In 2005, the global skin care market was estimated to be $36.2 billion, of which over 62% were facial skin care products, according to Global Industry Analysts, Inc., a market research firm. Additionally, the independent research firm, Kalorama Information, estimates that from 2005 to 2010, over 70 million people in the United States alone will receive cosmetic facial procedures for which they will pay over $60 billion. It is believed this reflects a growing desire and acceptance among the aging population to seek aesthetic facial products and procedures from their physicians. A key driver of this trend is the aging of the \"baby boomer\" segment of the U.S. population.

Consumer demand for physician-dispensed skin care products and procedures has been steadily growing. It is believed this growth is due to consumers realizing that many non-prescription consumer cosmetic products are unable to fully meet their needs. Consumers have increasingly turned to their physicians for products and simple in-office procedures that can provide better results than consumer cosmetics. According to ASPS, the number of minimally-invasive cosmetic office procedures performed increased 53% from approximately 4.9 million in 2002 to approximately 7.5 million in 2004. This increase was led by facial procedures such as Botox, up 166% since 2002, and injectable fillers, which were first measured by ASPS in 2003, and increased 927% the following year.

Beyond anti-aging and aesthetic treatments, there is significant market demand for effective treatments of skin diseases such as acne, rosacea, psoriasis, and eczema (dermatitis).

According to Kline & Co., in 2005, there were approximately 22,000 practicing dermatologists and plastic surgeons in the United States. According to a 2005 Kline & Co. study, a combined number of approximately 9,600 physicians dispensed skin care products directly to their patients.

The Company’s Obagi Nu-Derm System consists of a combination of six prescription and OTC drugs and adjunctive cosmetic skin care products to treat visible skin conditions such as photo damage and hyperpigmentation resulting from extrinsic damage and intrinsic changes to the skin. The Obagi Nu-Derm cosmetic skin care products include cleansers and exfoliating creams.

The Obagi-C Rx system consists of a combination of four prescription and OTC drugs and adjunctive cosmetic skin care products to treat skin conditions resulting from sun damage and the oxidative damage of free radicals. The central ingredients in the system are 4% hydroquinone, a prescription drug and Vitamin C. This combination distinguishes Obagi-C Rx from other Vitamin C based products available in the physician office. Two Obagi-C Rx System products contain this concentration of hydroquinone, which is designed to correct skin pigmentation problems by normalizing the production of new melanin in the epidermis. The Obagi-C Rx System includes cosmetic skin care cleansers and exfoliating lotions.

The Obagi Professional-C products are a complete line of proprietary, non-prescription products, which consist of Vitamin C serums used to reduce the appearance of damage to the skin caused by ultraviolet radiation and other environmental influences. Vitamin C (L-ascorbic acid) acts as a potent antioxidant. The Company’s Professional-C contains the most therapeutic and stable topical form of Vitamin C, L-ascorbic acid.

Tretinoin creams and related adjunctive acne care products are used for the topical treatment of acne in the United States. Tretinoin, the active ingredient in the prescription acne drug Retin-A, is a vitamin A derivative and has been the primary prescription acne therapy for approximately 25 years. Topical tretinoin normalizes the growth rate of skin cells, disrupting the onset of acne.

Obagi Blue Peel is a delivery system for acid chemical peel procedures used to smooth the surface of skin, improve skin tone and color, diminish wrinkles and shrink pore sizes. Chemical peels are an in-office procedure performed either by a physician or a member of a physician\'s staff, depending on the skin depth of the peel.

Gross margin percentage increased to 83.9% for the six months ended June 30, 2006 compared to 82.7% for the six months ended June 30, 2005.

Selling, general and administrative expenses increased $8.3 million to $22.7 million during the six months ended June 30, 2006, as compared to $14.4 million for the six months ended June 30, 2005.

Interest expense was $3.1 million during the six months ended June 30, 2006, as compared to $2.7 million for the six months ended June 30, 2005.

Income tax expense decreased $1.4 million to $1.7 million for six months ended June 30, 2006, as compared to $3.1 million for the six months ended June 30, 2005.