This discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and related notes contained in this quarterly report and the Consolidated Financial Statements and related notes and the Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in our Annual Report on Form 10-K for the year ended June 30, 2008. The results of operations for an interim period may not give a true indication of results for the year. In the following discussion, all comparisons are with the corresponding items in the prior year period.

Overview

We are a global prestige beauty products company with an extensive portfolio of prestige fragrance, skin care and cosmetics brands. Our branded products include the Elizabeth Arden fragrances: Red Door, Elizabeth Arden 5th Avenue, Elizabeth Arden Provocative Woman, Elizabeth Arden green tea, and Elizabeth Arden Mediterranean; the Elizabeth Arden skin care brands: Ceramide, Intervene and PREVAGEŽ; and the Elizabeth Arden branded lipstick, foundation and other color cosmetics products. Our prestige fragrance portfolio also includes the following celebrity, lifestyle and designer fragrances:

Celebrity Fragrances Elizabeth Taylor's White Diamonds and Passion, curious Britney Spears, fantasy Britney Spears and Britney Spears believe, with Love...Hilary Duff, Danielle by Danielle Steel, M by Mariah Carey, Usher

Lifestyle Fragrances Curve, Giorgio Beverly Hills, Lucky, PS Fine Cologne for

                     Men, Design and White Shoulders

Designer Fragrances  Juicy Couture, Badgley Mischka, Rocawear, Alberta Ferretti,
                     Alfred Sung, Nannette Lepore, Geoffrey Beene, Halston, Bob
                     Mackie, and GANT

In addition to our owned and licensed fragrance brands, we distribute over 400 additional prestige fragrance brands, primarily in the United States, through distribution agreements and other purchasing arrangements.

Our business strategy is to increase net sales, operating margins and earnings by (a) growing the sales of our existing brand portfolio, including the Elizabeth Arden brand, through new product innovation and targeting additional demographics and geographic markets, (b) acquiring prestige beauty brands through licensing opportunities and acquisitions, (c) expanding the prestige fragrance category at mass retail customers in the U.S., and (d) implementing initiatives to improve our cost structure and working capital efficiencies. We manage our business by evaluating net sales, EBITDA (as defined later in this discussion), EBITDA margin, segment profit and working capital utilization (including monitoring our levels of inventory, accounts receivable and operating cash flow). We encounter a variety of challenges that may affect our business and that should be considered as described in Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended June 30, 2008 and in the section of this quarterly report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results."

Effective June 9, 2008, we became the exclusive, global licensee for the sale, manufacture, distribution and marketing of the Liz Claiborne fragrance brands under a long-term license agreement with Liz Claiborne, Inc. and certain of its affiliates. The Liz Claiborne fragrance portfolio consists of the Juicy Couture, Curve by Liz Claiborne, Lucky, Liz, Realities, Bora Bora and Mambo fragrances. In connection with the Liz Claiborne license agreement we also assumed a license for the Usher celebrity fragrances. We anticipate that the Liz Claiborne licensing arrangement will allow us to (i) increase our market share in our North America Fragrance segment, (ii) gain efficiencies from a larger fragrance business, particularly by leveraging our supply chain, logistics and sales organizations, (iii) increase our gross margins by converting existing North America mass customer sales from distribution margins to owned/licensed margins, and (iv) provide additional sales volume for our International segment.

In fiscal 2007, we commenced a comprehensive review of our global business processes to re-engineer our extended supply chain, logistics and transaction processing systems. We call this initiative our Global Efficiency Re-engineering initiative. In May 2008, we announced that we had decided to accelerate the re-engineering of our extended supply chain functions as well as the realignment of other parts of our organization to better support our new business processes.

In connection with our Global Efficiency Re-engineering initiative, we are also migrating to an Oracle financial accounting and order processing system to improve key transaction processes and accommodate anticipated growth of our business. We expect this infrastructure investment to simplify our transaction processing by utilizing a common platform to centralize all of our global transaction processing functions.

As a result of the acceleration of the re-engineering of our extended supply chain functions and the implementation of the Oracle financial accounting and order processing system, we are implementing a restructuring plan that will result in restructuring and one-time expenses, including severance, relocation, recruiting and temporary staffing expenditures. We expect these expenses to be incurred primarily in fiscal years 2009 and 2010 and currently estimate that they will total $12.0 million to $14.0 million before taxes, of which $2.0 million has been incurred to date and $1.1 million was incurred during the quarter ended September 30, 2008.

Seasonality

Our operations have historically been seasonal, with higher sales generally occurring in the first half of the fiscal year (July through December) as a result of increased demand by retailers in anticipation of, and during, the holiday season. During the fiscal year ended June 30, 2008, approximately 61% of our net sales were made during the first half of the fiscal year. Due to product innovation and new product launches, the size and timing of certain orders from our customers and additions or losses of brand distribution rights, sales, results of operations, working capital requirements and cash flows can vary between quarters of the same and different years. As a result, we expect to experience variability in net sales, operating margin, net income, working capital requirements and cash flows on a quarterly basis. Increased sales of skin care and cosmetic products relative to fragrances may reduce the seasonality of our business.

We experience seasonality in our working capital, with peak inventory levels normally from July to October and peak receivable balances normally from September to December. Our working capital borrowings are also seasonal and are normally highest in the months of September, October and November. During the months of December, January, February of each year, cash is normally generated as customer payments on holiday season orders are received.

Critical Accounting Policies and Estimates

As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. We base our estimates on historical experience and other factors that we believe are most likely to occur. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known. Our most critical accounting policies relate to revenue recognition, provisions for inventory obsolescence, allowances for sales returns, markdowns and doubtful accounts, intangible and long-lived assets, income taxes, hedging contracts and share-based compensation. Since June 30, 2008, other than the adoption of Statement of Financial Accounting Standards No.157, Fair Value Measurements, as described below, there have been no significant changes to the assumptions and estimates related to those critical accounting policies.

Results of Operations

     The following discussion compares the historical results of operations for
the three months ended September 30, 2008 and September 30, 2007. Results of
operations as a percentage of net sales were as follows (dollar amounts in
thousands; percentages may not add due to rounding):

                                                          Three Months Ended

                                                September 30,             September 30,
                                                    2008                      2007

 Net sales                                  $  284,187   100.0 %      $  271,789   100.0 %
 Cost of sales                                 177,773    62.6           165,408    60.9
    Gross profit                               106,414    37.4           106,381    39.1
 Selling, general and administrative
 expenses                                      109,388    38.5            92,472    34.0
 Depreciation and amortization                   6,339     2.2             5,954     2.2
    (Loss) income from operations               (9,313 )  (3.3 )           7,955     2.9
 Interest expense, net                           6,575     2.3             7,488     2.8
    (Loss) income before income taxes          (15,888 )  (5.6 )             467     0.0
 (Benefit from) provision for income
 taxes                                          (3,372 )  (1.2 )             117     0.0
    Net (loss) income                          (12,516 )  (4.4 )             350     0.0

 Other data
 EBITDA and EBITDA margin (1) (2)           $   (2,974 )  (1.0 )%     $   13,909     5.1 %

(1) For a definition of EBITDA and a reconciliation of net (loss) income to EBITDA, see "EBITDA" under Results of Operations -- Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007. EBITDA margin represents EBITDA divided by net sales.
(2) The three months ended September 30, 2008 include $19.1 million of expenses ($15.4 million of which did not require the use of cash) related to the Liz Claiborne license agreement due to Liz Claiborne inventory that was purchased at a higher cost prior to the June 2008 effective date of the license agreement and transition expenses, and $1.1 million of expenses related to our Global Efficiency Re-engineering initiative and restructuring expenses. The three months ended September 30, 2007 include $0.9 million of restructuring expenses. For the three months ended September 30, 2008 and 2007, these expenses reduced EBITDA margin by 7.1% and 0.4%, respectively.

Our operations are organized into the following reportable segments:

- North America Fragrance - Our North America Fragrance segment sells our portfolio of owned, licensed and distributed fragrance brands to department stores, mass retailers and distributors in the United States, Canada and Puerto Rico. This segment also sells our Elizabeth Arden products in prestige department stores in Canada and Puerto Rico and to other selected retailers.

- International - Our International segment sells our portfolio of owned and licensed brands, including our Elizabeth Arden products, in approximately 90 countries outside of North America through perfumeries, boutiques, department stores and travel retail outlets worldwide.

- Other - The Other reportable segment sells our Elizabeth Arden products in prestige department stores in the United States and through the Red Door beauty salons, which are owned and operated by an unrelated third party.

Segment profit excludes depreciation and amortization, interest expense and unallocated corporate expenses, which are shown in the table below reconciling segment profit to consolidated (loss) income before income taxes. Included in unallocated corporate expenses are (i) adjustments to eliminate intercompany mark-up, (ii) employee incentive costs, and (iii) restructuring charges. Unallocated corporate expenses for the three months ended September 30, 2008, include $19.1 million of expenses ($15.4 million of which did not require the use of cash in the current period) related to our recent Liz Claiborne license agreement due to inventory that we purchased at a higher cost prior to the June 2008 effective date of the license agreement and transition expenses. We do not have intersegment sales.

The following table is a comparative summary of our net sales and segment profit by reportable segment for the three months ended September 30, 2008 and 2007 and reflects the basis of presentation described in Note 14 -- "Segment Data and Related Information" to the Notes to Unaudited Consolidated Financial Statements for all periods presented.

     (Amounts in thousands)                         Three Months Ended

                                           September 30,          September 30,
                                               2008                   2007

     Segment Net Sales:
       North America Fragrance            $       177,560        $       162,858
       International                               94,426                 93,795
       Other                                       12,201                 15,136

     Total                                $       284,187        $       271,789

     Segment Profit:
       North America Fragrance            $        31,899        $        20,512
       International                               (6,588 )                4,229
       Other                                         (880 )                 (999 )

     Total                                $        24,431        $        23,742

     Reconciliation:
       Segment Profit                     $        24,431        $        23,742
       Less:
         Depreciation and Amortization              6,339                  5,954
         Interest expense                           6,575                  7,488
         Unallocated Corporate Expenses            27,405  (1)             9,833

     (Loss) Income Before Income Taxes    $       (15,888 )      $           467

(1) In May 2008, we entered into an exclusive long-term global licensing agreement for the Liz Claiborne fragrance brands, which became effective on June 9, 2008. Amounts shown reflect $19.1 million of expenses ($15.4 million of which did not require the use of cash in the current period) related to the Liz Claiborne license agreement due to Liz Claiborne inventory that was purchased at a higher cost prior to the June 2008 effective date of the license agreement and transition expenses.

Net Sales. Net sales increased 4.6%, or $12.4 million, for the three months ended September 30, 2008, compared to the three months ended September 30, 2007. The higher net sales are primarily due to (i) $23.5 million of increased sales of the Liz Claiborne fragrance brands that we distributed in the prior year period, and of the Mariah Carey and Usher fragrance brands, (ii) $10.9 million of sales of fragrances launched since the prior year period, including the Juicy Couture fragrances, Viva La Juicy and Dirty English and the 9IX Rocawear fragrance, and (iii) $2.9 million of increased sales of skin care products. These increases were partially offset by a decline in sales of distributed and certain owned or licensed fragrance brands. Pricing changes and foreign currency translation had an immaterial effect on net sales.

North America Fragrance

Net sales increased by 9.0%, or $14.7 million. The higher net sales were primarily due to (i) $21.8 million of increased sales of the Liz Claiborne, Mariah Carey and Usher fragrance brands, (ii) $10.1 million of sales resulting from sales of fragrances launched since the prior year period, including the Juicy Couture fragrances, Viva La Juicy and Dirty English and the 9IX Rocawear fragrance, and (iii) $2.4 million of increased sales of skin care products. This increase was partially offset by a decline in sales of distributed and certain owned or licensed fragrance brands.

International

Net sales increased by 0.7%, or $0.6 million. Higher fragrance sales in our travel retail business and higher skin care product sales in China were mostly offset by lower fragrance sales in Europe, particularly in the United Kingdom, and in Australia. Excluding the unfavorable impact of foreign currency translation, International net sales increased 1.3%.

Gross Margin. For the three months ended September 30, 2008 and 2007, gross margins were 37.4% and 39.1%, respectively. The lower gross margin in the current year period is primarily due to $16.4 million of charges ($15.4 million of which did not require the use of cash) incurred in the three months ended September 30, 2008, related to the high cost Liz Claiborne inventory purchased prior to the June 2008 effective date of the recent Liz Claiborne license agreement and Liz Claiborne-related transition expenses, partially offset by current period sales of the Liz Claiborne fragrance brands that are now licensed brands. Our owned and licensed brands carry higher gross margins than our distributed brands. Prior to the effectiveness of the Liz Claiborne license agreement, sales of the Liz Claiborne fragrance brands were recorded as distributed brand sales.

SG&A. Selling, general and administrative expenses increased 18.3%, or $16.9 million, for the three months ended September 30, 2008, compared to the three months ended September 30, 2007. The increase was principally due to higher advertising, promotional and royalty costs of $10.9 million and transition expenses of $2.7 million related to the recently licensed Liz Claiborne fragrance brands. We also incurred costs of $1.1 million related to our Global Efficiency Re-engineering initiative and restructuring expenses, which mostly offset prior period restructuring expenses.

Segment Profit

North America Fragrance

Segment profit increased 55.5%, or $11.4 million, primarily due to the higher sales volumes and improved gross margins attributed to the recently licensed Liz Claiborne fragrance brands, which carry higher gross margins than our distributed fragrance brands. These increases were partially offset by $8.4 million of higher advertising, promotional and royalty costs to support the Liz Claiborne fragrance brands and the 9IX Rocawear fragrance launch.

International

Segment profit decreased $10.8 million, primarily due to lower gross margins mostly related to customer mix particularly in the United Kingdom and Australia, as well as higher distribution and freight costs. Also contributing to the decrease were increased sales overhead costs and the unfavorable impact of foreign currency translation.

(Benefit from) Provision for Income Taxes. A benefit from income taxes of $3.4 million was recorded for the three months ended September 30, 2008, compared to a provision for income taxes of $0.1 million for the three months ended September 30, 2007 primarily due to lower income from operations, which was mainly driven by the high cost inventory charges and transition expenses related to the Liz Claiborne license agreement. The estimated annual effective tax rate calculated as a percentage of income before income taxes used for the three months ended September 30, 2008 was 21.2%, compared to 24.9% for the three months ended September 30, 2007. The decrease in the estimated annual effective tax rate is mainly due to anticipated changes in earnings contributions from our worldwide affiliates as our worldwide affiliates generally have lower tax rates than our U.S. operations.

Net (Loss) Income. Net loss for the three months ended September 30, 2008 was approximately $12.5 million compared to net income of $0.4 million for the three months ended September 30, 2007. The decrease in net income was mainly driven by $19.1 million of high cost inventory charges and transition expenses related to the recent Liz Claiborne license agreement.

EBITDA. EBITDA (net income plus the provision for income taxes (or net loss less the benefit from income taxes), plus interest expense, plus depreciation and amortization expense) decreased by $16.9 million, to ($3.0) million for the three months ended September 30, 2008 compared to $13.9 million for the three months ended September 30, 2007. The decrease in EBITDA was primarily the result of $19.1 million of high cost inventory charges and transition expenses related to the Liz Claiborne license agreement as discussed above.

The following is a reconciliation of net (loss) income, as determined in accordance with generally accepted accounting principles, to EBITDA:

  (Amounts in thousands)                                  Three Months Ended

                                                   September 30,       September 30,
                                                       2008                2007

  Net (loss) income                               $       (12,516 )   $           350
  Plus:
      (Benefit from) provision for income taxes            (3,372 )               117
      Interest expense, net                                 6,575               7,488
      Depreciation and amortization                         6,339               5,954

              EBITDA                              $        (2,974 )   $        13,909


Liquidity and Capital Resources

(Amounts in thousands)                                        Three Months Ended

                                                      September 30,         September 30,
                                                          2008                  2007

Net cash used in operating activities                $       (94,539 )     $      (116,385 )
Net cash used in investing activities                        (12,888 )             (13,557 )
Net cash provided by financing activities                    109,431               126,452
Net increase (decrease) in cash and cash equivalents           1,122                (3,135 )

For the three months ended September 30, 2008, net cash used in investing activities of $12.9 million was comprised of $7.6 million of capital expenditures and the $5.3 million payment of the second installment of contingent consideration associated with our acquisition of the fragrance business of Sovereign Sales, LLC. For the three months ended September 30, 2007, net cash used in investing activities of $13.6 million was comprised of $7.2 million of capital expenditures and the $6.4 million payment of the first installment of such contingent consideration. The remaining contingent consideration of $0.3 million is expected to be paid in September 2009.

For the three months ended September 30, 2008, net cash provided by financing activities was $109.4 million, as compared to $126.5 million for the three months ended September 30, 2007. During the three months ended September 30, 2008, borrowings under our credit facility increased by $110.5 million to $229.5 million at September 30, 2008. During the three months ended September 30, 2007, borrowings under our credit facility increased by $125.4 million to $223.0 million at September 30, 2007.

Interest paid during the three months ended September 30, 2008, included $8.7 million of interest payments on the 7 3/4% senior subordinated notes due 2014 and $1.8 million of interest paid on the borrowings under our credit facility. Interest paid during the three months ended September 30, 2007, included $8.7 million of interest payments on the 7 3/4% senior subordinated notes due 2014 and $2.6 million of interest paid on the borrowings under our . . .