aggregate of 55,000 shares of common stock under the 2000 Performance Equity Plan. Options to purchase 25,000 shares are exercisable at an exercise price of $0.78 per share and options to purchase 30,000 shares are exercisable at an exercise price of $1.00 per share. These options vest 20% each year over five years.

The fair value of the Black-Scholes options-pricing model was calculated with the following weighted-average assumptions used for the grant: risk-free interest rate 4.56%; expected life 7 years; expected volatility 154% and expected dividends of zero. The fair value generated by the Black-Scholes model may not be indicative of the future benefit, if any, that may be received by the option holder.

3.    Effect of New Accounting Standards

In July 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes – An Interpretation of SFAS No. 109’’ (‘‘FIN 48’’).

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FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with Statement 109 and prescribes a recognition threshold and measurement attribute for the financial statement disclosure of tax positions taken, or expected to be taken, on a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company adopted the provisions of FIN 48 on July 1, 2007 and the adoption did not have a material impact on the consolidated financial statements. The Company classifies any interest and penalty payments or accruals within operating expenses in the financial statements. There were no accruals of interest and penalties, nor were there any unrecognized tax benefits at the date of adoption of FIN 48. The Internal Revenue Service has reviewed the Company’s income tax returns through the period ended June 30, 2003 and proposed no changes to the tax returns filed by the Company.

In September 2006, the FASB issued SFAS No. 157 ‘‘Fair Value Measures’’ (‘‘SFAS No. 157’’). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements; however, it does not apply to SFAS No. 123R. This Statement will be effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The provisions of this Statement should be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except in some circumstances where the statement shall be applied retrospectively. The Company does not expect the adoption of SFAS No. 157 to have a material impact on its financial statements.

In February 2007, FASB issued SFAS No. 159, ‘‘The Fair Value Option for Financial Assets and Financial Liabilities,’’ (‘‘SFAS No. 159’’), which amends the accounting for assets and liabilities in financial statements in accordance with SFAS No. 115, ‘‘Accounting for Certain Investments in Debt and Equity Securities’’. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. This statement does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS No. 159 is effective for the first fiscal year beginning after November 15, 2007. The Company does not expect the adoption of SFAS No. 159 to have a material impact on its financial statements.

In December 2007, the FASB issued SFAS No. 160 ‘‘Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51’’ (‘‘SFAS No. 160’’). SFAS No. 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company does not have any non-controlling interests in subsidiaries and believes that SFAS No. 160 will not have a material impact on its financial statements.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007) ‘‘Business Combinations’’ (‘‘SFAS No. 141R’’). SFAS No. 141R establishes principles and requirements for the reporting entity in a business combination, including recognition and measurement in the financial statements of the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. SFAS No. 141R also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and interim periods within those fiscal years.

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4.    Inventory

Inventory consists of the following (in thousands):

December 31,


June 30,


December 31,2007


2007


2006Raw materials



$
1,769




$
1,041




$
1,097Work-in process




116





200





336Finished goods




8,844





5,575





8,735$
10,729




$
6,816




$
10,168


5.    Note Payable

Effective June 30, 2006, the Company obtained a new line of credit with a financial institution. This line of credit was terminated in January 2008 (see Note 9). Under this line of credit, the Company could borrow up to $30,000,000, including revolving loans and letters of credit. As of December 31, 2007, the Company had outstanding borrowings of $11,328,000 under the revolving credit facility and had approximately $4,940,000 of outstanding letters of credit. Availability under this line of credit was subject to the Company’s compliance with certain financial formulas as specified in the agreement. As of December 31, 2007, the Company was in compliance with its requirements under this credit facility. Pursuant to the terms of this line of credit, the Company pledged substantially all of its assets. Interest on outstanding borrowings was payable at a variable per annum rate equal to JPMorgan Chase Bank’s prime rate less 0.75 percent (6.5 percent as of December 31, 2007).

6.    Net Income (Loss) Per Share

Basic net income (loss) per share has been computed by dividing the applicable net income (loss) by the weighted average number of shares outstanding. Diluted net income per share has been computed by dividing the applicable net income by the weighted average number of shares outstanding and common share equivalents. All share and per share data contained in this Report does not reflect the one-for-two reverse stock split effected by the Company on January 28, 2008. The Company’s calculation of basic and diluted net income (loss) per share is as follows (in thousands, except per share amounts):

Three Months Ended
December 31,


Six Months Ended
December 31,2007


2006


2007


2006BASIC:Net income (loss)



$
297




$
578




$
(669
)



$
944Basic weighted average number of shares outstanding




16,447





15,810





16,439





15,786Basic net income (loss) per share



$
.02




$
.04




$
(.04
)



$
.06DILUTED:Net income (loss)



$
297




$
578




$
(669
)



$
944Weighted average number of shares outstanding




16,447





15,810





16,439





15,786Shares issuable upon conversion of stock options




447





392





—





278Shares issuable upon conversion of warrants




30





30





—





26Total average number of equivalent shares outstanding




16,924





16,232





16,439





16,090Diluted net income (loss) per share



$
.02




$
.04




$
(.04
)



$
.06


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Options and warrants to purchase 527,000 shares of common stock at prices ranging from $0.4375 to $1.45 per share were not included in the computation of diluted net (loss) per share for the six month period ended December 31, 2007 since their effect would have been antidilutive.

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|7. | Sale of Property, Plant and Equipment

On August 14, 2006, the Company entered into a contract for the sale of the land, building and contents of the Petersburg distribution facility, previously recorded as assets held for sale. On October 17, 2006, the Company completed the sale of the distribution facility for approximately $683,000 in cash. As a result of the transaction, the Company recorded a pre-tax gain of approximately $482,000, net of related costs, in the second quarter of fiscal 2007. The Company also sold other property, plant and equipment that resulted in a pre-tax gain of approximately $14,000.

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|8. | Segment Reporting

The Company operates in one segment with revenues generated in the United States and Canada as follows (in thousands):

Three Months Ended
December 31,


Six Months Ended
December 31,2007


2006


2007


2006Net SalesUnited States



$
17,309




$
16,679




$
29,225




$
35,173Canada




426





845





449





1,041$
17,735




$
17,524




$
29,674




$
36,214


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|9. | Subsequent Events

On January 28, 2008, Fred Merger Corp., the Company’s wholly-owned subsidiary, consummated the Merger with FOH Holdings. As a result, FOH Holdings became the Company’s wholly-owned subsidiary. Immediately prior to the Merger, the Company completed a one-for-two reverse stock split of its outstanding common stock. However, the per share data referred to in this Form 10-Q does not reflect the reverse stock split unless otherwise indicated. Following the closing of the Merger, the Company changed its name to Frederick’s of Hollywood Group Inc.

In connection with the Merger, the Company issued to Fursa Alternative Strategies, LLC (‘‘Fursa’’) and certain funds and accounts affiliated with, managed by, or over which Fursa or any of its affiliates exercises investment authority, including, without limitation, with respect to voting and dispositive rights, and Tokarz Investments, LLC (‘‘Tokarz Investments’’) an aggregate of 11,844,591 post-split shares of our common stock in exchange for all of FOH Holdings’ outstanding common stock.

In connection with the Merger, the Company raised $20 million of gross proceeds through (i) the issuance of an aggregate of 752,473 post-split shares of common stock upon exercise by the Company’s shareholders of non-transferable subscription rights to purchase shares of common stock (the ‘‘Rights Offering’’) and (ii) the issuance of an aggregate of 4,929,346 post-split shares of common stock not subscribed for by the Company’s shareholders in the Rights Offering that were purchased on an equal basis by Tokarz Investments and Fursa, who acted as standby purchasers (the ‘‘Standby Purchase’’). As sole consideration for their commitments in connection with the Standby Purchase, the Company issued warrants to the standby purchasers representing the right to purchase an aggregate of 596,591 post-split shares of common stock.

In connection with the Merger, the Company issued an aggregate of 3,629,325 shares of Series A 7.5% Convertible Preferred Stock to Fursa in exchange for the cancellation of a $7.5 million portion of the debt owed by FOH Holdings and its subsidiaries.

Also in connection with the Merger, the Company issued to the Executive Chairman and Chief Financial Officer of the Company an aggregate of 74,194 post-split shares of common stock

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under the Company’s 2000 Performance Equity Plan in accordance with the terms of their respective consulting and employment agreements. These shares are 100% vested. The Chief Executive Officer of FOH Holdings and certain other key employees of FOH Holdings also were issued an aggregate of 290,006 post-split shares of restricted common stock under the FOH Holdings 2003 Employee Equity Incentive Plan (which was assumed by the Company upon the consummation of the Merger) in accordance with the terms of the Merger Agreement and their respective equity incentive agreements. These shares vest 50% on December 31, 2009 and 25% on each of December 31, 2010 and 2011.

For accounting purposes, the acquisition of FOH Holdings is treated as a reverse acquisition transaction, with FOH Holdings as the acquirer and the Company as the acquired party. As a result, the Company has adopted FOH Holdings’ fiscal year end, which is the last Saturday of July. The Company’s next four fiscal quarters will end on April 26, 2008, July 26, 2008 (fiscal year end), October 25, 2008 and January 31, 2009. Because this Form 10-Q relates solely to the results of operations and financial position of the Company prior to the consummation of the Merger, this Form 10-Q only refers to the results of operations and financial position of the Company prior to the Merger and does not include the results of operations and financial position of FOH Holdings. Accordingly, the results of operations and financial position of the Company as reported herein are not an indication of the future results of the combined company.

Upon the closing of the Merger, for the purpose of refinancing and consolidating both companies existing credit facilities, the Company entered into an amended and restated senior credit facility with FOH Holdings, Frederick’s of Hollywood, Inc. (‘‘Frederick’s’’) and the subsidiaries of Frederick’s (the ‘‘Facility’’), which amends the existing revolving credit facility between FOH Holdings, Frederick’s and the subsidiaries of Frederick’s and Wells Fargo Retail Finance II, LLC (‘‘Senior Lender’’). The Facility includes the Company as a borrower, and extends the maturity date of the Facility to January 28, 2012.

The Facility is for a maximum amount of $50 million comprised of a $25 million line of credit with a $15 million sub-limit for letters of credit, as well as an additional $25 million commitment at the option of Frederick’s of Hollywood Group Inc. so long as the borrowers are in compliance with the terms of the Facility. The actual amount of credit available under the Facility will be determined using measurements based on the borrowers’ receivables, inventory and other measures. The Facility is secured by a first priority security interest in the assets of the borrowers.

Interest accrues at an agreed to reference rate, which shall be, at the borrowers’ election, either the Wells Fargo prime rate less 25 basis points or LIBOR plus 150 basis points. Interest is payable monthly, in arrears. In addition, the Facility provides for certain customary fees to be paid, which include (i) a 25 basis point fee on the amount of any increase in the Facility above $25 million, (ii) a 25 basis point fee on any unused portion of the Facility, (iii) a $2,000 monthly service fee, (iv) letter of credit fees on stand-by letters of credit and documentary letters of credit and (v) a one-time closing fee of $19,375.

The Facility contains customary representations and warranties, affirmative and negative covenants and events of default. The borrowers also agreed to maintain specified minimum availability reserves in lieu of financial covenants, fixed charge coverage and overall debt ratios.

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|ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

When used in this Form 10-Q of Frederick’s of Hollywood Group Inc. (formerly Movie Star, Inc.)(‘‘Company’’, ‘‘we’’, ‘‘us’’, ‘‘our’’) and in our future filings with the Securities and Exchange Commission, the words or phrases ‘‘will likely result,’’ ‘‘management expects’’ or ‘‘we expect,’’ ‘‘will continue,’’ ‘‘is anticipated,’’ ‘‘estimated’’ or similar expressions are intended to identify ‘‘forward-looking statements’’ within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. We have no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.

Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. These risks are included in ‘‘Item 1: Business,’’ ‘‘Item 1A: Risk Factors’’ and ‘‘Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ of our Form 10-K for the fiscal year ended June 30, 2007. In assessing forward-looking statements contained herein, readers are urged to carefully read those statements. Among the factors that could cause actual results to differ materially are: competition; business conditions and industry growth; rapidly changing consumer preferences and trends; general economic conditions; large variations in sales volume with significant customers; addition or loss of significant customers; continued compliance with government regulations; loss of key personnel; labor practices; product development; management of growth; increases of costs of operations or inability to meet efficiency or cost reduction objectives; timing of orders and deliveries of products; and foreign government regulations and risks of doing business abroad.

Presentation

This Form 10-Q has been prepared by the Company to report the Company’s financial results for the period ended prior to the merger of Fred Merger Corp., the Company’s wholly-owned subsidiary, with FOH Holdings, Inc. (‘‘FOH Holdings’’), which was consummated on January 28, 2008 (the ‘‘Merger’’), pursuant to the terms of an Agreement and Plan of Merger and Reorganization, dated as of December 18, 2006, as amended, by and among the Company, Fred Merger Corp. and FOH Holdings (‘‘Merger Agreement’’),. Because this Form 10-Q only reports the results of operations and financial position of the Company prior to the Merger and does not include the results of operations and financial position of FOH Holdings, the results of operations and financial position of the Company as reported herein are not an indication of the future results of the combined company.

Merger with FOH Holdings, Inc.

On January 28, 2008, Fred Merger Corp., our wholly-owned subsidiary, consummated the Merger with FOH Holdings. As a result, FOH Holdings became our wholly-owned subsidiary. FOH Holdings is the parent company of Frederick’s of Hollywood, Inc. Immediately prior to the Merger, we completed a one-for-two reverse stock split of our outstanding common stock. However, the per share data referred to in this Form 10-Q does not reflect the reverse stock split unless otherwise indicated. Following the closing of the Merger, we changed our name to Frederick’s of Hollywood Group Inc.

In connection with the Merger, we issued to Fursa Alternative Strategies, LLC (‘‘Fursa’’) and certain funds and accounts affiliated with, managed by, or over which Fursa or any of its affiliates exercises investment authority, including, without limitation, with respect to voting and dispositive rights, and Tokarz Investments, LLC (‘‘Tokarz Investments’’) an aggregate of 11,844,591 post-split shares of our common stock in exchange for all of FOH Holdings’ outstanding common stock.

9

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In connection with the Merger, we raised $20 million of gross proceeds through (i) the issuance of an aggregate of 752,473 post-split shares of our common stock upon exercise by the Company’s shareholders of non-transferable subscription rights to purchase shares of common stock (the ‘‘Rights Offering’’) and (ii) the issuance of an aggregate of 4,929,346 post-split shares of our common stock not subscribed for by the Company’s shareholders in the Rights Offering that were purchased on an equal basis by Tokarz Investments and Fursa, who acted as standby purchasers (the ‘‘Standby Purchase’’). As sole consideration for their commitments in connection with the Standby Purchase, we issued warrants to the standby purchasers representing the right to purchase an aggregate of 596,591 post-split shares of our common stock.

In connection with the Merger, we issued an aggregate of 3,629,325 shares of our Series A 7.5% Convertible Preferred Stock to Fursa in exchange for the cancellation of a $7.5 million portion of the debt owed by FOH Holdings and its subsidiaries.

Also in connection with the Merger, we issued to our Executive Chairman and Chief Financial Officer an aggregate of 74,194 post-split shares of common stock under our 2000 Performance Equity Plan in accordance with the terms of their respective consulting and employment agreements. These shares are 100% vested. The Chief Executive Officer of FOH Holdings and certain other key employees of FOH Holdings also were issued an aggregate of 290,006 post-split shares of restricted common stock under the FOH Holdings 2003 Employee Equity Incentive Plan (which we assumed upon the consummation of the Merger) in accordance with the terms of the Merger Agreement and their respective equity incentive agreements. These shares vest 50% on December 31, 2009 and 25% on each of December 31, 2010 and 2011.

For accounting purposes, the acquisition of FOH Holdings is treated as a reverse acquisition transaction, with FOH Holdings as the acquirer and the Company as the acquired party. As a result, the Company has adopted FOH Holdings’ fiscal year end, which is the last Saturday of July. The Company’s next four fiscal quarters will end on April 26, 2008, July 26, 2008 (fiscal year end), October 25, 2008 and January 31, 2009. Because this Form 10-Q relates solely to the results of operations and financial position of the Company prior to the consummation of the Merger, this Form 10-Q only refers to the results of operations and financial position of the Company prior to the Merger and does not include the results of operations and financial position of FOH Holdings. Accordingly, the results of operations and financial position of the Company as reported herein are not an indication of the future results of the combined company.

Overview

As of December 31, 2007, prior to the consummation of the Merger, we were engaged solely in the design, manufacture, distribution and sale of women’s intimate apparel to mass merchandisers, specialty and department stores, discount retailers, national and regional chains and direct mail catalog marketers throughout the United States and Canada. In fiscal 2007, approximately 58% of our sales were to mass merchandisers, 14% to specialty stores, 10% to department stores and 6% to discount retailers. The balance of our sales were unevenly distributed among national chain stores, regional chain stores and direct mail catalog marketers.

The intimate apparel industry is characterized by numerous small companies selling unbranded merchandise, and by several large companies that have developed widespread consumer recognition of the brand names associated with the merchandise sold by these companies. In addition, retailers to whom we sell our products have sought to expand the development and marketing of their own private-label brands and to obtain intimate apparel products directly from the same or similar sources from which we obtain our products. Consolidation within the retail industry has led to the creation of larger retailers that are able to source their own products rather than utilize companies like ours. Many of these companies have greater financial, technical and sourcing capabilities than we do.

In addition to sourcing and producing merchandise themselves, from time to time some of our retail customers eliminate specific product categories that we previously have sold to them or select competing vendors. Customers continuously select different vendors based not only on product design, the desirability of fabrics and styles, price, quality and reliability of service and delivery, but also on

10

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branding capabilities. We believe that retail customers producing products themselves and selecting vendors with branding capabilities are material trends that could adversely affect our sales in the future and, in turn, have a negative impact on our operating performance and our liquidity.

The intimate apparel business for department stores, specialty stores and regional chains is divided into four selling seasons per year. For each selling season, we create a new line of products that represents our own brand name, Cinema Etoile®. Our brand name does not have widespread consumer recognition, although it is well known by our customers. We sell our brand name products primarily during these selling seasons. We also develop specific products (private label) for our larger accounts, mass merchandisers and national chains, and make between five and eight presentations throughout the year to these accounts. We do not have long-term contracts with any of our customers and, therefore, our business is subject to unpredictable increases and decreases in sales depending upon the size and number of orders that we receive each time we present our products.

Our business is subject to seasonal variations. Consistent with what we believe is the general pattern associated with sales to the retail industry, our results of operations are somewhat more meaningful on a seasonal basis rather than on a quarterly basis. In that regard, our net sales and net earnings generally have been higher during the period from July to December (which includes our first and second fiscal quarters), during which time our customers typically increase inventory levels in anticipation of both holiday and Valentine’s day sales. However, during the years that we were able to increase sales in the second half of our fiscal year (January through June) and create a more even balance between the first and second halves of our fiscal year, we increased our overall profitability. This trend is unpredictable and is primarily dependent upon the size and number of orders that we receive each time we present our products to our larger customers.

Management considers certain key indicators when reviewing our results of operations and liquidity and capital resources. Because our results of operations are subject to seasonal variations, we review our quarterly and year to date sales revenue in conjunction with our backlog of orders to determine our total position for the year. When reviewing the sales and backlog of open orders, a material factor that we consider is the gross profit percentage. We also consider our selling, general and administrative expenses as a key indicator in evaluating our financial performance. Inventory, accounts receivable and our outstanding borrowings are the main indicators we consider when we review our liquidity and capital resources, particularly the size and age of the inventory and accounts receivable. We review all of our key indicators against the prior year and our operating projections in order to evaluate our operating performance and financial condition.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements.

Management believes that the application of accounting policies, and the estimates inherently required by the policies, are reasonable. These accounting policies and estimates are constantly re-evaluated, and adjustments are made when facts and circumstances dictate a change. Historically, management has found the application of accounting policies to be appropriate, and actual results generally do not differ materially from those determined using necessary estimates.

Our accounting policies are more fully described in Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007. Management has identified certain critical accounting policies that are described below.

Inventory – Our inventory is carried at the lower of cost or market on a first-in, first-out basis. Management writes down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions

11

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about future demand, market conditions and the age of the inventory. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Historically, management has found its write-down of inventory to be appropriate, and actual results generally do not differ materially from those determined using necessary estimates. Inventory reserves were $837,000 at December 31, 2007, $940,000 at June 30, 2007 and $1,015,000 at December 31, 2006.

Accounts Receivable/Allowance for Doubtful Accounts and Sales Discounts – Our accounts receivable is net of allowance for doubtful accounts and sales discounts. An allowance for doubtful accounts is determined through the analysis of the aging of accounts receivable at the date of the financial statements. An assessment of the accounts receivable is made based on historical trends and an evaluation of the impact of economic conditions. This amount is not significant, primarily due to the Company’s history of minimal bad debts. An allowance for sales discounts is based on discounts relating to open invoices where trade discounts have been extended to customers, costs associated with potential returns of products, as well as allowable customer markdowns and operational charge backs, net of expected recoveries. These allowances are included as a reduction to net sales and are part of the provision for allowances included in accounts receivable. The foregoing results from seasonal negotiations and historic deduction trends, net of expected recoveries and the evaluation of current market conditions. As of December 31, 2007, June 30, 2007 and December 31, 2006, accounts receivable was net of allowances of $1,068,000, $700,000 and $1,451,000, respectively. Historically, management has found its allowance for doubtful accounts and sales discounts to be appropriate, and actual results generally do not differ materially from those determined using necessary estimates. However, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. If market conditions were to worsen, management may take actions to increase customer incentive offerings, possibly resulting in an incremental allowance at the time the incentive is offered.

Deferred Tax Valuation Allowance – In assessing the need for a deferred tax valuation allowance, we consider future taxable income and ongoing prudent and feasible tax planning strategies. Since we were able to determine that we should be able to realize our deferred tax assets in the future, a deferred tax asset valuation allowance was not deemed necessary. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

Presentation

This Form 10-Q has been prepared by the Company to report the Company’s financial results for the period ended prior to the Merger, which was consummated on January 28, 2008. Because this Form 10-Q only reports the results of operations and financial position of the Company prior to the Merger and does not include the results of operations and financial position of FOH Holdings, the results of operations and financial position of the Company as reported herein are not an indication of the future results of the combined company.

12

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Results of Operations

The following table shows each specified item as a dollar amount and as a percentage of net sales in each fiscal period, and should be read in conjunction with the consolidated financial statements included elsewhere in this report (in thousands, except for percentages):

Three Months Ended
December 31,


Six Months Ended
December 31,2007


2006


2007


2006Net sales



$
17,735





100.0
%



$
17,524





100.0
%



$
29,674





100.0
%



$
36,214





100.0
%Cost of sales




11,780





66.4





11,462





65.4





20,357





68.6





24,329





67.2Gross profit




5,955





33.6





6,062





34.6





9,317





31.4





11,885





32.8Selling, general and administrative expenses




4,704





26.5





4,580





26.1





9,206





31.0





9,067





25.0Merger related fees




559





3.2





803





4.6





917





3.1





1,342





3.7Gain on sale of property, plant and equipment




—





—





(496
)




(2.8
)




—





—





(496
)




(1.4
)Income (loss) from operations




692





3.9





1,175





6.7





(806
)




(2.7
)




1,972





5.4Interest expense




197





1.1





212





1.2





309





1.0





399





1.1Income (loss) before provision for (benefit from) income taxes




495





2.8





963





5.5





(1,115
)




(3.8
)




1,573





4.3Provision for (benefit from) income taxes




198





1.1





385





2.2





(446
)




(1.5
)




629





1.7Net Income (loss)



$
297





1.7
%



$
578





3.3
%



$
(669
)




(2.3
)%



$
944





2.6
%


Percent amounts may not add due to rounding.

Net Sales

Net sales for the three and six months ended December 31, 2007 were $17,735,000 and $29,674,000 compared to $17,524,000 and $36,214,000 in the comparable periods in 2006, respectively.

Net Sales for the Three Months Ended December 31,
(in thousands except for percentages)

Customer


2007


2006


2007 vs. 2006
Increase/(Decrease)Wal-Mart



$
8,671





48.9
%



$
7,459





42.6
%



$
1,212





16.2
%Frederick’s of Hollywood




1,354





7.6
%




1,344





7.7
%




10





0.7
%All other U.S. net sales




7,284





41.1
%




7,876





44.9
%




(592
)




(7.5
)%Total U.S. net sales




17,309





97.6
%




16,679





95.2
%




630





3.8
%Canada




426





2.4
%




845





4.8
%




(419
)




(49.6
)%Total



$
17,735





100.0
%



$
17,524





100.0
%



$
211





1.2
%


The increase for the three month period was primarily due to:

| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | a $1,212,000 increase in shipments to Wal-Mart, which resulted from our receipt of orders in fiscal 2008 for different programs with later shipment schedules than the fiscal 2007 orders. This increase was partially offset by

| |   |                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | a decrease of $1,011,000 in shipments to customers other than Wal-Mart and Frederick’s of Hollywood. The decrease in shipments to these other customers was due to customers placing fewer orders with us in the current year, which resulted from certain customers eliminating the sale of specific product categories that we previously sold to them, producing some of the

13

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | products themselves, selecting competing vendors, particularly those with branding capabilities and industry consolidation, such as the May Company and Federated Department Stores merger. We have experienced similar decreases in shipments to other customers over the past few years. We believe that customers producing some products themselves and selecting vendors with branding capabilities are material trends that could adversely affect our sales in the future.

Net Sales for the Six Months Ended December 31,
(in thousands except for percentages)

Customer


2007


2006


2007 vs. 2006
(Decrease)/IncreaseWal-Mart



$
14,676





49.5
%



$
17,086





47.2
%



$
(2,410
)




(14.1
)%Frederick’s of Hollywood




1,995





6.7
%




2,059





5.7
%




(64
)




(3.1
)%All other U.S. net sales




12,554





42.3
%




16,028





44.2
%




(3,474
)




(21.7
)%Total U.S. net sales




29,225





98.5
%




35,173





97.1
%




(5,948
)




(16.9
)%Canada




449





1.5
%




1,041





2.9
%




(592
)




(56.9
)%Total



$
29,674





100.0
%



$
36,214





100.0
%



$
(6,540
)




(18.1
)%


The decrease for the six month period was primarily due to:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | a $2,410,000 decrease in shipments to Wal-Mart. $2,000,000 of the decrease was attributable to our shipment of an order in the fourth quarter of fiscal 2007 instead of the first quarter of fiscal 2008; a comparable order in the prior year had been shipped in the first quarter of fiscal 2007 instead of the fourth quarter of fiscal 2006. The remaining $410,000 decrease resulted from our receipt of orders in fiscal 2008 for different programs with later shipment schedules than the fiscal 2007 orders; and

| |   |                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | a $4,130,000 decrease in shipments to other customers, including a $592,000 reduction in shipments to Canada. The decrease was due to the same reasons for the reduction in shipments for the three month period as described above.

Backlog of Open Orders

Backlog of Open Orders as of December 31,
(in thousands except for percentages)

Customer


2007


2006


2007 vs. 2006
(Decrease)/IncreaseWal-Mart



$
15,868





59.1
%



$
15,233





60.3
%



$
635





4.2
%Frederick’s of Hollywood




1,219





4.6
%




879





3.5
%




340





38.7
%All other U.S. net sales




9,609





35.8
%




8,981





35.6
%




628





7.0
%Total U.S. net sales




26,696





99.5
%




25,093





99.4
%




1,603





6.4
%Canada




134





0.5
%




148





0.6
%




(14
)




(9.5
)%Total



$
26,830





100.0
%



$
25,241





100.0
%



$
1,589





6.3
%


Our orders are booked upon receipt. We believe that our current backlog is firm and will be primarily filled by the end of July 2008. In addition, subsequent to December 31, 2007, we received an order for approximately $2,500,000 that was not included in our backlog at December 31, 2007. In the prior year, we received a comparable order in the month of December that was included in our backlog position at December 31, 2006.

14

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Gross Profit

The gross profit percentage decreased to 33.6% and 31.4% for the three and six months ended December 31, 2007, from 34.6% and 32.8% in the same period in the prior year, respectively. The decrease in the overall gross profit percentage for the three and six month periods was due primarily to a lower initial gross profit percentage resulting from the current year’s product mix, partially offset by lower markdowns in the current year as a percentage of sales.

As a result of differences among the accounting policies of companies in the apparel industry relating to whether certain items of expense are included in cost of sales rather than as selling expenses, the reported gross profits of different companies, including our own, may not be directly comparable. For example, we record the costs of preparing merchandise for shipment, including warehousing costs and shipping and handling costs, as a selling expense, rather than a cost of sale. Therefore, our gross profit is higher than it would be if such costs were included in cost of sales.

Selling, General and Administrative Expenses

For the three months ended December 31, 2007, selling, general and administrative expenses were $4,704,000, or 26.5% of net sales as compared to $4,580,000, or 26.1% of net sales for the same period in 2006. The $124,000 increase resulted primarily from increases in:

| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | shipping and shipping related costs of $94,000, which resulted from an increase in the usage of a public warehouse and higher shipping supply purchases in the current year;

| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| | • | salary and related costs of $39,000, primarily due to a net overall increase in the head count in the current year as compared to the prior year;

| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| | • | an increase in medical insurance expense of $51,000 as a result of the higher head count and increased insurance rates; and

| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| | • | a net overall increase in other selling, general and administrative expenses.

These increases were partially offset by decreases in:

| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| | • | freight out costs of $71,000 as a result of lower shipments to certain accounts that require the prepayment of freight costs; and

| |   |                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | stock compensation costs of $159,000, which resulted primarily from the issuance of stock options to our Chief Executive Officer in October 2006 that were 75% vested on the first anniversary of the grant date (October 2007), which required us to record a higher stock compensation expense in the prior year.

For the six months ended December 31, 2007, selling, general and administrative expenses were $9,206,000, or 31.0% of net sales as compared to $9,067,000, or 25.0% of net sales for the same period in 2006. The $139,000 increase resulted primarily from increases in:

| |   |                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | salary and related costs of $146,000, primarily due to additional employees hired during the first quarter of fiscal 2007 to service the anticipated increase in business with Frederick’s of Hollywood and having a full quarter of salaries included in the fiscal 2008 first quarter as compared to a partial quarter of salaries included in the fiscal 2007 first quarter;

| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| | • | medical insurance expense of $98,000 as a result of the higher head count and increased insurance rates; and

| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | design and design related costs, primarily fabric samples, of approximately $117,000 as a result of the efforts of our design and merchandising teams to develop additional products for our sales force to present to our customers; and

| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| | • | a net overall increase in other selling, general and administrative expenses.

These increases were partially offset by decreases in:

| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| | • | freight out costs of $96,000 as a result of lower shipments to certain accounts that require the prepayment of freight costs;

15

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| |   |                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | stock compensation costs of $126,000, which resulted primarily from the issuance of stock options to our Chief Executive Officer in October 2006 that were 75% vested on the first anniversary of the grant date (October 2007), which required us to record a higher stock compensation expense in the prior year; and

| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| | • | legal costs of $95,000 as a result of a decrease in general corporate matters requiring services of outside legal counsel.

In connection with our merger with FOH Holdings, we incurred merger-related fees of $559,000 and $917,000 for the three and six months ended December 31, 2007, respectively, as compared to $803,000 and $1,342,000 for the same periods in 2006. Included in merger-related fees are costs such as legal and accounting fees and financial advisory services. These fees are being expensed as a result of the merger being treated as a reverse acquisition. We also incurred an additional $67,000 and $161,000 in related fees, which have been recorded as deferred issuance costs for the three and six months ended December 31, 2007, as these costs are directly related to the $20,000,000 rights offering.

We recorded a gain on the sale of property, plant and equipment in the quarter ended December 31, 2006 of $496,000, which resulted primarily from the sale of our closed distribution facility in Petersburg, Pennsylvania. On October 17, 2006, we completed the sale for approximately $683,000 in cash. As a result of that transaction, we recorded a gain of approximately $482,000, net of related costs.

Income (Loss) from Operations

For the three months ended December 31, 2007, we recorded income from operations of $692,000 compared to income from operations of $1,175,000 for the same period in the prior year. The decrease was primarily due to lower gross profit dollars of $107,000, and higher selling, general and administrative expenses of $124,000 as well as the gain on the sale of property, plant and equipment in the prior year of $496,000, partially offset by lower merger-related fees in the current year of $244,000.

For the six months ended December 31, 2007, we recorded a loss from operations of $806,000 compared to income from operations of $1,972,000 for the same period in the prior year. The decrease was primarily due to lower gross profit dollars of $2,568,000, which resulted from lower sales and gross profit margins and higher selling, general and administrative expenses of $139,000 as well as the gain on the sale of property, plant and equipment in the prior year of $496,000, partially offset by lower merger-related fees in the current year of $425,000.

Interest Income/Expense

Net interest expense for the three and six months ended December 31, 2007 decreased to $197,000 and $309,000 as compared to $212,000 and $399,000 in the comparable periods in 2006, respectively. The decrease for the three month period was due to lower interest rates, partially offset by higher borrowing levels. The decrease for the six month period was due to lower interest rates and overall lower borrowing levels.

Income Tax Provision/Benefit

For the three months ended December 31, 2007, we recorded an income tax provision of $198,000 as compared to an income tax provision of $385,000 for the same period in the prior year. We utilized an estimated income tax rate of 40% in both periods.

For the six months ended December 31, 2007, we recorded an income tax benefit of $446,000 as compared to an income tax provision of $629,000 for the same period in the prior year. Since we determined that it is more likely than not that we will be able to utilize our net operating loss carry forwards in the future, we recorded a tax benefit for the six months ended December 31, 2007. We utilized an estimated income tax rate of 40% in both periods.

16

---



Net Income/(Loss)

We recorded net income of $297,000 for the three months ended December 31, 2007, compared to net income of $578,000 for the same period in the prior year. The decrease was primarily due to lower gross profit dollars of $107,000, higher selling, general and administrative expenses of $124,000 and the gain on the sale of property, plant and equipment in the prior year of $496,000. These negative factors were partially offset by lower merger-related fees of $244,000 and lower interest expense of $15,000, as well as a lower income tax expense in the current year of $187,000.

We recorded a net loss of $669,000 for the six months ended December 31, 2007, compared to net income of $944,000 for the same period in the prior year. The decrease was primarily due to lower gross profit dollars of $2,568,000, which resulted from lower sales and gross profit margins, higher selling, general and administrative expenses of $139,000 and the gain on the sale of property, plant and equipment in the prior year of $496,000. These negative factors were partially offset by lower merger-related fees of $425,000 and interest costs of $90,000, as well as an income tax benefit in the current year of $446,000 as compared to a tax provision in the prior year of $629,000.

Liquidity and Capital Resources

Cash Used in Operations

Net cash used in operating activities for the six months ended December 31, 2007 was $6,665,000, resulting primarily from:

| |   |                                                                   
| | - | ------------------------------------------------------------------
| | • | a net loss of $669,000 for the six months ended December 31, 2007;

| |   |                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | an increase in accounts receivable of $2,109,000, which was due to higher sales during the last two months (November and December) of the quarter ended December 31, 2007 as compared to the last two months (May and June) of the fiscal year ended June 30, 2007;

| |   |                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | an increase in inventory of $3,913,000, which was primarily related to higher finished goods inventory of $3,269,000. The increase in finished goods was due to normal inventory fluctuations to fulfill order requirements subsequent to December 31, 2007; and

| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | a non-cash increase in the deferred tax asset of $462,000, primarily as a result of the income tax benefit that we recorded for the six months ended December 31, 2007.

These decreases in cash flow were partially offset by non-cash expenses of $202,000 for depreciation and amortization and $361,000 for the provision for sales allowances and doubtful accounts.

Cash Used in Investing Activities

Net cash used in investing activities for the six months ended December 31, 2007 consisted of $371,000 for purchases of property, plant and equipment.

Cash Provided by Financing Activities

Net cash provided by financing activities for the six months ended December 31, 2007 was $7,196,000, resulting primarily from net proceeds of short-term borrowings of $7,202,000 and the proceeds from the exercise of warrants of $22,000, offset by repayments of capital lease obligations totaling $28,000.

17

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Contractual Obligations and Commercial Commitments

To facilitate an understanding of our contractual obligations and commercial commitments, the following data is provided (in thousands) as of December 31, 2007:

Payments Due by PeriodContractual Obligations


Total


Within
1 Year


2-3 Years


4-5 Years


After 5
YearsNote Payable(1)



$
11,328




$
11,328




$
—




$
—




$
—Note Payable Interest(2)




736





736





—





—





—Capital Lease Obligation




86





61





25





—





—Operating Leases




4,267





1,383





2,814





70





—Employment Contracts




2,468





1,220





1,108





140





—Consulting Agreement




233





233





—





—





—Long-term Liability




80





18





42





20





—Total Contractual Obligations



$
19,198




$
14,979




$
3,989




$
230




$
—





Amount of Commitment Expiration Per PeriodOther Commercial Commitments


Total
Amounts
Committed


Within
1 Year


2-3 Years


4-5 Years


After
5 YearsLetters of Credit



$
4,940




$
4,940




$
—




$
—




$
—Total Commercial Commitments



$
4,940




$
4,940




$
—




$
—




$
—


|
|
|
|

|(1) | Note Payable is a less than one-year obligation because the financial institution may demand payment at any time. Interest on outstanding borrowings is payable at a variable rate per annum, equal to the prime rate less 0.75% (our current borrowing rate at December 31, 2007 was 6.5%).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Note Payable Interest assumes that the principal amount outstanding on our line of credit is paid in full on December 31, 2008, that the principal amount to be repaid on that date will be $11,328,000 and that the interest rate will be 6.5% (our current borrowing rate at December 31, 2007).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have no obligations that have a provision for increased or accelerated payments, except in respect of defaults.

Note Payable

Effective June 30, 2006, we obtained a revolving line of credit of up to $30,000,000. This revolving line of credit and letter of credit facility was terminated in January 2008 in connection with our merger with FOH Holdings. A new revolving line of credit and letter of credit facility became effective upon the consummation of the Merger and is discussed below in ‘‘Future Financing Requirements.’’ Direct borrowings under this line bore interest at the J.P. Morgan Chase Bank prime rate less .75 percent per annum. Availability under the line of credit was subject to our compliance with certain agreed upon financial formulas. We were in compliance with our requirements under this facility at December 31, 2007. This line of credit was secured by substantially all of our assets.

Future Financing Requirements

For the six months ended December 31, 2007, our working capital decreased by $1,682,000 to $7,908,000, primarily due to our loss from operations.

Upon the closing of the merger on January 28, 2008, for the purpose of refinancing and consolidating our existing credit facilities, we entered into an amended and restated senior credit facility with FOH Holdings, Frederick’s of Hollywood, Inc. (‘‘Frederick’s’’) and the subsidiaries of Frederick’s (the ‘‘Facility’’), which amends the existing revolving credit facility between FOH Holdings, Frederick’s and the subsidiaries of Frederick’s and Wells Fargo Retail Finance II, LLC (‘‘Senior Lender’’). The Facility includes the Company as a borrower, and extends the maturity date of the Facility to January 28, 2012.

18

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The Facility is for a maximum amount of $50 million comprised of a $25 million line of credit with a $15 million sub-limit for letters of credit, as well as an additional $25 million commitment at the option of Frederick’s of Hollywood Group Inc. so long as the borrowers are in compliance with the terms of the Facility. The actual amount of credit available under the Facility will be determined using measurements based on the borrowers’ receivables, inventory and other measures. The Facility is secured by a first priority security interest in the assets of the borrowers.

Interest accrues at an agreed to reference rate, which shall be, at the borrowers’ election, either the Wells Fargo prime rate less 25 basis points or LIBOR plus 150 basis points. Interest is payable monthly, in arrears. In addition, the Facility provides for certain customary fees to be paid, which include (i) a 25 basis point fee on the amount of any increase in the Facility above $25 million, (ii) a 25 basis point fee on any unused portion of the Facility, (iii) a $2,000 monthly service fee, (iv) letter of credit fees on stand-by letters of credit and documentary letters of credit and (v) a one-time closing fee of $19,375.

The Facility contains customary representations and warranties, affirmative and negative covenants and events of default. The borrowers also agreed to maintain specified minimum availability reserves in lieu of financial covenants, fixed charge coverage and overall debt ratios.

We believe that the available borrowing under the Facility, along with anticipated operating cash flows, will be sufficient to cover our working capital requirements for the next twelve months.

We anticipate that the capital expenditures for the Company (not including FOH Holdings) for fiscal 2008 will be less than $1,000,000.

Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.

Effect of New Accounting Standards

In December 2007, the FASB issued SFAS 160 ‘‘Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51’’ (‘‘SFAS No. 160’’). SFAS No. 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company does not have any non-controlling interests in subsidiaries and believes that SFAS No. 160 will not have a material impact on its financial statements.

In December 2007, the FASB issued SFAS 141 (Revised 2007) ‘‘Business Combinations’’ (‘‘SFAS No. 141R’’). SFAS No. 141R establishes principles and requirements for the reporting entity in a business combination, including recognition and measurement in the financial statements of the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. SFAS No. 141R also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and interim periods within those fiscal years.

Inflation

We do not believe that our operating results have been materially affected by inflation during the preceding three years. There can be no assurance, however, that our operating results will not be affected by inflation in the future.

19

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Seasonality

We manufacture a wide variety of intimate apparel in many different styles and sizes and for use in all seasons and climates in the United States. Because of our product mix, we are subject to seasonal variations in sales. Historically, more than 50% of our sales have been made in the first six months of our fiscal year (i.e., the second half of the calendar year).

Imports

Transactions with our foreign manufacturers and suppliers are subject to the risks of doing business outside of the United States. Our import and offshore operations are subject to constraints imposed by agreements between the United States and the foreign countries in which we do business. These agreements often impose quotas on the amount and type of goods that can be imported into the United States from these countries. Such agreements also allow the United States to impose, at any time, restraints on the importation of categories of merchandise that, under the terms of the agreements, are not subject to specified limits. Our imported products are also subject to United States customs duties and, in the ordinary course of business, we are from time to time subject to claims by the United States Customs Service for duties and other charges. The United States and other countries in which our products are manufactured may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adversely adjust presently prevailing quotas, duty or tariff levels, which could adversely affect our operations and our ability to continue to import products at current or increased levels. We cannot predict the likelihood or frequency of any such events occurring.

20

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to changes in the J.P. Morgan Chase Bank prime rate based on the Federal Reserve actions and general market interest fluctuations. We believe that moderate interest rate increases or decreases will not have a material impact on our results of operations, or financial position, in the foreseeable future. For the six months ended December 31, 2007, borrowings peaked during the period at $12,013,000 and the average daily amount of borrowings was $8,485,000.

ITEM 4.    CONTROLS AND PROCEDURES

An evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2007 was made under the supervision and with the participation of our management, including the principal executive officer and principal financial officer. Based on that evaluation, they concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding disclosure. During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

21

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PART II    Other Information

Item 1A — Risk Factors.

There are no material changes from the risk factors set forth in Item 1A ‘‘Risk Factors’’ of our Annual Report on Form 10-K for the fiscal year ended June 30, 2007. Please refer to that section for disclosures regarding the risks and uncertainties in our business.

Item 4.    Submission of Matters to a Vote of Security Holders

On January 23, 2008, we held our Special Meeting in Lieu of the Annual Meeting of Shareholders in New York City.

The shareholders considered approving the issuance of 39,370,436 shares of common stock pursuant to the Agreement and Plan of Merger and Reorganization as the same may be amended from time to time, among the Company, Fred Merger Corp. and FOH Holdings and the related transactions. The results of the vote were as follows:

Representing the affirmative vote of the holders of a majority of the outstanding shares of common stock on November 27, 2007 (the ‘‘Record Date’’):

Votes For


Votes Against or
Withheld


Abstentions & Broker
Non-votes12,111,438


201,380


23,373


Representing the affirmative vote of the holders of a majority of the 12,902,631 shares of common stock held by the Company’s shareholders other than TTG Apparel, LLC and its affiliates and associates on the Record Date. The results of the vote were as follows:

Votes For


Votes Against or
Withheld


Abstentions & Broker
Non-votes8,578,794


201,380


23,273


The shareholders also considered approving an amendment to the Certificate of Incorporation of the Company to increase the number of shares of common stock available for issuance from 30,000,000 to 200,000,000 shares. The results of the vote were as follows:

Representing the affirmative vote of the holders of a majority of the outstanding shares of common stock on the Record Date:

Votes For


Votes Against or
Withheld


Abstentions & Broker
Non-votes14,600,806


345,138


51,559


Representing the affirmative vote of the holders of a majority of the 12,902,631 shares of common stock held by the Company’s shareholders other than TTG Apparel, LLC and its affiliates and associates on the Record Date:

Votes For


Votes Against or
Withheld


Abstentions & Broker
Non-votes11,068,162


345,138


51,559


22

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The shareholders also considered approving an amendment to the Certificate of Incorporation of the Company to change its name to Frederick’s of Hollywood Group Inc. The results of the vote were as follows:

Representing the affirmative vote of the holders of a majority of the outstanding shares of common stock on the Record Date:

Votes For


Votes Against or
Withheld


Abstentions & Broker
Non-votes14,740,254


209,173


48,077


Representing the affirmative vote of the holders of a majority of the 12,902,631 shares of common stock held by the Company’s shareholders other than TTG Apparel, LLC and its affiliates and associates on the Record Date:

Votes For


Votes Against or
Withheld


Abstentions & Broker
Non-votes11,207,610


209,173


48,077


The shareholders also considered approving an amendment to the Certificate of Incorporation of the Company to authorize the issuance of up to 10,000,000 shares of preferred stock and to establish the terms, rights, preference and privileges of the Series A Preferred Stock. The results of the vote were as follows:

Representing the affirmative vote of the holders of a majority of the outstanding shares of common stock on the Record Date:

Votes For


Votes Against or
Withheld


Abstentions & Broker
Non-votes11,471,069


844,662


20,360


Representing the affirmative vote of the holders of a majority of the 12,902,631 shares of common stock held by the Company’s shareholders other than TTG Apparel, LLC and its affiliates and associates on the Record Date:

Votes For


Votes Against or
Withheld


Abstentions & Broker
Non-votes7,938,425


844,662


20,360


The shareholders also considered to authorize the board of directors, in its discretion, to amend the Certificate of Incorporation of the Company to effect a reverse stock split immediately prior to the closing of the Merger within a range to be determined by the board of directors from 9 for 10 to 1 for 2. The results of the vote were as follows:

Votes For


Votes Against or
Withheld


Abstentions & Broker
Non-votes14,365,187


584,530


47,782


The shareholders also considered approving the Amended and Restated 2000 Performance Equity Plan to increase the number of shares available for issuance from 750,000 shares to 4,000,000 shares. The results of the vote were as follows:

Votes For


Votes Against or
Withheld


Abstentions & Broker
Non-votes9,073,008


3,029,665


233,418


23

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The shareholders also considered electing the following directors, subject to the consummation of the merger. The results of the vote were as follows:

Nominee


Votes For


Authority WithheldPeter Cole




14,625,429





372,075Melvyn Knigin




14,435,285





562,219Thomas Rende




14,619,950





377,554John L. Eisel




14,119,129





878,375Michael A. Salberg




14,118,794





878,710Joel Simon




14,654,094





343,410William F. Harley




14,744,429





253,075Linda LoRe




14,742,429





255,075Rose Peabody Lynch




14,744,429





253,075Thomas J. Lynch




14,744,429





253,075Milton J. Walters




14,744,429





253,075


The shareholders also considered the authorization to the adjournment of the special meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies in the event there are insufficient votes at the time of the special meeting to adopt any of the foregoing proposals. The results of the vote were as follows:

Votes For


Votes Against or
Withheld


Abstentions & Broker
Non-votes13,649,965


1,030,394


317,143


Item 6 — (a) Exhibits

31
.1



Certification by Principal Executive Officer.31
.2



Certification by Chief Financial Officer and Principal Accounting Officer.32




Section 1350 Certification.


24

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SIGNATURES

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

FREDERICK’S OF HOLLYWOOD GROUP INC.
(formerly MOVIE STAR, INC.)Date: February 14, 2008


By:


/s/ Peter ColePETER COLE
Principal Executive OfficerDate: February 14, 2008


By:


/s/ Thomas RendeTHOMAS RENDE
Chief Financial Officer and
Principal Accounting Officer


25

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