**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC  20549**




**FORM 10-Q**




**x** QUARTERLY
          REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
          OF 1934




**For
      the quarterly period ended June 30, 2007**




**OR**




oTRANSITION
          REPORT
          PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
          1934




**For
      the transition period from
            to            .**




**COMMISSION
      FILE NUMBER: 001-33142**




**Physicians
      Formula Holdings, Inc.**




(Exact
      name of registrant as specified in its charter)




**DELAWARE**
            
            **20-0340099**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                No.)**1055
                West 8th Street**
            
            **91702****Azusa,
                California**
            
            (Zip
                Code)(Address
                of principal executive offices)







**(626)
      334-3395**




(Registrant’s
      telephone number, including area code)




**N/A**




(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 o




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




Large
                accelerated filer o
            Accelerated
                filer o
            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 o  No x




The
      number of shares outstanding of the registrant’s common stock, par value $.01
      per share, as of August 10, 2007, was 13,927,055.












**TABLE
      OF CONTENTS**




PART
                I. FINANCIAL INFORMATION
            
            1Item
                1.
            
            Financial
                Statements
            
            1Item
                2.
            
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            
            10Item
                3.
            
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            
            17Item
                4.
            
            Controls
                and Procedures
            
            17PART
                II. OTHER INFORMATION
            
            18Item
                1.
            
            Legal
                Proceedings
            
            18Item
                1A.
            
            Risk
                Factors
            
            18Item 4.
            
            Submission
              of Matters to a Vote of Security
              Holders
            
            18Item
                6.
            
            Exhibits
            
            18










**PART I.**




**FINANCIAL
      INFORMATION**




**ITEM
        1.FINANCIAL
        STATEMENTS**




**PHYSICIANS
      FORMULA HOLDINGS, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(unaudited)**


**(dollars
      in thousands, except share data)**




**June
                    30,**
                
                
                **December
                    31,****2007**
                
                
                **2006****ASSETS**CURRENT
                    ASSETS:Cash
                    and cash equivalents
                
                $
                81
                
                
                $
                26Accounts
                    receivable, net of allowance for bad debts of $370 and
                    $348
                
                
                16,610
                
                
                
                26,654Inventories
                
                
                27,470
                
                
                
                23,472Prepaid
                    expenses and other current assets
                
                
                1,285
                
                
                
                1,775Income
                    tax receivables
                
                
                1,567
                
                
                
                -Deferred
                    income taxes—net
                
                
                4,730
                
                
                
                5,139Total
                    current assets
                
                
                51,743
                
                
                
                57,066PROPERTY
                    AND EQUIPMENT—Net
                
                
                2,726
                
                
                
                2,506OTHER
                    ASSETS—Net
                
                
                1,177
                
                
                
                968INTANGIBLE
                    ASSETS—Net
                
                
                55,429
                
                
                
                56,311GOODWILL
                
                
                17,463
                
                
                
                17,463TOTAL
                
                $
                128,538
                
                
                $
                134,314**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**CURRENT
                    LIABILITIES:Accounts
                    payable
                
                $
                10,009
                
                
                $
                12,670Accrued
                    expenses
                
                
                1,633
                
                
                
                1,915Trade
                    allowances
                
                
                4,873
                
                
                
                3,479Sales
                    returns reserve
                
                
                6,942
                
                
                
                9,440Income
                    taxes payable
                
                
                -
                
                
                
                378Line
                    of credit borrowings
                
                
                2,944
                
                
                
                7,522Current
                    portion of long-term debt
                
                
                2,438
                
                
                
                2,063Total
                    current liabilities
                
                
                28,839
                
                
                
                37,467DEFERRED
                    COMPENSATION
                
                
                811
                
                
                
                721DEFERRED
                    INCOME TAXES-Net
                
                
                20,725
                
                
                
                21,617LONG-TERM
                    DEBT
                
                
                11,812
                
                
                
                12,937COMMITMENTS
                    AND CONTINGENCIESSTOCKHOLDERS'
                    EQUITY:Series A
                    preferred stock, $.01 par value—10,000,000 shares authorized, 0 and
                    0 shares issued and outstanding
                
                
                -
                
                
                
                -Common
                    stock, $.01 par value—50,000,000 shares authorized, 13,927,055 and
                    13,843,056 shares issued and outstanding
                
                
                139
                
                
                
                138Additional
                    paid-in capital
                
                
                58,046
                
                
                
                57,047Retained
                    earnings
                
                
                8,166
                
                
                
                4,387Total
                    stockholders' equity
                
                
                66,351
                
                
                
                61,572TOTAL
                
                $
                128,538
                
                
                $
                134,314




See
            notes
            to condensed consolidated financial
            statements.
 -1-


**PHYSICIANS
      FORMULA HOLDINGS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(unaudited)**


**(dollars
      in thousands, except per share data)**




**Three
                      Months Ended June 30,**
                  
                  
                  **Six
                      Months Ended June 30,****2007**
                  
                  
                  **2006**
                  
                  
                  **2007**
                  
                  
                  **2006**NET
                      SALES
                  
                  $
                  22,102
                  
                  
                  $
                  23,083
                  
                  
                  $
                  57,825
                  
                  
                  $
                  50,772COST
                      OF SALES
                  
                  
                  9,920
                  
                  
                  
                  9,341
                  
                  
                  
                  25,023
                  
                  
                  
                  21,379GROSS
                      PROFIT
                  
                  
                  12,182
                  
                  
                  
                  13,742
                  
                  
                  
                  32,802
                  
                  
                  
                  29,393SELLING,
                      GENERAL AND ADMINISTRATIVE EXPENSES
                  
                  
                  12,458
                  
                  
                  
                  9,331
                  
                  
                  
                  25,567
                  
                  
                  
                  19,282(LOSS)
                      INCOME FROM OPERATIONS
                  
                  
                  (276
                  )
                  
                  
                  4,411
                  
                  
                  
                  7,235
                  
                  
                  
                  10,111INTEREST
                      EXPENSE
                  
                  
                  312
                  
                  
                  
                  1,742
                  
                  
                  
                  716
                  
                  
                  
                  3,512OTHER
                      (INCOME) EXPENSE
                  
                  
                  (49
                  )
                  
                  
                  20
                  
                  
                  
                  (54
                  )
                  
                  
                  (1
                  )(LOSS)
                      INCOME BEFORE INCOME TAXES
                  
                  
                  (539
                  )
                  
                  
                  2,649
                  
                  
                  
                  6,573
                  
                  
                  
                  6,600(BENEFIT)
                      PROVISION FOR INCOME TAXES
                  
                  
                  (16
                  )
                  
                  
                  1,023
                  
                  
                  
                  2,794
                  
                  
                  
                  2,559NET
                      (LOSS) INCOME
                  
                  $
                  (523
                  )
                  
                  $
                  1,626
                  
                  
                  $
                  3,779
                  
                  
                  $
                  4,041NET
                      (LOSS) INCOME PER COMMON SHARE:Basic
                  
                  $
                  (0.04
                  )
                  
                  $
                  0.16
                  
                  
                  $
                  0.27
                  
                  
                  $
                  0.39Diluted
                  
                  $
                  (0.04
                  )
                  
                  $
                  0.14
                  
                  
                  $
                  0.26
                  
                  
                  $
                  0.35WEIGHTED-AVERAGE
                      COMMON SHARES OUTSTANDING:Basic
                  
                  
                  13,927,055
                  
                  
                  
                  10,421,916
                  
                  
                  
                  13,896,890
                  
                  
                  
                  10,421,916Diluted
                  
                  
                  13,927,055
                  
                  
                  
                  11,607,824
                  
                  
                  
                  14,549,682
                  
                  
                  
                  11,604,836


See
            notes
            to condensed consolidated financial
            statements.
 -2-


**PHYSICIANS
      FORMULA HOLDINGS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(unaudited)**


**(dollars
      in thousands)**




**Six
                              Months Ended June 30,****2007**
                          
                          
                          **2006****CASH
                              FLOWS FROM OPERATING ACTIVITIES:**Net
                              income
                          
                          $
                          3,779
                          
                          
                          $
                          4,041Adjustments
                              to reconcile net income to net cash provided by operating
                              activities:Depreciation
                              and amortization
                          
                          
                          1,364
                          
                          
                          
                          1,259Deferred
                              income taxes
                          
                          
                          (482
                          )
                          
                          
                          921Provision
                              for bad debts
                          
                          
                          36
                          
                          
                          
                          34Amortization
                              of debt issuance costs
                          
                          
                          19
                          
                          
                          
                          100Accrued
                              payment-in-kind interest
                          
                          
                          -
                          
                          
                          
                          77Recognition
                              of stock-based compensation
                          
                          
                          992
                          
                          
                          
                          -Changes
                              in operating assets and liabilities:Accounts
                              receivable
                          
                          
                          10,009
                          
                          
                          
                          3,729Inventories
                          
                          
                          (3,998
                          )
                          
                          
                          389Prepaid
                              expenses and other current assets
                          
                          
                          490
                          
                          
                          
                          388Other
                              assets
                          
                          
                          (93
                          )
                          
                          
                          -Accounts
                              payable
                          
                          
                          (2,684
                          )
                          
                          
                          (1,102
                          )Accrued
                              expenses, trade allowances and sales returns reserve
                          
                          
                          (1,388
                          )
                          
                          
                          (2,085
                          )Income
                              taxes payable/receivable
                          
                          
                          (1,945
                          )
                          
                          
                          (2,860
                          )Net
                              cash provided by operating activities
                          
                          
                          6,099
                          
                          
                          
                          4,891**CASH
                              FLOWS FROM INVESTING ACTIVITIES:**Purchase
                              of property and equipment
                          
                          
                          (679
                          )
                          
                          
                          (217
                          )Net
                              cash used in investing activities
                          
                          
                          (679
                          )
                          
                          
                          (217
                          )**CASH
                              FLOWS FROM FINANCING ACTIVITIES:**Paydowns
                              of term loans
                          
                          
                          (750
                          )
                          
                          
                          (2,088
                          )Net
                              paydowns under line of credit
                          
                          
                          (4,578
                          )
                          
                          
                          (3,991
                          )Debt
                              issuance costs
                          
                          
                          (45
                          )
                          
                          
                          (172
                          )Bank
                              overdraft
                          
                          
                          -
                          
                          
                          
                          1,585Exercise
                              of stock options
                          
                          
                          8
                          
                          
                          
                          37Cash
                              payment of common stock dividend
                          
                          
                          -
                          
                          
                          
                          (46
                          )Net
                              cash used in financing activities
                          
                          
                          (5,365
                          )
                          
                          
                          (4,675
                          )NET
                              INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                          
                          
                          55
                          
                          
                          
                          (1
                          )CASH
                              AND CASH EQUIVALENTS—Beginning of period
                          
                          
                          26
                          
                          
                          
                          20CASH
                              AND CASH EQUIVALENTS—End of period
                          
                          $
                          81
                          
                          
                          $
                          19SUPPLEMENTAL
                              DISCLOSURE OF CASH FLOW INFORMATION—Cash paid during the period
                              for:Interest
                          
                          $
                          716
                          
                          
                          $
                          2,977Income
                              taxes
                          
                          $
                          5,221
                          
                          
                          $
                          4,499SUPPLEMENTAL
                              DISCLOSURE OF NON-CASH INVESTING ACTIVITIES - The Company
                              had accounts
                              payable of $23 outstanding as of June 30, 2007, relating
                              to purchases of
                              property and equipment.




See
            notes
            to condensed consolidated financial
            statements.
 -3-


**PHYSICIANS
      FORMULA HOLDINGS, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




**1. 
        ORGANIZATION AND BASIS OF PRESENTATION**




The
      accompanying unaudited condensed consolidated financial statements include
      the
      accounts of Physicians Formula Holdings, Inc. (the ‘‘Company’’), a Delaware
      corporation, and its wholly owned subsidiary, Physicians Formula, Inc.
      (‘‘Physicians’’), a New York corporation, and its wholly owned subsidiaries,
      Physicians Formula Cosmetics, Inc., a Delaware Corporation, and
      Physicians Formula DRTV, LLC, a Delaware limited liability company.




The
      Company develops, markets, manufactures and distributes innovative,
      premium-priced products for the mass market channel. The Company’s products
      include face powders, bronzers, concealers, blushes, foundations, eye shadows,
      eyeliners, brow makeup and mascaras. The Company sells its products to mass
      market retailers such as Wal-Mart, Target, CVS, Walgreens and
      Albertsons.




The
      accompanying condensed consolidated balance sheet as of June 30, 2007, the
      condensed consolidated statements of operations for the three and six months
      ended June 30, 2007 and 2006 and the condensed consolidated statements of cash
      flows for the six months ended June 30, 2007 and 2006 are unaudited. These
      unaudited condensed interim consolidated financial statements have been prepared
      in accordance with U.S. generally accepted accounting principles for interim
      financial information and Article 10 of Regulation S-X. In the opinion of
      the Company’s management, the unaudited condensed interim consolidated financial
      statements include all adjustments of a normal recurring nature necessary for
      the fair presentation of the Company’s financial position as of June 30, 2007,
      its results of operations for the three and six months ended June 30, 2007
      and
      2006, and its cash flows for the six months ended June 30, 2007 and 2006. The
      results for the interim periods are not necessarily indicative of the results
      to
      be expected for any future period or for the fiscal year ending
      December 31, 2007. The condensed consolidated balance sheet as of
      December 31, 2006 has been derived from the audited consolidated balance
      sheet as of that date.




These
      condensed interim consolidated financial statements should be read in
      conjunction with the Company’s audited financial statements and notes thereto
      included in the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2006.




***Use
      of Estimates—***The preparation of financial statements in conformity
      with accounting principles generally accepted in the United States of America
      requires management to make estimates and assumptions that affect the amounts
      reported in the condensed consolidated financial statements and accompanying
      notes. Actual results could differ from those estimates.




**2. 
          NEW ACCOUNTING STANDARDS**
  In
            June
            2006, the Financial Accounting Standards Board (‘‘FASB’’) issued FASB
            Interpretation No. (“FIN”) 48, *Accounting for Uncertainty in Income
            Taxes*. FIN 48 prescribes a more likely than not threshold for financial
            statement recognition and measurement of a tax position taken or expected
            to be
            taken in a tax return. FIN 48 also provides guidance on derecognition
            of income
            tax assets and liabilities, accounting for interest and penalties associated
            with tax positions, accounting for income taxes in interim periods and
            income
            tax disclosures. The Company adopted FIN 48 on January 1, 2007, and did not
            record any cumulative effect adjustment to retained earnings as a result
            of
            adopting FIN 48.  Interest and penalties, if any, related to unrecognized
            tax benefits are recorded in income tax expense. Total unrecognized tax
            benefits
            and interest and penalties were not significant at January 1, 2007. The
            Company
            is subject to U.S. Federal income tax examinations for the tax years
            2003
            through 2006, and is subject to state and local income tax examinations
            for the
            tax years 2002 through 2006.
  3. 
        NET INCOME (LOSS) PER SHARE
  Basic
        net
        income (loss) per common share is computed as net income (loss) divided by
        the
        weighted-average number of common shares outstanding during the period. Diluted
        net income (loss) per share reflects the potential dilution that could occur
        from the exercise of outstanding stock options and is computed by dividing
        net
        income (loss) by the weighted-average number of common shares outstanding
        for
        the period, plus the dilutive effect of outstanding stock options, calculated
        using the treasury stock method. The following table summarizes the potential
        dilutive effect of outstanding stock options, calculated using the treasury
        stock method:
  **Three
                    Months Ended June 30,**
                
                
                **Six
                    Months Ended June 30,****2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006**Weighted-average
                    number of common shares—basic
                
                
                13,927,055
                
                
                
                10,421,916
                
                
                
                13,896,890
                
                
                
                10,421,916Effect
                    of dilutive employee stock options
                
                
                -
                
                
                
                1,185,908
                
                
                
                652,792
                
                
                
                1,182,920Weighted-average
                    number of common shares—diluted
                
                
                13,927,055
                
                
                
                11,607,824
                
                
                
                14,549,682
                
                
                
                11,604,836
  Stock
        options for the purchase of 1,122,695 shares of common stock were excluded
        from
        the above calculation during the three months ended June 30, 2007 and stock
        options for the purchase of 300,000 shares of common stock were excluded
        from
        the above calculation during the six months ended June 30, 2007, as the effect
        of those options was anti-dilutive.  There were no anti-dilutive
        options during the three months and six months ended June 30,
        2006.




-4-


**4. 
          INVENTORIES**




Inventories
      consist of the following (dollars in thousands):




**June
                  30,**
              
              
              **December
                  31,****2007**
              
              
              **2006**Raw
                  materials and components
              
              $
              12,877
              
              
              $
              11,955Finished
                  goods
              
              
              14,593
              
              
              
              11,517Total
              
              $
              27,470
              
              
              $
              23,472




**5. 
        INTANGIBLE ASSETS**




Intangible
      assets consist of the following as of June 30, 2007 (dollars in
      thousands):




**Gross
                  Carrying Amount**
              
              
              **Accumulated
                  Amortization**
              
              
              **Total**Trade
                  names
              
              $
              29,500
              
              
              $
              -
              
              
              $
              29,500Patents
              
              
              8,699
              
              
              
              2,127
              
              
              
              6,572Distributor
                  relationships
              
              
              23,701
              
              
              
              4,344
              
              
              
              19,357Total
              
              $
              61,900
              
              
              $
              6,471
              
              
              $
              55,429




Intangible
      assets
      consist of the following as of December 31, 2006 (dollars in
      thousands):




**Gross
                  Carrying Amount**
              
              
              **Accumulated
                  Amortization**
              
              
              **Total**Trade
                  names
              
              $
              29,500
              
              
              $
              -
              
              
              $
              29,500Patents
              
              
              8,699
              
              
              
              1,836
              
              
              
              6,863Distributor
                  relationships
              
              
              23,701
              
              
              
              3,753
              
              
              
              19,948Total
              
              $
              61,900
              
              
              $
              5,589
              
              
              $
              56,311




Amortization
      expense was $441,000 for both of the three month periods ended June 30, 2007
      and
      2006 and $882,000 for both of the six month periods ended June 30, 2007 and
      2006. Amortization of intangible assets for the remainder of 2007 will be
      approximately $882,000 and for the next five years will be approximately
      $1,765,000 per year.




-5-


**6. 
        STOCKHOLDERS’ EQUITY**




***Secondary Public
        Offering***




On
      April 25, 2007, the Company completed a secondary public offering in
      which certain stockholders sold 5,049,650 shares of the Company’s common stock,
      which included 658,650 shares of common stock sold pursuant to the underwriters’
over-allotment option. The underwriters exercised this over-allotment option
      on
      April 20, 2007 and the secondary public offering closed on April 25, 2007.
      The
      Company did not receive any proceeds from the sale of the shares but incurred
      approximately $725,000 of the expenses of the offering.




***Initial Public
        Offering***




On
      November 14, 2006, the Company completed an initial public offering of
      shares of the Company’s common stock. In the initial public offering, the
      Company sold 3,125,000 shares of common stock and the selling stockholders
      sold
      5,500,000 shares of common stock, which included 1,125,000 shares of common
      stock sold by the selling stockholders pursuant to the underwriters'
      over-allotment option. The underwriters exercised this over-allotment option
      on
      November 10, 2006 and the initial public offering closed on
      November 14, 2006.




**7. 
        EQUITY AND STOCK OPTION PLANS**




***2006
        Equity Incentive Plan***




In
      connection with the Company’s initial public offering, the Company adopted the
      Physicians Formula Holdings, Inc. 2006 Equity Incentive Plan (the “2006
      Plan”). The 2006 Plan provides for grants of stock options, stock appreciation
      rights, restricted stock, restricted stock units, deferred stock units and
      other
      performance awards to directors, officers and employees of the Company, as
      well
      as others performing services for the Company. The options generally have a
      10-year life and vest in equal monthly installments over a four-year period.
      As
      of June 30, 2007, a total of 876,861 shares of the Company’s common stock were
      available for issuance under the 2006 Plan. This amount will automatically
      increase on the first day of each fiscal year ending in 2016 by the lesser
      of:
      (i) 2% of the shares of common stock outstanding on the last day of the
      immediately preceding fiscal year or (ii) such lesser number of shares as
      determined by the compensation committee of the Board of Directors. On
      February 6, 2007, the Company granted 300,000 stock options under the 2006
      Plan to certain employees of the Company.




***2003
        Stock Option Plan***




In
      November 2003, the Board of Directors adopted the 2003 Stock Option Plan
      (the “2003 Plan”) and reserved a total of 2,500,000 shares for grants under the
      2003 Plan. The 2003 Plan provides for the issuance of stock options for common
      stock to executives and other key employees. The options generally have a
      10-year life and vest over a period of time. Options granted under the 2003
      Plan
      were originally granted as Time-Vesting Options and Performance-Vesting Options.
      The original Time-Vesting Options vest in equal annual installments over a
      four-year period. In connection with the initial public offering, the 713,334
      Performance-Vesting Options were amended to accelerate the vesting of 550,781
      of
      such options, and 296,140 of these options were exercised. The remaining 162,553
      Performance-Vesting Options were converted to Time-Vesting Options that vest
      in
      equal monthly installments over a two-year period. Options are granted with
      exercise prices not less than the fair value at the date of grant, as determined
      by the Board of Directors, which subsequent to our initial equity offering
      is
      the closing price on grant date.




-6-




The
      equity incentive and stock option plan activity is summarized
      below:




**Time-Vesting
                  Options**
              
              
              **Performance-Vesting
                  Options****Weighted-Average
                  Exercise Price**
              
              
              **Aggregate
                  Intrinsic Value**
              
              
              
              
              
              **Weighted-Average
                  Exercise Price**
              
              
              **Aggregate
                  Intrinsic Value**Options
                  outstanding—January 1, 2007
              
              
              652,053
              
              
              $
              0.11
              
              
              
              
              
              
              254,641
              
              
              $
              0.10Options
                  granted in February 2007
              
              
              300,000
              
              
              
              20.75
              
              
              
              -
              
              
              
              -
              
              
              
              -Options
                  exercised
              
              
              (83,999
              )
              
              
              0.10
              
              
              $
              1,313,000
              
              
              
              -
              
              
              
              -Options
                  outstanding—June 30, 2007
              
              
              868,054
              
              
              $
              7.24
              
              
              $
              7,368,000
              
              
              
              254,641
              
              
              $
              0.10
              
              
              $
              3,980,000Vested
                  and expected to vest-June 30, 2007
              
              
              868,054
              
              
              $
              7.24
              
              
              $
              7,368,000
              
              
              
              254,641
              
              
              $
              0.10
              
              
              $
              3,980,000




The
      fair
      value of options granted during the six months ended June 30, 2007 totaled
      $3,161,000. The Company utilized the Black-Scholes option valuation model to
      calculate the fair value of these options using the following weighted-average
      assumptions:




Risk-free
                interest rate
            
            4.9
            %Volatility
            
            52.2
            %Dividend
                rate
            
            NoneLife
                in years
            
            5.0







The
      risk-free interest rate is based-upon the U.S. Treasury yield curve in
      effect at the time of grant for periods corresponding with the expected life
      of
      the options. The expected volatility rate is based on companies of similar
      growth and maturity and our peer group in the industry in which the Company
      does
      business. The dividend rate assumption is excluded from the calculation, as
      the
      Company intends to retain all earnings. The expected life of our stock options
      represents management’s best estimate based upon historical and expected
      trends.




The
      vesting activity for the equity incentive and stock option plans is summarized
      below:




**Time-Vesting
                  Options**
              
              **Performance-Vesting
                  Options****Weighted-Average**
              
              
              
              
              
              
              **Weighted-Average****Vested
                  and Exercisable**
              
              **Aggregate
                  Exercise Price**
              
              **Exercise
                  Price**
              
              **Remaining
                  Contractual Life**
              
              **Aggregate
                  Intrinsic Value**
              
              **Vested
                  and Exercisable**
              
              **Aggregate
                  Exercise Price**
              
              **Exercise
                  Price**
              
              **Remaining
                  Contractual Life**
              
              **Aggregate
                  Intrinsic Value**January
                  1, 2007
              246,108
              $
              25,000
              
              
              
              
              
              
              
              254,641
              $
              25,000Vesting
                  during period
              92,585
              
              526,000
              
              
              
              
              
              
              
              -
              
              -Options
                  exercised
              (83,999)
              
              (8,000)
              
              
              
              
              
              
              
              -
              
              -June
                  30, 2007
              254,694
              $
              543,000
              $
              2.13
              
              6.7
                  years
              $
              3,463,000
              
              254,641
              $
              25,000
              $
              0.10
              
              6.4
                  years
              $
              3,980,000




As
      of
      June 30, 2007, the options outstanding under the 2003 Plan and 2006 Plan had
      exercise prices between $0.10 and $20.75 and the weighted-average remaining
      contractual life for all options was 7.3 years.




-7-


A
      summary
      of the weighted-average grant date fair value of the non-vested stock option
      awards is presented in the table below:




**Weighted-Average
                  Grant Date Fair Value**January
                  1, 2007
              
              
              405,945
              
              
              $
              6.56Vested
              
              
              (92,585
              )
              
              
              10.27Granted
              
              
              300,000
              
              
              
              10.54June
                  30, 2007
              
              
              613,360
              
              
              $
              7.91




The
      total
      fair value of options that vested during the six months ended June 30, 2007
      and
      2006 was $951,000 and $4,000, respectively.




As
      of
      June 30, 2007, total unrecognized estimated compensation cost related to
      non-vested stock options was approximately $4,737,000, which is expected to
      be
      recognized over a weighted-average period of approximately 2.7 years. The
      Company recorded cash received from the exercise of stock options of $8,000
      during the six months ended June 30, 2007. Upon option exercise, the Company
      issues new shares of stock.




**8. 
        COMMITMENTS AND CONTINGENCIES**




***Litigation—***The
      Company is involved in various lawsuits in the ordinary course of business.
      In
      management’s opinion, the ultimate resolution of these matters will not result
      in a material impact to the Company’s consolidated financial
      statements.




***Manufacturing—***The
      Company has a contractual agreement, for approximately $1,100,000, to automate
      a
      product assembly line, of which $536,000 has been incurred as of June 30,
      2007.




***Environmental—***The
      shallow soils and groundwater below our City of Industry facilities were
      contaminated by the former operator of the property. The former operator
      performed onsite cleanup and we anticipate that we will receive written
      confirmation from the State of California that no further onsite cleanup is
      necessary. Such confirmation would not rule out potential liability for
      regional groundwater contamination or alleged potable water supply contamination
      discussed below. If further onsite cleanup is required, the Company believes
      the
      cost, which the Company is not able to estimate, would be indemnified, without
      contest or material limitation, by companies that have fulfilled similar
      indemnity obligations to the Company in the past, and that the Company believes
      remain financially able to do so.




The
      facility is located within an area of regional groundwater contamination known
      as the Puente Valley “operable unit” (“PVOU”) of the San Gabriel Valley
      Superfund Site. The Company, along with many others, was named a potentially
      responsible party (“PRP”) for the regional contamination by the United States
      Environmental Protection Agency (“EPA”). The Company entered into a settlement
      with another PRP at the site, pursuant to which, in return for a payment the
      Company has already made and that was fully indemnified and paid by a second
      company, the other PRP indemnified the Company against most claims for PVOU
      contamination. The Company expects to enter into a consent decree with EPA
      and
      the other PRP that will resolve its liability for the cleanup of regional
      groundwater contamination without any payment by us to EPA. Depending on the
      scope and duration of the cleanup, the Company may be required to make further
      payments to the other PRP for regional groundwater remediation costs. The
      Company estimates the amount of any such additional payments would not exceed
      approximately $130,000. The estimate is based on component estimates for two
      distinct contaminants that may require remediation. Those estimates in turn
      are
      based on a number of assumptions concerning the likelihood that remediation
      will
      be required, the cost of remediation if required and other matters. Uncertainty
      in predicting these matters limits the reliability and precision of the
      estimates. The Company expects any such additional payments by the Company
      to be
      covered by indemnities given to the Company by other companies. Those companies
      may contest their indemnity obligation for these payments. The Company believes
      the companies are financially able to pay the liability. Because the Company
      believes it is not probable that it will be held liable for any of these
      expenses, the Company has not recorded a liability for such potential
      claims.




-8-




The
      Company is also one of approximately 25 parties considered potentially liable
      by
      a regional water authority for alleged contamination of two of that water
      authority’s wells. The Company is fully indemnified for this liability under a
      past settlement with a private company. The indemnity is not materially limited
      and the Company does not believe it would be contested. The Company believes
      it
      is financially able to pay the liability. Because the Company believes it is
      not
      probable that it will be held liable for any of these expenses, the Company
      has
      not recorded a liability for such potential claims for alleged contamination
      of
      the area’s potable water supply.




The
      Company’s liability for these contamination matters and related claims is
      substantially covered by third-party indemnities and resolved by prior
      settlements, and borne by prior operators of the facility, their successors
      and
      their insurers. The Company is attempting to recoup approximately $0.7 million
      in defense costs from one of these indemnitors. These costs have been expensed
      as paid by the Company and are not recorded in its condensed consolidated
      balance sheets.




**9. 
        GEOGRAPHIC INFORMATION**




Geographic
      revenue information is based on the location of the customer. All of the
      Company’s assets are located in the United States. Net sales to external
      customers by geographic region are as follows (dollars in
      thousands):




**Three
                    Months Ended June 30,**
                
                
                **Six
                    Months Ended June 30,****Customer**
                
                **2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006**United
                    States
                
                $
                20,143
                
                
                $
                21,485
                
                
                $
                51,318
                
                
                $
                47,295Canada
                
                
                1,872
                
                
                
                1,467
                
                
                
                6,294
                
                
                
                3,301Other
                
                
                87
                
                
                
                131
                
                
                
                213
                
                
                
                176$
                22,102
                
                
                $
                23,083
                
                
                $
                57,825
                
                
                $
                50,772




-9-


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




**General**




This
      discussion should be read in conjunction with the Notes to Condensed
      Consolidated Financial Statements included herein and the Notes to Consolidated
      Financial Statements and Management’s Discussion and Analysis of Financial
      Condition and Results of Operations included in our Annual Report on
      Form 10-K for the year ended December 31, 2006.




**Overview
        of the Business**




We
      are
      one of the fastest growing cosmetics companies of the ten largest in the U.S.
      mass market channel by retail sales. We specialize in developing and marketing
      innovative, premium-priced products for the mass market channel. Our products
      focus on addressing skin imperfections through a problem-solution approach,
      rather than focusing on changing fashion trends. Our products address specific,
      everyday cosmetics needs and include face powders, bronzers, concealers,
      blushes, foundations, eye shadows, eyeliners, brow makeup and
      mascaras.




We
      sell
      our products to mass market retailers such as Wal-Mart, Target, CVS, Walgreens
      and Albertsons. Our products provide above-average profitability for retailers
      due to their higher price points and sales per linear foot. Our products are
      currently sold in approximately 26,000 of the 49,000 stores in which we estimate
      our *masstige* competitors’ products are sold. We seek to be
      first-to-market with new products within this channel, and are able to take
      new
      products from concept development to shipment in less than 12 months. New
      products are a very important part of our business and have contributed, on
      average, approximately 38% of our net sales for the last three
      years.




**Overview
        of U.S. Market Share Data**




We
      define
      the *masstige* market as products sold in the mass market channel under
      the following premium-priced brands: Physicians Formula, Almay, L’Oreal, Max
      Factor, Neutrogena, Revlon and Vital Radiance. The following table sets forth
      the approximate market share, based on retail sales, of our products in total
      and for selected categories within the *masstige* market, as we define
      it, based on ACNielsen(1)data for
      the 52
      weeks ended July 14, 2007:




**52 Weeks Ended July
                14, 2007****Masstige ($ Share)(1)**
            
            **% Change vs. Prior Year ($ Sales)(1)**Total
                Company
            
            
            7.5
            
            %
            
            
            15
            
            %Face
            
            
            13.9
            
            %
            
            
            20
            
            %Eye
            
            
            5.2
            
            %
            
            
            2
            
            %




(1)ACNielsen
                is an independent research entity. ACNielsen data does not include
                Wal-Mart, which is our largest
                customer.




-10-


**Seasonality**




Our
      business, similar to others in the cosmetic industry, is subject to seasonal
      variation due to the annual “sell-in” period when retailers decide on a plan for
      how much retail space will be allotted to each supplier and the number of new
      and existing products to be offered in their stores. We refer to these plans
      as
      "Plan-o-grams". For us, this period has historically been from
      December through April. Sales during these months are typically greater due
      to the shipments required to fill the inventory at retail stores and retailers’
warehouses. Retailers typically reset their retail selling space during these
      months to accommodate changes in space allocation to each supplier and to
      incorporate the addition of new products and the deletion of slow-selling items.
      For example, our net sales for the three months ended June 30, 2006 were
      lower than our net sales for the first and fourth quarter of 2006, as a result
      of this seasonality. Our quarterly results of operations may also fluctuate
      as a
      result of a variety of other reasons including the timing of new product
      introductions, general economic conditions or consumer buyer behavior. In
      addition, results for any one quarter may not be indicative of results for
      the
      same quarter in subsequent years.




**Results
        of Operations**




The
      following table sets forth our condensed consolidated statements of operations
      for the three and six months ended June 30, 2007 and 2006:




**Three
                    Months Ended June 30,**
                
                
                **Six
                    Months Ended June 30,****2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006****(dollars
                    in thousands, except per share data)****Statement
                    of Operations Data:**Net
                    sales
                
                $
                22,102
                
                
                $
                23,083
                
                
                $
                57,825
                
                
                $
                50,772Cost
                    of sales
                
                
                9,920
                
                
                
                9,341
                
                
                
                25,023
                
                
                
                21,379Gross
                    profit
                
                
                12,182
                
                
                
                13,742
                
                
                
                32,802
                
                
                
                29,393Selling,
                    general and administrative expenses
                
                
                12,458
                
                
                
                9,331
                
                
                
                25,567
                
                
                
                19,282(Loss)
                    income from operations
                
                
                (276
                )
                
                
                4,411
                
                
                
                7,235
                
                
                
                10,111Interest
                    expense
                
                
                312
                
                
                
                1,742
                
                
                
                716
                
                
                
                3,512Other
                    (income) expense
                
                
                (49
                )
                
                
                20
                
                
                
                (54
                )
                
                
                (1
                )(Loss)
                    income before income taxes
                
                
                (539
                )
                
                
                2,649
                
                
                
                6,573
                
                
                
                6,600(Benefit)
                    Provisions for income taxes
                
                
                (16
                )
                
                
                1,023
                
                
                
                2,794
                
                
                
                2,559Net
                    (loss) income
                
                $
                (523
                )
                
                $
                1,626
                
                
                $
                3,779
                
                
                $
                4,041Net
                    (loss) income per common share:Basic
                
                $
                (0.04
                )
                
                $
                0.16
                
                
                $
                0.27
                
                
                $
                0.39Diluted
                
                
                (0.04
                )
                
                
                0.14
                
                
                
                0.26
                
                
                
                0.35Weighted-average
                    common shares outstanding:Basic
                
                
                13,927,055
                
                
                
                10,421,916
                
                
                
                13,896,890
                
                
                
                10,421,916Diluted
                
                
                13,927,055
                
                
                
                11,607,824
                
                
                
                14,549,682
                
                
                
                11,604,836




The
      following is a discussion of our results of operations for the three and six
      months ended June 30, 2007 and 2006.




-11-


***Three
        Months Ended June 30, 2007 Compared to Three Months Ended June 30,
        2006***




*Net
      Sales.*Net sales decreased $1.0 million, or 4.3%, to $22.1 million
      for the three months ended June 30, 2007, from $23.1 million for the three
      months ended June 30, 2006. The decrease was primarily attributable to an
      increase in trade spending with retailers of $3.5 million, of which $3.1
      million represents higher cooperative advertising expense and $0.4 million
      represents higher coupon expense, as well as an increase in our provision
      for markdowns of $0.3 million. The variance is primarily due to
      management’s strategic decision to increase trade spending with
      retailers for in-store advertising and promotion to increase
      consumer retail sales. Partially offsetting our net sales decrease for the
      three months ended June 30, 2007 was an increase in growth in sales of our
      face
      and eye makeup products, as we continued to broaden our total distribution.
      Total distribution represents the number of stores in which we sell products
      multiplied by our number of stock keeping units per store. Total unit volume
      increased by 102,000 units, or 2.0%, to 5.6 million units for the three months
      ended June 30, 2007 from 5.5 million units for the same period a year ago.
      New
      products represented 38% of our net sales for the three months ended June 30,
      2007, 4% higher than the same period a year ago when new products
      contributed 34% of net sales. During the three months ended June 30, 2007,
      our
      results included net sales of $2.0 million from our international customers,
      compared to $1.6 million for the three months ended June 30, 2006.




*Cost
      of Sales.*Cost of sales increased $0.6 million, or 6.5%, to $9.9
      million for the three months ended June 30, 2007, from $9.3 million for the
      three months ended June 30, 2006. The increase in cost of sales resulted
      primarily from an increase in volume for the three months ended June 30, 2007.
      Cost of sales as a percentage of net sales was 44.9% of net sales for the three
      months ended June 30, 2007, compared to 40.5% for the three months ended June
      30, 2006. The increase in cost of sales, as a percentage of net sales, was
      primarily due to the impact of higher trade spending with retailers to
      increase consumer retail sales.




*Selling,
      General and Administrative Expenses.*Selling, general and
      administrative expenses increased by $3.2 million, or 34.4%, to $12.5 million
      for the three months ended June 30, 2007, from $9.3 million for the three months
      ended June 30, 2006. The increase was primarily due to a $1.1 million increase
      in marketing spending and a $2.1 million increase in fixed costs that included
      a
      $0.8 million increase in employee compensation associated with our growth,
      a
      $0.5 million expense for stock option awards, a $0.5 million expense for
      transaction fees associated with the secondary public offering, a $0.2 million
      increase in distribution costs related to our growth and an increase in expenses
      associated with being a public company.




*Interest
      Expense.*Interest expense decreased by $1.4 million, or 82.4%, to
      $0.3 million for the three months ended June 30, 2007, from $1.7 million for
      the
      three months ended June 30, 2006. The decrease in interest expense was due
      to
      the decrease in average borrowings outstanding under our credit facility as
      we
      repaid all borrowings under our former senior credit agreement with the net
      proceeds of the initial public offering and borrowings under our senior credit
      agreement.




*Other
      (Income) Expense.*Other (income) expense increased by $69,000 to
      income of $49,000 for the three months ended June 30, 2007, from an expense
      of
      $20,000 for the three months ended June 30, 2006. Other (income) expense for
      the
      three months ended June 30, 2007 and 2006 was attributable to realized and
      unrealized gains related to investments held as part of our non-qualified
      deferred compensation plan.




*(Benefit)
      Provision for Income Taxes.*The income tax benefit for the three
      months ended June 30, 2007 was $16,000 compared to a provision for income taxes
      of $1.0 million, representing an effective income tax rate of 38.6%, for the
      three months ended June 30, 2006. The effective rates differed from the
      statutory rates due to the effect of varying state and local taxes, the impact
      of the change in the deferred carrying rate and certain permanent items such
      as
      extra-territorial income exclusions, research and development credits and
      certain transaction fees associated with the secondary public
      offering.




-12-


***Six
        Months Ended June 30, 2007 Compared to Six Months Ended June 30,
        2006***




*Net
      Sales.*Net sales increased $7.0 million, or 13.8%, to $57.8 million
      for the six months ended June 30, 2007, from $50.8 million for the six months
      ended June 30, 2006. The increase was primarily attributable to growth in sales
      of our face and eye makeup products, as we continued to broaden our total
      distribution. Total distribution represents the number of stores in which we
      sell products multiplied by our number of stock keeping units per store. Total
      unit volume increased by 1.7 million units, or 13.8%, to 14.0 million units
      for
      the six months ended June 30, 2007 from 12.3 million units for the same period
      a
      year ago. New products represented 43% of our net sales for the six months
      ended
      June 30, 2007, 3% higher than the same period a year ago when new products
      contributed 40% of net sales. Partially offsetting our net sales growth for
      the
      six months ended June 30, 2007 was an increase in trade spending with retailers
      of $4.7 million, which includes an increase in cooperative
      advertising expense of $4.0 million and an increase in coupon expense of
      $0.6 million, as well as an increase in our provision for markdowns of $2.7
      million.   The variance in cooperating advertising expense
      and coupon expense is primarily due to management's strategic decision to
      increase trade spending with retailers for in-store advertising and promotions
      to increase consumer retail sales. The variance in our provision for markdowns
      is primarily due to retailers resetting their Plan-o-grams including
      changing their wall displays during the six months ended June 30,
      2007. During the six months ended June 30, 2007, our results included net
      sales of $6.5 million from our international customers, compared to $3.5 million
      for the six months ended June 30, 2006.




*Cost
      of Sales.*Cost of sales increased $3.6 million, or 16.8%, to $25.0
      million for the six months ended June 30, 2007, from $21.4 million for the
      six
      months ended June 30, 2006.  The increase in cost of sales resulted
      primarily from an increase in volume for the six months ended June 30,
      2007. Cost of sales as a percentage of net sales was 43.3% of net sales for
      the
      six months ended June 30, 2007, compared to 42.1% for the six months ended
      June
      30, 2006. The increase in cost of sales, as a percentage of net sales, was
      primarily due to the impact of higher trade spending with retailers to
      increase consumer retail sales, including cooperative advertising expense and
      coupon expense, as well as an increase in our provision for
      markdowns.




*Selling,
      General and Administrative Expenses.*Selling, general and
      administrative expenses increased by $6.3 million, or 32.6%, to $25.6 million
      for the six months ended June 30, 2007, from $19.3 million for the six months
      ended June 30, 2006. The increase was primarily due to a $1.4 million increase
      in marketing spending and a $4.2 million increase in fixed costs that included
      a $1.6 million increase in employee compensation associated with our
      growth, a $1.0 million expense for our stock option awards, a $0.7 million
      expense for transaction fees associated with the secondary public offering,
      a
      $0.3 million increase in distribution costs related to our growth, and an
      increase in expenses associated with being a public company. In addition, there
      were higher costs associated with increased sales volumes, including a $0.7
      million increase in outbound freight costs.




*Interest
      Expense.*Interest expense decreased by $2.8 million, or 80%, to
      $0.7 million for the six months ended June 30, 2007, from $3.5 million for
      the
      six months ended June 30, 2006. The decrease in interest expense was due to
      the
      decrease in average borrowings outstanding under our credit facility as we
      repaid all borrowings under our former senior credit agreement with the net
      proceeds of the initial public offering and borrowings under our senior credit
      agreement.




*Other
      (Income) Expense.*Other (income) expense increased by $53,000 to
      income of $54,000 for the six months ended June 30, 2007, from $1,000 for the
      six months ended June 30, 2006. Other (income) expense for the six months
      ended June 30, 2007 and 2006 was attributable to realized and unrealized gains
      related to investments held as part of our non-qualified deferred compensation
      plan.




*Provision
      for Income Taxes.*The income tax expense for the six months ended
      June 30, 2007 was $2.8 million, representing an effective income tax rate of
      42.5%, compared to income tax expense of $2.6 million, representing an effective
      income tax rate of 38.8%, for the six months ended June 30, 2006. The effective
      rates differed from the statutory rates due to the effect of varying state
      and
      local taxes, the impact of the change in the deferred carrying rate and certain
      permanent items such as extra-territorial income exclusions, research and
      development credits and certain transaction fees associated with the
      secondary public offering.




-13-


**Liquidity
      and Capital Resources**




*Cash
        Flows*




As
      of
      June 30, 2007, we had $81,000 in cash and cash equivalents compared to $26,000
      in cash and cash equivalents as of December 31, 2006. The low level of cash
      reflects the use of cash to pay down the revolving credit facility on a regular
      basis. As of June 30, 2007 we had $17.1 million of availability under our
      revolving credit facility. The significant components of our working capital
      are
      accounts receivable and inventories, reduced by accounts payable and accrued
      expenses.




*Operating
      activities.*Cash provided by operating activities increased $1.2
      million, or 24.5%, to $6.1 million for the six months ended June 30, 2007,
      from
      $4.9 million for the six months ended June 30, 2006. The net increase in cash
      provided by operating activities resulted primarily from increases in non-cash
      activities, such as the recognition of stock-based compensation, and favorable
      changes in accounts receivable and accrued expenses, trade allowances and our
      sales returns reserve.  The net increase in cash provided by operating
      activities was offset by unfavorable changes in inventory and accounts payable.
      Inventory increased by $4.0 million when compared to prior year due to
      lower than expected unit sales resulting from a softer consumer
      spending environment and a decrease in the purchase of promotional pre-packs
      during the latter portion of the six months ended June 30, 2007. Our
      inventory turnover rate has slightly decreased to an annualized 1.8 times per
      year for the six months ended June 30, 2007, from an annualized 2.0 times per
      year for the six months ended June 30, 2006. Days sales outstanding decreased
      6.0 days, to 39.6 days for the six months ended June 30, 2007 from 45.6
      days for the six months ended June 30, 2006.




*Investing
      activities.*Cash used in investing activities for the six months
      ended June 30, 2007 was $679,000, which was related to capital expenditures
      for
      the replacement of machinery and equipment and the automation of an assembly
      line to accommodate future growth. Cash used in investing activities for the
      six
      months ended June 30, 2006 of $217,000 was related to capital expenditures
      for
      the replacement and upgrade of machinery and equipment.




*Financing
      activities.*Cash used in financing activities was $5.4 million for
      the six months ended June 30, 2007 compared to cash used in
      financing activities of $4.7 million for the six months ended June 30,
      2006. The increase in cash used in financing activities between periods
      primarily resulted from higher repayments of indebtedness under our credit
      facilities.




*Future
      Liquidity and Capital Needs.*The significant components of our
      working capital are accounts receivable and inventory, reduced by accounts
      payable and accrued expenses. Net working capital requirements increased by
      $13.2 million, or approximately 136.1%, to $22.9 million in the six months
      ended
      June 30, 2007, from $9.7 million in the six months ended June 30, 2006. We
      anticipate that working capital will remain materially consistent during the
      third quarter and increase during the fourth quarter of 2007, when we typically
      experience higher inventory levels as we produce new products for shipment
      in
      the first quarter of the following year. We have budgeted capital expenditures
      of $2.5 million for 2007, compared to $1.0 million in 2006, for several key
      projects, including completion of our automated assembly line, investment in
      our
      information technology infrastructure and improvements to our warehouse
      distribution systems. Capital requirements related to manufacturing include
      a
      major project to automate product assembly lines that are used to assemble
      products representing approximately 44% of our net sales in 2006. We expect
      this
      to add approximately $800,000 of a $1.1 million project to our normal level
      of
      capital expenditures in 2007, of which $300,000 was incurred in 2006 and
      $236,000 was incurred during the six months ended June 30, 2007. We have
      completed the replacement of our IBM AS/400 mainframe computer to accommodate
      future growth at a cost of approximately $0.3 million. Further, we are
      implementing improvements to our warehouse distribution systems at a cost of
      approximately $0.5 million during the third and fourth quarters of 2007. We
      believe that our cash flows from operations and funds from our revolving
      credit facility will provide adequate funds for our working capital needs and
      planned capital expenditures for at least the next twelve months. No assurance
      can be given, however, that this will be the case.




-14-


*Credit
        Facilities*




On
      November 14, 2006, we entered into a senior credit agreement with a bank
      that will terminate in 2011 and consists of a $15.0 million term loan
      facility and a revolving credit facility providing for borrowings of up to
      $20.0 million. At June 30, 2007, there was $2.9 million outstanding
      under the revolving credit facility at an interest rate of 8.75% and we had
      $17.1 million of availability under the revolving credit facility. The
      interest rate on the term loan was 7.36% at June 30, 2007. The availability
      under the revolving credit facility is reduced by outstanding letters of credit.
      There were no outstanding letters of credit as of June 30, 2007.




We
      used
      the borrowings under our senior credit agreement and a portion of the net
      proceeds of our initial public offering to repay borrowings and accrued interest
      under our former senior credit agreement. Borrowings under our senior credit
      agreement are guaranteed by Physicians Formula Holdings, Inc. and the
      domestic subsidiaries of Physicians Formula, Inc., and borrowings under our
      senior credit agreement are secured by liens on substantially all of the assets
      of Physicians Formula, Inc., including the assets of its subsidiaries.
      Amounts outstanding under the term loan facility, which totaled
      $14.3 million at June 30, 2007, are due in quarterly payments currently
      equal to $375,000 and increasing to $562,500 on December 31, 2007, $750,000
      on December 31, 2008, $937,500 on December 31, 2009 and $1,125,000 on
      December 31, 2010. The initial quarterly payment of $375,000 was made on
      January 1, 2007, the second quarterly payment of $375,000 was made on
      April 2, 2007 and the third quarterly payment of $375,000 was made on July
      16, 2007.




Amounts
      outstanding under the term loan facility and the revolving credit facility
      bear
      interest at a LIBOR Adjusted Rate (as defined in our senior credit agreement)
      plus 2.0% or at a Base Rate (as defined in our senior credit agreement) plus
      0.5%. The revolving credit facility is also subject to a commitment fee of
      0.25%
      on any unused commitments.




Our
      senior credit agreement contains the following financial covenants: a maximum
      total leverage ratio; a minimum fixed charge coverage ratio; a minimum net
      worth
      requirement; and a limitation on capital expenditures (which may be no more
      than
      $3,000,000 per fiscal year). As of June 30, 2007, we were in compliance with
      these covenants.




Our
      senior credit agreement contains certain additional negative covenants,
      including limitations on the ability of Physicians Formula, Inc., our
      operating subsidiary, to: incur other indebtedness and liens; fundamentally
      change its business through a merger, consolidation, amalgamation or
      liquidation; sell assets; pay cash dividends or pay for expenses of Physicians
      Formula Holdings, Inc., unless certain conditions are satisfied; make
      certain acquisitions, investments, loans and advances; engage in transactions
      with our affiliates; enter into certain agreements; engage in sale-leaseback
      transactions; incur certain unfunded liabilities; and change our line of
      business.




Our
      senior credit agreement requires us to make mandatory prepayments with the
      proceeds of certain asset dispositions and upon the receipt of insurance or
      condemnation proceeds to the extent we do not use the proceeds for the purchase
      of satisfactory replacement assets.




-15-


**Off-Balance
        Sheet Transactions**




We
      do not
      have any relationships with unconsolidated entities or financial partnerships,
      such as entities often referred to as structured finance or special purpose
      entities, which would have been established for the purpose of facilitating
      off-balance sheet arrangements or other contractually narrow or limited
      purposes. In addition, we do not engage in trading activities involving
      non-exchange traded contracts that rely on estimation techniques to calculate
      fair value. As such, we are not exposed to any financing, liquidity, market
      or
      credit risk that could arise if we had engaged in such
      relationships.




**Forward-Looking
        Statements**




This
      section and other parts of this Quarterly Report on Form 10-Q contain
      forward-looking statements within the meaning of Section 27A of the
      Securities Act of 1933, as amended and Section 21E of the Securities
      Exchange Act of 1934, as amended. In some cases, forward-looking statements
      can
      be identified by words such as “anticipates,” “expects,” “believes,” “plans,”
“predicts,” and similar terms. Such forward-looking statements are based on
      current expectations, estimates and projections about our industry, management’s
      beliefs and assumptions made by management. Forward-looking statements are
      not
      guarantees of future performance and our actual results may differ significantly
      from the results discussed in the forward-looking statements. Factors that
      might
      cause such differences include, but are not limited to those discussed in
      Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for
      the year ended December 31, 2006. Unless otherwise required by law, we
      expressly disclaim any obligation to update publicly any forward-looking
      statements, whether as result of new information, future events or
      otherwise.




-16-


**ITEM
        3.QUANTITATIVE AND QUALITATIVE
        DISCLOSURES ABOUT MARKET RISK**




(a)  *Foreign Currency Risk.*




The
      Company pays overseas suppliers and third-party manufacturers in U.S. dollars.
      A
      decrease in the value of the euro and the Chinese yuan relative to the U.S.
      dollar could cause our suppliers to raise prices that would result in higher
      cost of sales. The volatility of the applicable rates and prices are dependent
      on many factors that cannot be forecast with reliable accuracy. Our current
      reliance on foreign suppliers for many of the raw materials and components
      used
      to produce products makes it possible that our operating results may be affected
      by fluctuations in the exchange rate of the currencies of the suppliers. We
      do
      not have any foreign currency hedges.




(b) 
        *Interest Rate Risk.*




We
      are
      exposed to interest rate risks primarily through borrowings under our revolving
      loan arrangement and term loans. Interest on these borrowings is based upon
      variable interest rates. Our weighted-average borrowings outstanding under
      the
      revolving loan arrangement and term loans during the six months ended June
      30,
      2007, was $17.7 million and the weighted-average interest rate in effect at
      June
      30, 2007, was 7.6%. A hypothetical 1% increase or decrease in interest rates
      would have resulted in an $88,000 change to interest expense for the six months
      ended June 30, 2007.




**ITEM
        4.CONTROLS AND
        PROCEDURES**




The
      Company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in its reports pursuant to the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in Rule 13a-15 under the Exchange Act, and that such
      information is accumulated and communicated to the Company’s management,
      including its Chief Executive Officer and Chief Financial Officer, as
      appropriate, to allow timely decisions regarding required disclosure. Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting.




As
      required by Rule 13a-15(b) under the Exchange Act, the Company carried
      out an evaluation, under the supervision and with the participation of its
      management, including the Chief Executive Officer and the Chief Financial
      Officer, of the effectiveness of the design and operation of the Company’s
      disclosure controls and procedures. Based on the foregoing, the
      Company's Chief Executive Officer and Chief Financial Officer determined
      that disclosure controls and procedures were effective at a reasonable assurance
      level as of the end of the period covered by this report.




There
      has
      been no change in internal controls over financial reporting during the most
      recent fiscal quarter that has materially affected, or is reasonably likely
      to
      materially affect, internal controls over financial reporting.




-17-


**PART II.**


**OTHER
      INFORMATION**




**ITEM
        1.LEGAL
        PROCEEDINGS**




The
      Company is involved in various lawsuits in the ordinary course of business.
      In
      management’s opinion, the ultimate resolution of these matters will not result
      in a material impact to the Company’s consolidated financial
      statements.




**ITEM
        1A.   RISK FACTORS**




There
      have been no material changes to our risk factors as disclosed in Item 1A.
“Risk
      Factors” in our Annual Report on Form 10-K for the year ended
      December 31, 2006.




**ITEM
          4.SUBMISSION OF MATTERS
          TO A VOTE
          OF SECURITY HOLDERS**
  The
          Company’s 2007 annual meeting of stockholders was held on June 5, 2007. At the
          annual meeting, our stockholders elected six directors to the Company’s Board of
          Directors and ratified the Audit Committee’s appointment of Deloitte &
Touche LLP as the Company’s independent registered public accounting firm for
          the year ending December 31, 2007. Following are the results of the
          election:
  **Proposal
          I:  
Election of six directors to the Board of Directors**
  **Votes
                    For**
                
                
                **Votes
                    Withheld**Ingrid
                    Jackel
                
                
                12,203,179
                
                
                
                0Sonya
                    T. Brown
                
                
                12,203,179
                
                
                
                0Craig
                    D. Frances
                
                
                12,203,179
                
                
                
                0Claude
                    Gros
                
                
                12,202,879
                
                
                
                300Walter
                    G. Kortschak
                
                
                9,371,716
                
                
                
                2,831,463James
                    A. Lawrence
                
                
                12,200,354
                
                
                
                2,825
  **Proposal
          II:   Ratification of the Audit Committee’s appointment of Deloitte
& Touche LLP as independent registered public accounting
          firm for the year ending December 31, 2007**
 
 Votes
                    for
                
                
                12,179,094Votes
                    against
                
                
                11,493Abstentions
                
                
                12,592
  **ITEM
        6.EXHIBITS**




**Exhibit**
              **Number**
            
            
            
            **Description**31.1
            
            Certification
                by Ingrid Jackel, Chief Executive Officer.31.2
            
            Certification
                by Joseph J. Jaeger, Chief Financial Officer.32.1
            
            Certification
                Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
                Section 906 of the Sarbanes-Oxley Act of 2002.32.2
            
            Certification
                Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
                Section 906 of the Sarbanes-Oxley Act of
                2002.




-18-


**SIGNATURES**




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




Physicians
                Formula Holdings, Inc./s/
                Ingrid JackelDate:
              August 13, 2007
            
            By:
                Ingrid JackelIts:
                *Chief Executive Officer*
              *(principal executive officer)*/s/
                Joseph J. JaegerDate:
              August 13, 2007
            
            By:
                Joseph J. JaegerIts:
                *Chief Financial Officer*
              *(principal
                financial officer)*








-19-