Parlux Fragrances, Inc. is a manufacturer and international distributor of prestige products. We hold licenses for Paris Hilton fragrances, watches, cosmetics, sunglasses, handbags and other small leather accessories in addition to licenses to manufacture and distribute the designer fragrance brands of GUESS?, Jessica Simpson, Nicole Miller, Josie Natori, Queen Latifah, Marc Ecko, Rihanna, Kanye West, XOXO, Ocean Pacific (OP), Andy Roddick, babyGund, and Fred Hayman Beverly Hills.

Certain statements within this Quarterly Report on Form 10-Q, which are not historical in nature, including those that contain the words, "anticipate"; "believe"; "plan"; "estimate"; "expect"; "should"; "intend"; and other similar expressions, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements are based on current expectations regarding important risk factors. Investors are cautioned that forward-looking statements involve such risks and uncertainties, which may affect our business and prospects, including economic, competitive, governmental, technological and other factors included in our filings with the Securities and Exchange Commission ("SEC"), including the Risk Factors included in our Annual Report on Form 10-K for the year ended March 31, 2009. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. We do not undertake any obligation to update the information herein, which speaks only as of this date. The following discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and noted thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

Recent Developments

Artistic Brands Development Agreement

On April 3, 2009, we entered into an agreement with Artistic Brands Development, LLC ("Artistic Brands"), formerly known as Iconic Fragrances, LLC, a licensing company in which entertainment mogul and icon Shawn "JAY-Z" Carter and Rene Garcia are principals. The agreement includes sublicensing to us the worldwide fragrance licenses with entertainers Rihanna and Kanye West. Artistic Brands is also in negotiations for a worldwide fragrance license with Shawn "JAY-Z" Carter, and in discussions with a well-established female artist, both of which would also be sublicensed to us.

The agreement provides for the payment of royalties and profit sharing on these new fragrance products, and the issuance of warrants to purchase shares of our common stock at a strike price of $5.00 per share. The warrants to purchase 4,000,000 shares issued in connection with the licenses for Rihanna and Kayne West were issued to Artistic Brands and the celebrities and their respective affiliates. See Note E to the accompanying unaudited Condensed Consolidated Financial Statements for further discussion.

Critical Accounting Policies and Estimates

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. We have included in our Annual Report on Form 10-K for the year ended March 31, 2009, a discussion of our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We have not made any changes in these critical accounting policies, nor have we made any material change in any of the critical accounting estimates underlying these accounting policies, since the filing of our Annual Report on Form 10-K filing, discussed above.

Recent Accounting Pronouncements

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157 ("FSP 157-2") , which provided a one-year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except for those that are recognized or disclosed in the financial statements at fair value at least annually. In accordance with FSP 157-2, with respect to non-financial assets and non-financial liabilities, disclosure requirements begin in fiscal year 2010. The adoption of FSP 157-2 did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position No. FAS 157-4, Determining the Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly ("FSP 157-4"), which emphasizes that even if there has been a significant decrease in the volume and level of activity for an asset or liability, the objective of the fair value measurement remains the same. It is effective for interim and annual reporting periods ending after June 15, 2009, and is to be applied prospectively. The adoption of FSP 157-4 did not have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations ("SFAS
141(R)"). SFAS 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The provisions of SFAS 141(R) are effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of SFAS 141(R) did not have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51 ("SFAS 160"). SFAS 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements ("ARB 51"), to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement also amends certain of ARB 51's consolidation procedures for consistency with the requirements of SFAS 141(R). In addition, SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. The provisions of SFAS 160 are effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. The adoption of SFAS 160 did not have a material impact on our consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position FAS No. 142-3, Determination of the Useful Life of Intangible Assets ("FSP 142-3"). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R), and other pronouncements under generally accepted accounting principles ("GAAP"). FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of FSP 142-3 did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position FAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosure about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. It also amends APB Opinion No. 28, Interim Financial Reporting, to require the disclosure in summarized financial information at interim reporting periods. It is effective for interim reporting periods ending after June 15, 2009. The adoption of FASB Staff Position FAS No. 107-1 and APB 28-1 did not have a material impact on our consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events ("SFAS 165"), to establish general standards of accounting for and the disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. It requires disclosure of the date through which we have evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The adoption of SFAS 165 did not have a material impact on our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification ("Codification") and the Hierarchy of Generally Accepted Accounting Principles ("SFAS 168") - a replacement of FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. Under the provisions of SFAS 168, the Codification will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The rules and interpretive releases of the SEC under authority federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. The provisions of SFAS 168 are effective for financial statements issued for interim and annual periods ending after September 15, 2009. We are currently reviewing the provisions of SFAS 168 to determine the impact on our consolidated financial statements.

Significant Trends

A significant number of new prestige fragrance products continue to be introduced on a worldwide basis. The beauty industry, in general, is highly competitive and consumer preferences often change rapidly. The initial appeal of these new fragrances, launched for the most part in U.S. department stores, fuels the growth of our industry. Department stores continue to lose sales to the mass market as a product matures. To counter the effect of lower department store sales, companies are required to introduce new products more quickly, which requires additional spending for development and advertising and promotional expenses. In addition, a number of the new launches are with celebrities (either entertainers or athletes), which require substantial royalty commitments and whose careers and/or appeal could change drastically, both positively and negatively, based on a single event. We believe these trends will continue. If one or more of our new product introductions would be unsuccessful, or the appeal of the celebrity would diminish, it could result in a substantial reduction in profitability and operating cash flows. In the past, certain U.S. department store retailers consolidated operations resulting in the closing of retail stores, as well as implementing various inventory control initiatives. The result of these consolidation efforts include lower inventories maintained by the retailers and higher levels of returns after each gift-giving holiday season. We expect that these store closings, the inventory control initiatives, and the current global economic conditions will continue to affect our sales in the short-term. In response, during fiscal year 2010 we continued to implement a number of cost reduction initiatives including a targeted reduction in staff, along with a reduction in committed advertising and promotional spending, and have reduced our production levels in response to the current economic environment.

Since the past holiday season, U.S. department store retailers experienced a major reduction in consumer traffic, resulting in decreased sales. In response, the retailers offered consumers deep discounts on most of their products. As is customary in the fragrance industry, these discounts were not offered on fragrances and cosmetics. This resulted in an overall reduction in sales of these products.

Historically, as is the case for most fragrance companies, our sales have been influenced by seasonal trends generally related to holiday or gift giving periods. Substantial sales often occur during the final month of each quarter. This practice assumes activities in future periods will support planned objectives, but there can be no assurance that will be achieved and future periods may be negatively affected.

As of June 30, 2009, we were in compliance with our applicable financial covenants of our credit facility with Regions Bank (see Liquidity and Capital Resources and Note F to the accompanying unaudited Condensed Consolidated Financial Statements for further discussion). As of the filing of this report on Form 10-Q, we have approximately $6.1 million in borrowings in excess of the borrowing base limitation under our credit facility. As a result, we may not be allowed to borrow additional funds under the credit facility and may be required to repay approximately $6.1 million of the outstanding borrowings. We are in discussions with Regions Bank to convert the outstanding amount of borrowings under the revolving credit facility to a term loan while we seek to obtain a replacement credit facility with a new lender over the next few months.

Our license with GUESS?, which is scheduled to expire at the end of our third fiscal quarter on December 31, 2009, will not be renewed. As of June 30, 2009, our inventories of GUESS? products totaled $25.1 million ($27.7 million at March 31, 2009). We may be required to record charges to operations to reduce the recorded value of such inventories to the amounts which would be realized upon their sale or liquidation. We continue to discuss the transition of any remaining inventory with GUESS? and have implemented a plan to reduce the inventory levels of the GUESS? products. At December 31, 2009, the end of the license period, GUESS? has the option of purchasing the remaining inventory, or the inventory must be destroyed. While we believe that our

inventory position in GUESS? products is stated at its lower of cost or market, if, at the end of the license period, inventory levels are significant, and GUESS? elects not to purchase the entire remaining inventory, we could have a material inventory write-off.

We expect to offset any reduction in sales of GUESS? products by increased sales of fragrances launched during fiscal year 2009 and 2010, including our Jessica Simpson fragrances, Fancy and Fancy Love, and Paris Hilton fragrances, Fairy Dust and Siren, as well as sales from our contemplated product launches in the fall of fiscal year 2010 of new fragrances under our Queen Latifah, Josie Natori, and Mark Ecko licenses. We do not anticipate launching new fragrances under our recently signed Rihanna and Kanye West licenses in fiscal year 2011. We also anticipate a continued shift in our sales from international to domestic, in part due to our belief that GUESS? is a stronger international brand than several of our new fragrances being launched in fiscal year 2010, as well as to economic conditions and changes in our arrangements with international distributors. It is always very difficult to predict sales levels, and is even more difficult in a challenging economic environment.

Results of Operations

During the quarter ended June 30, 2009, we experienced a 1% increase in sales as compared to the quarter ended June 30, 2008. The increase was primarily due to improved sales to domestic department stores, however, overall sales in the quarter continue to be negatively affected by the global economic climate. Our total sales were less than anticipated, essentially due to lower than expected international sales. However, our product sales mix, primarily due to increased domestic sales, resulted in improved margins; and reduced spending and staffing resulted in a substantially reduced loss for the quarter compared to the same prior year period.

Our gross margins may not be comparable to other entities that include all of the costs related to their distribution network in costs of goods sold, since we allocate a portion of these distribution costs to costs of goods sold and include the remaining unallocated amounts as selling and distribution expenses. Selling and distribution expenses for the quarters ended June 30, 2009, and 2008, include $0.7 million and $1.2 million, respectively, relating to the cost of warehouse operations not allocated to inventories and other related distribution expenses (excluding shipping expenses which are recorded as cost of goods sold). A portion of these costs is allocated to inventory in accordance with GAAP.

Comparison of the three-month period ended June 30, 2009 with the three-month period ended June 30, 2008.

Net Sales

                                              For the Three Months Ended June 30,
                                                                 %
                                            2009              Change            2008
                                                            (in millions)
  Domestic sales                          $     8.4              53%           $  5.5
  International sales                          10.2             (36)%            16.0
  Unrelated customer sales                     18.6             (13)%            21.5
  Related sales                                 5.0              173%             1.8
  Total net sales                         $    23.6               1%           $ 23.3


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% change is based on unrounded numbers

During the three-months ended June 30, 2009, net sales increased 1% to $23.6 million, as compared to $23.3 million for the same prior year period. The increase was primarily due to the launches of our Jessica Simpson fragrances, Fancy, in August 2008 and, Fancy Love, in June 2009, primarily in our domestic market, resulting in an increase in gross sales of $2.9 million and the launches of our Paris Hilton fragrances, Fairy Dust, in September 2008, and Siren, in June 2009, resulting in gross sales of $1.9 million. However, the increase in sales was negatively impacted by the current global economic environment, resulting in lower sales than anticipated primarily in our international market.

Net sales to unrelated customers, which represent 79% of our total net sales for the three-months ended June 30, 2009, decreased 13% to $18.6 million, as compared to $21.5 million for the same prior year period. This was primarily due to a decrease in sales in our international market. Net sales to the U.S. department store sector increased 53% to $8.4 million for the three-months ended June 30, 2009, as compared to $5.5 million for the same

prior year period, while net sales to international distributors decreased 36% to $10.2 million, as compared to $16.0 million for the same prior year period. The increase in domestic sales was primarily due to the launch of our new Jessica Simpson fragrances, as well as our new Paris Hilton fragrances, noted above. Additionally, in the domestic market we benefited from higher levels of sell-through in difficult economic conditions. The decrease in international net sales was primarily due to the continuing global recessionary economic conditions and the volatility of the U.S. dollar.

Sales to related parties increased 173% to $5.0 million for the three-months ended June 30, 2009, as compared to $1.8 million for the same prior year period. The increase is primarily due to an increase in GUESS? brands fragrances gross sales of $2.8 million to Perfumania. During the same prior year period, we experienced inventory shortages of certain products, which for the most part, negatively impacted our related party sales. (See Note G to the accompanying unaudited Condensed Consolidated Financial Statements for further discussion of related parties).

Cost of Goods Sold


                                            For the Three Months Ended June 30,
                                                           %
                                        2009            Change           2008
                                                              (in
                                                         millions )
      Unrelated customers             $     8.3           (26)%      $       11.2
      As a % of unrelated
      customer net sales                     44 %                              52 %
      Related parties                       2.4            345%               0.5
      As a % of related parties
      net sales                              48 %                              30 %
      Total cost of goods sold        $    10.7            (9)%      $       11.7
      As a % of net sales                    45 %                              50 %


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*

% change is based on unrounded numbers

During the three-months ended June 30, 2009, our overall cost of goods sold decreased as a percentage of net sales to 45%, as compared to 50% for the same prior year period. Cost of goods sold as a percentage of net sales to unrelated customers and related parties approximated 44% and 48%, respectively, for the three-months ended June 30, 2009, as compared to 52% and 30%, respectively, for the same prior year period. The three-months ended June 30, 2009, includes a higher percentage of sales to U.S. department store customers, which sales generally have a higher margin than sales of these products to international distributors, which generally reflect a lower margin. As is common in the industry, we offer international customers higher discounts, which are generally offset by reduced advertising expenditures for those sales, as the international distributors are responsible for advertising in their own territories.
International distributors have no rights to return merchandise. During the three-months ended June 30, 2008, inventory shortages of certain products mostly affected our related parties sales, resulting in significantly lower cost of goods sold.

Total Operating Expenses

                                             For the Three Months Ended June 30,
                                                               %
                                              2009           Change          2008
                                                        (in millions)
   Advertising and promotional            $        8.0          (17)%      $     9.7
   As a % of net sales                              34 %                          41 %
   Selling and distribution                        3.4          (18)%            4.1
   As a % of net sales                              14 %                          18 %
   Royalties                                       2.7           3%              2.6
   As a % of net sales                              11 %                          11 %
   General and administrative                      2.1          (17)%            2.6
   As a % of net sales                               9 %                          11 %
   Depreciation and amortization                   0.7           10%             0.6
   As a % of net sales                               3 %                           3 %
   Total operating expenses               $       16.9          (14)%      $    19.6
   As a % of net sales                              71 %                          84 %


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*

% change is based on unrounded numbers

During the three-months ended June 30, 2009, total operating expenses decreased 14% to $16.9 million from $19.6 million, decreasing as a percentage of net sales to 71% from 84% in the same prior year period. However, certain individual components of our operating expenses experienced more significant changes.

Advertising and Promotional Expenses

Advertising and promotional expenses decreased 17% to $8.0 million for the three-months ended June 30, 2009, as compared to $9.7 million in the same prior year period, decreasing as a percentage of net sales to 34% from 41%. The decrease is primarily due to reductions in advertising and demonstration costs and in-store representatives, both in U.S department stores and internationally.
During the prior year period, we incurred advertising and promotion expense in order to position ourselves for the launches of Jessica Simpson, Fancy, and Paris Hilton, Fairy Dust, fragrances.

Selling and Distribution Costs

Selling and distribution costs decreased 18% to $3.4 million for the three-months ended June 30, 2009, as compared to $4.1 million in the same prior year period, decreasing as a percentage of sales to 14% from 18%. The decrease was mainly attributable to lower warehouse operational costs of $0.7 million, resulting from an increase in inventory levels, as compared to $1.2 million in the same period year period.

Royalties

Royalties increased 3% to $2.7 million for the three-months ended June 30, 2009, as compared to $2.6 million in the same prior year period, remaining constant as a percentage of net sales at 11%. The increase is the result of the current sales mix, and reflects contractual royalty rates on actual sales coupled with minimum royalty requirements, most notably for Paris Hilton cosmetics, sunglasses, and handbags, for which minimum sales levels were not achieved. In fiscal year 2009, we assigned the worldwide exclusive licensing rights for the production and distribution of Paris Hilton sunglasses, which will begin generating sublicensing revenues in the fall of fiscal year 2010. In fiscal year 2008, we sublicensed the international rights for the handbags, which continues to absorb a portion of the minimum royalty. We generated sublicense revenue of $0.1 million in the three-months ended June 30, 2009, and 2008, which has been recorded as a reduction in royalty expense.

General and Administrative Expenses

General and administrative expenses decreased 17% to $2.1 million for the three-months ended June 30, 2009, as compared to $2.6 million in the same prior year period, decreasing as a percentage of sales to 9% from 11%. The decrease in expenses was mainly attributable to a decrease in personnel and the related benefit and insurance expenses, and a decrease in professional fees.

Depreciation and Amortization

Depreciation and amortization increased 10% to $0.7 million for the three-months
ended June 30, 2009, as compared to $0.6 million in the same prior year period,
. . .