10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

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FORM 10-Q

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(Mark One)

þ

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

For the quarterly period ended: DECEMBER 31, 2008

or

¨

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

For the transition period from ________ to ________

^{Commission File Number: 0-15491}

PARLUX FRAGRANCES, INC.

(Exact Name of Registrant As Specified in Its Charter)

______________

DELAWARE	22-2562955
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

5900 N. Andrews Avenue, Suite 500, Fort Lauderdale, FL  33309

(Address of Principal Executive Offices) (Zip Code)

(954) 316-9008

(Registrant’s Telephone Number, Including Area Code)

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 þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨  Accelerated filer ¨  Non-accelerated filer ¨  Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at February 9, 2008
Common Stock, $0.01 par value per share	20,324,812 shares

PART I. – FINANCIAL INFORMATION

Item 1.

Financial Statements.

See pages 16 to 32.

Item 2.

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

Parlux Fragrances, Inc. is a manufacturer and international distributor of prestige products. It holds 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 Marc Ecko, GUESS?, Jessica Simpson, Nicole Miller, Josie Natori, Queen Latifah, 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. Investors are cautioned that forward-looking statements involve many risks and uncertainties, which may affect our business and prospects, including economic, competitive, governmental 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, 2008. Accordingly, actual results may differ material ly 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 forward-looking 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 notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

Recent Developments

Paris Hilton Sunglass License

On April 5, 2006, we entered into an exclusive worldwide license agreement with PHEI, to develop, manufacture and distribute sunglasses under the Paris Hilton name. The initial term of the agreement expires on January 15, 2012, and is renewable for an additional five-year period. In January 2009, we entered into an agreement with Gripping Eyewear, Inc. (”GEI”), assigning the worldwide exclusive licensing rights with Paris Hilton Entertainment, Inc. (“PHEI”), for the production and distribution of Paris Hilton Sunglasses. We remain contingently liable for the minimum guaranteed royalty under the license. However, we anticipate offsetting approximately 60% of such from our assignment to GEI through the agreement expiration date of January 15, 2012.

Marc Ecko Fragrance License

Effective November 5, 2008, we entered into an exclusive license agreement with Ecko Complex LLC, to develop, manufacture and distribute fragrances under the Marc Ecko marks. The initial term of the agreement expires on December 31, 2014, and is renewable for an additional three-year term if certain sales levels are met. We must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based upon sales volume. We anticipate launching a new fragrance under this license in the fall of 2009. Our license agreement calls for minimum royalties in the first year after the launch of an initial product, based upon a minimum sales target. Based upon preliminary discussions with our retail partners, and assuming no material adverse change in the current economic environment, we anticipate sales for this brand should exceed the minimum target.

Josie Natori Fragrance License

Effective May 1, 2008, we entered into an exclusive license agreement with J.N. Concepts, Inc., to develop, manufacture and distribute prestige fragrances and related products under the Josie Natori name. The initial term of the agreement expires on September 30, 2012, or December 31, 2012, depending on the first product launch date, and is renewable for an additional three-year term if certain sales levels are met. We must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based upon sales volume. We anticipate launching a new fragrance under this license in the fall of 2009 or early 2010. Since this brand is a higher end luxury brand that we expect to launch in an exclusive arrangement with an upper tier retailer, we expect that our first year sales will not be material.

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Queen Latifah Fragrance License

Effective May 22, 2008, we entered into an exclusive license agreement with Queen Latifah Inc., to develop, manufacture and distribute prestige fragrances and related products under the Queen Latifah name. The initial term of the agreement expires on March 31, 2014, and is renewable for an additional five-year term if certain sales levels are met. We must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based upon sales volume. We anticipate launching a new fragrance under this license in the fall of 2009 or early 2010. Our license agreement calls for minimum royalties in the first year after the launch of an initial product, based upon a minimum sales target. Based upon preliminary discussions with our retail partners, and assuming no material adverse change in the current economic environment, we anticipate sales for this brand should exceed the minimum target.

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, 2008, 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 ch ange 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

Effective April 1, 2008, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and expands disclosure requirements about fair value measurements. In accordance with the Financial Accounting Standards Board (“FASB”) Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), we will defer the adoption of SFAS 157 for our non-financial assets and non-financial liabilities, except those items recognized or disclosed at fair value on an annual or more frequent recurring basis, until April 1, 2009. In October 2008, the FASB issued Staff Position FAS 157-3, Determining the Fair Value of a Financia l Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS 157 in a market that is not active. It is effective upon issuance, including prior periods for which financial statements have not been issued. The adoption of SFAS 157 did not have a material impact on our fair value measurements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB No. 115 ("SFAS 159"). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for our fiscal year ending March 31, 2009. We implemented the provisions of SFAS 159 effective April 1, 2008. The adoption of SFAS 159 did not have a material impact on our condensed 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. We are currently assessing the financial impact, if any, of SFAS 141(R) on our condensed 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

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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. We are currently assessing the financial impact, if any, of SFAS 160 on our condensed consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). The current GAAP hierarchy, as set forth in the American Institute of Certified Public Accountants (“AICPA”) Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, has been criticized because (1) it is directed to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB Statements of Financial Accounting Concepts. The FASB believes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Accordingly, the FASB concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and is issuing t his Statement to achieve that result. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We are currently reviewing the provisions of SFAS 162 to determine the impact, if any, on our condensed consolidated financial statements.

During April 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 142-3, Determination of the Useful Life of Intangible Assets (“FAS 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 GAAP. FAS 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. We are currently assessing the financial impact, if any, of this statement on our condensed consolidated financial statements.

Significant Trends

Over the last few years, a significant number of new prestige fragrance products have been 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, has fueled 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. 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, we have implemented a number of cost reduction initiatives including a targeted reduction in staff, along with a reduction in committed advertising and promotional spending, and expect to reduce our production levels in response to the current economic environment.

During the recent 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, although sales of our products increased during this period, as a result of investments we made with our promotional activities and in our domestic sales force.

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

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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.

In light of the recent downturn in the global economy the Company performed a review of its intangible, long-lived assets at December 31, 2008. This review was based upon the estimated future net cash flows for the remaining period of each license. Based upon management’s review, no impairment charges were deemed necessary.

Results of Operations

As more fully discussed in Note N to the accompanying condensed consolidated financial statements, on December 6, 2006, the Company sold the Perry Ellis fragrance brand license back to Perry Ellis International (PEI) at a price of approximately $63 million, including approximately $21 million for inventory and promotional products relating to the brand. Subsequently, the Perry Ellis brand activity has been presented as discontinued operations and prior period statements of operations have been retrospectively adjusted. The discussions on results of operations that follow are based upon the results from continuing operations and exclude any discussion of discontinued operations, unless specifically noted.

We did business with fragrance distributors owned/operated by individuals related to our former Chairman and CEO. Through June 30, 2007, these sales were included as related party sales in the accompanying condensed consolidated statements of operations. As of June 30, 2007, the former Chairman and CEO’s beneficial ownership interest in the Company was approximately 7.6%. During the quarter ended September 30, 2007, his beneficial ownership declined to less than 5%. Accordingly, the Company’s management determined that, effective as of July 1, 2007, transactions with such parties will no longer be reported as related party transactions. As of June 30, 2008, the former Chairman and CEO had no further beneficial ownership interest in the Company.

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 nine-months ended December 31, 2008 and 2007, include approximately $4,073,000 and $3,279,000 respectively, ($1,474,000 and $1,511,000 for the three-months ended December 31, 2008 and 2007) 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 December 31, 2008, with the three-month period ended December 31, 2007.

Net Sales

During the three-months ended December 31, 2008, net sales from continuing operations increased 6% to $47,292,522, as compared to $44,543,788 for the same prior year period. The increase was primarily due to the launch, in August 2008, of our new Jessica Simpson fragrance, Fancy, resulting in an increase in gross sales of $8,391,708 and the launch, in late September 2008, of our new Paris Hilton fragrance, Fairy Dust, resulting in an increase in gross sales of $6,000,269. Both fragrances were launched in our domestic market. However, the increase in sales was negatively impacted by the current global economic environment, resulting in a significant drop in consumer retail business and retail re-orders, particularly in our international market.

Net sales to unrelated customers, which represented 82% of our total net sales for the three-months ended December 31, 2008, increased 10% to $38,546,367, as compared to $35,055,318 for the same prior year period. This was primarily due to an increase in sales to the U.S. department store sector. Net sales to the U.S. department store sector increased 82% to $24,140,143 for the three-months ended December 31, 2008, as compared to $13,288,524 for the same prior year period, while net sales to international distributors decreased 34% to $14,406,223, as compared to $21,766,868 for the same prior year period. The increase in domestic sales was primarily due to the launch of our new Jessica Simpson fragrance, Fancy, and the launch of our new Paris Hilton fragrance, Fairy Dust, noted above. Additionally, in the domestic market we benefited from our investments in promotional activities and our domestic sales force, coupled with high level s of sell-through in difficult economic conditions. The decrease in international net sales was primarily due to global recessionary economic conditions and the volatility of the U.S. dollar. Sales to related parties, primarily from Perfumania, (See Note F to the accompanying condensed consolidated financial statements for further discussion of related parties) decreased 8% to $8,746,156 for the three-months ended December 31, 2008, as compared to $9,488,396 for the same prior year period. The decrease in sales reflects the

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depressed economic conditions within the U.S. retail industry, partially offset by approximately $2,200,000 in sales of overstock merchandise to Perfumania.

Cost of Goods Sold

Our overall cost of goods sold remained constant at 50% of net sales for the three-months ended December 31, 2008, as compared to the same prior year period. Cost of goods sold as a percentage of net sales to unrelated customers and related parties approximated 47% and 60%, respectively, for the three-months ended December 31, 2008, as compared to 49% and 53%, respectively, for the same prior year period. The three-months ended December 31, 2008, included 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. Internatio nal distributors have no rights to return merchandise. As noted above, the current year period also includes the sale of overstock merchandise to related parties, which sales resulted in lower margins.

Total Operating Expenses

Total operating expenses increased by 42% for the three-months ended December 31, 2008, as compared to the same prior year period, to $31,085,949 from $21,896,502, increasing as a percentage of net sales to 66% from 49%. However, certain individual components of our operating expenses discussed below experienced more significant changes.

Advertising and Promotional Expenses

Advertising and promotional expenses increased 48% to $18,370,026 for the three-months ended December 31, 2008, as compared to $12,454,247 for the same prior year period, increasing as a percentage of net sales to 39% from 28%, primarily due to the launches and advertising campaigns for our new Jessica Simpson and Paris Hilton fragrances in the fall of 2008 and due to the investments we made with our promotional activities in our domestic markets. During the prior year period, we incurred advertising and promotional costs in connection with the launch of our Paris Hilton Can Can fragrance. During the quarter ended December 31, 2008, we anticipated significantly higher sales and we committed our spending accordingly. However, during the last five weeks of the quarter, retailers experienced a significant drop in consumer business and re-orders were negatively affected. We anticipate promotional spending for all brands to decrease during the fourth quarter ending March 31, 2009, and into our next fiscal year as we reduce our promotional spending in response to the current economic climate.

Selling and Distribution Costs

Selling and distribution costs increased 47% to $4,936,975 for the three-months ended December 31, 2008, as compared to $3,358,058 for the same prior year period, increasing as a percentage of sales to 10% from 8%. The increase in costs was mainly attributable to increases in personnel for the Domestic Sales and Marketing departments required to support new product development and in-store activities of our launches and the holiday season. Additionally, selling expenses were incurred with the launch of our new Jessica Simpson brand. During the prior year period, our selling and distribution cost decreased primarily due to the centralization of all distribution activities in our New Jersey facility.

Royalties

Royalties increased by 13% to $3,734,456 for the three-months ended December 31, 2008, as compared to $3,301,514 for the same prior year period, increasing as a percentage of net sales to 8% from 7%. The increase is due to the increase in sales for the three-months ended December 31, 2008, 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. We anticipate that this percentage will remain relatively constant for the remainder of the fiscal year ending March 31, 2009, as increases in fragrance sales partially offset minimum royalty payments for Paris Hilton non-fragrance licenses. In January 2009, we entered into an agreement with GEI, assigning the worldwide exclusive licensing rights with PHEI, for the production and distribution of Paris Hilton sunglass es.

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General and Administrative Expenses

General and administrative expenses increased 73% to $3,416,942 for the three-months ended December 31, 2008, as compared to $1,975,670 for the same prior year period, increasing as a percentage of sales to 7% from 4%. The increase in expenses was mainly attributable to an increase in the reserves for uncollectible accounts receivable of approximately $637,000, as compared to the same prior year period, resulting from the aging of past due receivables and to an increase in personnel, and related benefit and insurance expenses, partially offset by a decrease in accounting fees.

Depreciation and Amortization

Depreciation and amortization decreased 22% to $627,550 for the three-months ended December 31, 2008, as compared to $807,013 for the same prior year period, decreasing as a percentage of sales to 1% from 2%. The decrease was attributable to lower amortization expense. In addition, an impairment charge of $200,000 was recorded in the comparable prior year period in connection with the XOXO fragrance license (See Note D to the accompanying condensed consolidated financial statements for further discussion).

Operating (Loss) Income

As a result of the above factors, we incurred an operating loss from continuing operations of $(7,357,012) for the three-months ended December 31, 2008, as compared to an operating income from continuing operations of $493,840 for the same prior year period.

Net Interest/Income Expense

Net interest income was $40,632 in the three-months ended December 31, 2008, as compared to net interest expense of $217,067 for the same prior year period, as we earned interest on our cash balances and did not need to utilize our line of credit during the three-months ended December 31, 2008.

(Loss) Income Before Income Taxes, Taxes, Discontinued Operations and Net (Loss) Income

Our loss from continuing operations before income taxes for the three-months ended December 31, 2008, was $(7,316,400), as compared to income from continuing operations before income taxes of $288,648 for the same prior year period. Our tax benefit in the current year period and our tax provision in the prior year period reflect an estimated effective rate of 38%. As a result, we incurred a loss from continuing operations of $(4,536,168) for the three-months ended December 31, 2008, as compared to income from continuing operations of $178,962 for the same prior year period.

Income from discontinued operations (See Note N to the accompanying condensed consolidated financial statements for further discussion), net of the tax effect, was $0 for the three-months ended December 31, 2008, and $3,719 for the same prior year period. There was no discontinued operation activity during the three-months ended December 31, 2008.

As a result, we incurred a net loss of $(4,536,168) for the three-months ended December 31, 2008, as compared to net income of $182,681 for the same prior year period.

Comparison of the nine-month period ended December 31, 2008, with the nine-month period ended December 31, 2007.

Net Sales

During the nine-months ended December 31, 2008, net sales from continuing operations increased 9% to $122,988,837, as compared to $113,277,679 for the same prior year period. The increase was mainly attributable to an increase of $13,998,170 in gross sales of our GUESS? brand fragrances, primarily due to the launch of GUESS? by Marciano in February 2008, which generated gross sales of $10,406,543 during the nine-month period, and to the launch, in August 2008, of our new Jessica Simpson fragrance, Fancy, resulting in an increase in gross sales of $14,910,050 and the launch, in late September 2008, of our new Paris Hilton fragrance, Fairy Dust, resulting in an increase in gross sales of $7,494,204. However, the increase in sales was negatively impacted during the holiday season by the current global economic environment, resulting in a significant drop in consumer retail business and retail re-orders. In addition, delays in o btaining critical components, particularly glass and plastics, negatively impacted our first quarter of fiscal year 2009.

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Net sales to unrelated customers, which represented 76% of our total net sales for the nine-months ended December 31, 2008, increased 43% to $93,839,974, as compared to $65,493,977 for the same prior year period, mainly as a result of an increase in gross sales of $15,667,856 to unrelated customers of our GUESS? brand fragrances and the launch of our new Jessica Simpson and Paris Hilton fragrances sold primarily in our domestic market. Net sales to the U.S. department store sector increased 82% to $45,293,441 for the nine-months ended December 31, 2008, as compared to $24,952,863 for the same prior year period, while net sales to international distributors increased 20% to $48,546,533, as compared to $40,541,114 for the same prior year period. The increase in domestic sales is primarily due to the launch of our new Jessica Simpson fragrance, Fancy, and the launch of our new Paris Hilton fragrance, Fairy Dust, noted above. Additionally, in the domestic market we benefited from our investments in promotional activities and our domestic sales force, coupled with higher levels of sell-through in difficult economic conditions. The increase in international net sales was primarily a result of an increase of $10,315,607 in gross sales of our GUESS? brand fragrances and an increase of $4,996,629 in gross sales of our Paris Hilton’s Can Can fragrance, which was launched internationally in October of 2007. However, our international net sales were negatively impacted by the current recessionary economic conditions and the volatility of the U.S. dollar. Sales to related parties decreased 39% to $29,148,863 for the nine-months ended December 31, 2008, as compared to $47,783,701 for the same prior year period, reflecting the depressed economic conditions within the U.S. retail industry, coupled with certain current unrelated customers being reported as related customers through June 30, 2007.

Effective July 1, 2007, related party sales include only sales to Perfumania, as sales to certain distributors, that were previously reported as related parties, are now included as unrelated international customer sales (See Note F to the accompanying condensed consolidated financial statements for further discussion of related parties).

Cost of Goods Sold

Our overall cost of goods sold as a percentage of net sales decreased to 48% for the nine-months ended December 31, 2008, as compared to 51% for the same prior year period. Cost of goods sold as a percentage of net sales to unrelated customers and related parties approximated 48% and 49%, respectively, for the nine-months ended December 31, 2008, as compared to 51% for both unrelated customers and related parties for the same prior year period. The nine-months ended December 31, 2008, 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 advert ising in their own territories. International distributors have no rights to return merchandise. Both comparative periods also included the sale of overstock merchandise to related parties, which sales resulted in lower margins.

Total Operating Expenses

Total operating expenses increased by 43% for the nine-months ended December 31, 2008, as compared to the same prior year period, to $73,229,720 from $51,224,419, increasing as a percentage of net sales to 60% from 45%. However, certain individual components of our operating expenses discussed below experienced more significant changes than others.

Advertising and Promotional Expenses

Advertising and promotional expenses increased 68% to $39,734,565 for the nine-months ended December 31, 2008, as compared to $23,687,391 for the same prior year period, increasing as a percentage of net sales to 32% from 21%, primarily due to the launches and advertising campaigns for our new Jessica Simpson and Paris Hilton fragrances in the fall of 2008 and due to the investments we made with our promotional activities in our domestic markets. During the prior year period, we incurred advertising and promotional costs in connection with the launch of our Paris Hilton Can Can fragrance. During the quarter ended December 31, 2008, we anticipated significantly higher sales and we committed our spending accordingly. However, during the last five weeks of the quarter, retailers experienced a significant drop in consumer business and re-orders were negatively affected. We anticipate promotional spending for all brands to decrease du ring the fourth quarter ending March 31, 2009, and into our next fiscal year as we reduce our promotional spending in response to the current economic climate.

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Selling and Distribution Costs

Selling and distribution costs increased 52% to $13,041,895 for the nine-months ended December 31, 2008, as compared to $8,575,452 for the same prior year period, increasing as a percentage of net sales to 11% from 8%. The increase in costs was mainly attributable to increases in personnel for the Domestic Sales and Marketing departments required to support new product development and in-store activities of our launches and the holiday season. Additionally, selling expenses were incurred with the launch of our new Jessica Simpson brand. During the prior year period, our selling and distribution cost decreased primarily due to the centralization of all distribution activities in our New Jersey facility.

Royalties

Royalties increased by 11% to $10,211,310 for the nine-months ended December 31, 2008, as compared to $9,240,576 for the same prior year period, remaining constant as a percentage of net sales at 8%. The increase is due to the increase in sales for the three-months ended December 31, 2008, 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. We anticipate that this percentage will remain relatively constant for the remainder of the fiscal year ending March 31, 2009, as increases in fragrance sales partially offset minimum royalties for Paris Hilton non-fragrance licenses. In January 2009, we entered into an agreement with GEI, assigning the worldwide exclusive licensing rights with PHEI, for the production and distribution of Paris Hilton sunglass es.

General and Administrative Expenses

General and administrative expenses increased 11% to $8,357,841 for the nine-months ended December 31, 2008, as compared to $7,500,119 for the same prior year period, remaining constant as a percentage of net sales at 7%. The increase in expenses was mainly attributable to an increase in personnel, and related benefit and insurance expenses, partially offset by a decrease in accounting fees.

Depreciation and Amortization

Depreciation and amortization decreased 15% to $1,884,109 for the nine-months ended December 31, 2008, as compared to $2,220,881 for the same prior year period, remaining constant at 2% of net sales. The decrease was attributable to lower amortization expense, as an impairment charge of approximately $385,000 was recorded in the comparative prior year period in connection with the XOXO fragrance license (See Note D to the accompanying condensed consolidated financial statements for further discussion).

Operating (Loss) Income

As a result of the above factors, we incurred an operating loss from continuing operations of $(9,551,805) for the nine-months ended December 31, 2008, as compared to an operating income from continuing operations of $3,936,495 for the same prior year period.

Net Interest/Income Expense

Net interest income was $238,062 in the nine-months ended December 31, 2008, as compared to net interest expense of $1,071,394 for the same prior year period, as we did not utilize our line of credit during the current year period.

(Loss) Income Before Income Taxes, Income Taxes, Discontinued Operations and Net (Loss) Income

Loss from continuing operations before taxes for the nine-months ended December 31, 2008, was $(9,314,781), as compared to income from continuing operations before taxes of $3,372,905 for the same prior year period. Our tax benefit in the current year and our tax provision in the prior year reflect an estimated effective tax rate of 38%. Actual tax benefits realized may be greater or less than amounts recorded, and such differences may be material. As a result, we incurred a loss from continuing operations of $(5,775,164) for the nine-months ended December 31, 2008, as compared to income from continuing operations of $2,091,201 for the same prior year period.

8

Income from discontinued operations net of the tax effect was $0 for the nine-months ended December 31, 2008, as compared to $25,350 for the same prior year period. (See Note N to the accompanying condensed consolidated financial statements for further discussion).

As a result, we incurred a net loss for the nine-months ended December 31, 2008, of $(5,775,164), as compared to net income of $2,116,551 for the same prior year period.

Liquidity and Capital Resources

Working capital decreased to $100,456,915 at December 31, 2008, compared to $107,293,236 at March 31, 2008, primarily due to the use of current assets to support the net loss reported for the nine-months ended December 31, 2008.

During the nine-months ended December 31, 2008, net cash used in operating activities was $9,486,005, as compared to net cash provided by operating activities of $27,971,307 during the same prior year period. The current year activity reflects an increase in inventories, prepaid expenses and other current assets, accounts payable and accrued expenses due to the launch of our new Jessica Simpson and Paris Hilton fragrances in the current year and the anticipated launches planned for our next fiscal year. This was exacerbated by the current downturn in global economic conditions. The prior year activity reflects an increase in trade receivables, along with a decrease in accounts payable, offset by a refund of income taxes paid in the prior year, decreases in inventories and prepaid expenses and receipt of the remaining balance due from the sale of the Perry Ellis fragrance license.

For the nine-months ended December 31, 2008, net cash used in investing activities was $185,916, as compared to net cash provided by investing activities of $740,685 during the same prior year period. The current year activity reflects lower purchases of equipment and trademarks, as compared to the prior year period, and no restricted cash, while the prior year investing activities primarily resulted from a decrease in restricted cash.

During the nine-months ended December 31, 2008, net cash used in financing activities was $1,846,997, as compared to $16,391,630 during the same prior year period. The current year activity reflects $1,172,622 of cash payments for the repurchase of shares of our common stock and continued repayments of capital leases, while the prior year financing activities was mainly attributable to $16,775,318 in repayments of the GMACCC credit facility, offset by an increase of $2,339,990 in proceeds from the issuance of common stock and exercise of warrants.

As of December 31, 2008 and 2007, our ratios of the number of days sales in accounts receivable and number of days cost of sales in inventory, on an annualized basis, were as follows:

	December 31,
	2008		2007
Trade accounts receivable:
Unrelated (1)		88		104
Related:
Perfumania		171		84
Total		108		97
Inventories		280		260

———————

(1)

Calculated on gross trade receivables excluding allowances for doubtful accounts, sales returns and advertising allowances of approximately $9,014,000 and $6,763,000 in 2008 and 2007, respectively.

The decrease in the number of days in trade account receivables from 2007 to 2008 for unrelated customers was mainly attributable to improved collections from our international distributors in the nine-months ended December 31, 2008. Due to restrictions on sales of GUESS? products and delays in receiving GUESS? products, in the prior year, certain international distributors had exceeded their payment terms as of December 31, 2007. During this past holiday season, U.S. department store retailers experienced a major reduction in consumer traffic, resulting in decreased sales. In addition, the current volatility in the U.S. dollar has affected the purchasing power and cash flow of many of our international customers. As a result of this it is likely that the number of days in trade receivables at the end of the next quarter will increase. Management closely monitors the Company’s activities with all customers, however, if one or mor e of our major customers were to default on their payables to the Company, it would have a material adverse affect on our overall sales and liquidity.

9

The number of days sales in trade receivables from Perfumania, Inc. (“Perfumania”) continues to exceed those of unrelated customers, due mainly to their seasonal cash flow (See Note F to the accompanying condensed consolidated financial statements for further discussion of our relationship with Perfumania). However, due to the limited amount of sales to Perfumania during the nine-months ended December 31, 2008, and the reclassification of certain distributors previously classified as related parties in 2007, the calculated number of days sales in accounts receivable from Perfumania is not indicative of a true aging. The number of days, based upon the actual aging as of December 31, 2008, would be 119 days (112 days at December 31, 2007). During the month of January 2009, we received an additional $6 million in payments from Perfumania.

On January 28, 2009, Perfumania filed a Form 8-K with the SEC disclosing that it was not in compliance with a certain debt covenant under its Senior Credit Facility triggering an event of default. Perfumania reported that it has requested a waiver from their Senior Creditor, but there are no guarantees that the waiver will be received. If Perfumania is unable to obtain a waiver or to refinance its credit facility, its operations and financial condition would be materially adversely affected. Any significant reduction in business with Perfumainia as a customer of the Company would have a material adverse affect on our overall net sales. Perfumania’s inability to pay its account balance due to us at a time when it has a substantial accounts payable balance could have an adverse affect on our financial condition and results of operations. Management closely monitors the Company’s activity with Perfumania and holds periodic discussions with Perfumania in order to review their anticipated payments for each quarter. Perfumania is currently performing under the terms of its credit arrangements. No allowance for credit loss has been recorded as of December 31, 2008. Management will continue to closely monitor all developments with respect to its extension of credit to Perfumania.

As noted in Note F to the accompanying condensed consolidated financial statements, effective as of July 1, 2007, transactions with such parties formerly identified as related, through their affiliation with our former Chairman and CEO, are no longer reported as related party transactions. Their number of days sales are included with unrelated parties in the 2008 and 2007 periods.

The lead time for certain of our raw materials and components inventory (up to 180 days) requires us to maintain at least a three to six month supply of some items in order to ensure production schedules. In addition, when we launch a new brand or Stock Keeping Unit (“SKU”), we frequently produce a six to nine-month supply to ensure adequate inventories if the new products exceed our forecasted expectations. We believe that the gross margins on our products outweigh the additional carrying costs. However, if future sales do not reach forecasted levels, it could result in excess inventories and may cause us to decrease prices to reduce inventory levels.

As of March 31, 2008, we had repurchased, under all phases of our common stock buy-back program, a total of 11,347,377 shares at a cost of $39,176,713. On October 16, 2008, our Board of Directors (the “Board”) approved the reinstatement of our buy-back program, approving the repurchase of 1,000,000 shares, subject to certain limitations, including approval from our new lender. Our new lender’s approval was received on October 24, 2008. During the three-months ended December 31, 2008, we repurchased, in the open market, 355,700 shares at a cost of $1,172,622.

On July 20, 2001, we entered into a Loan and Security Agreement (the “Loan Agreement”) with GMAC Commercial Credit LLC (“GMACCC”). On January 4, 2005, the Loan Agreement was extended through July 20, 2006. Under the Loan Agreement, we were able to borrow, depending upon the availability of a borrowing base, on a revolving basis, up to $20,000,000 at an interest rate of LIBOR plus 2.75% or the Bank of New York’s prime rate, at our option.

On January 10, 2006, the Loan Agreement was amended, increasing the loan amount to $30,000,000, with an additional $5,000,000 available at our option, while extending the maturity to July 20, 2008. The interest was reduced to 0.25% below the prime rate. During May 2006, we exercised our option and increased the line to $35,000,000. On September 13, 2006, the Loan Agreement was further amended, temporarily increasing the loan amount to $40,000,000 until December 13, 2006, at which time the maximum loan amount reverted back to $35,000,000. On July 20, 2008, the Loan Agreement with GMACCC expired.

Restricted cash represents collections of trade accounts receivable deposited with our bank and pending transfer to GMACCC. As of March 31, 2008, there were no amounts on deposit with our bank pending transfer.

Through July 20, 2008, substantially all of our assets collateralized the Loan Agreement which contained customary events of default and covenants prohibiting, among other things, incurring additional indebtedness in

10

excess of a specified amount, paying dividends, creating liens, and engaging in mergers and acquisitions without the prior consent of GMACCC. The Loan Agreement also contained certain financial covenants relating to net worth, interest coverage and other financial ratios.

On July 22, 2008, we signed a new Loan and Security Agreement (the “New Loan Agreement”) with Regions Bank (“Bank”). The New Loan Agreement provides a credit line of up to $20,000,000, depending upon the availability of a borrowing base, at an interest rate of LIBOR plus 2.00% or the Bank’s prime rate, at our option, of which no amounts were outstanding at December 31, 2008.

Restricted cash represents collections of trade accounts receivable deposited with our bank and pending transfer to the Bank. As of December 31, 2008, there were no amounts on deposit with our bank pending transfer.

Substantially all of our assets collateralize our New Loan Agreement. The New Loan Agreement contains customary events of default and covenants which prohibit, among other things, incurring additional indebtedness in excess of a specified amount, paying dividends, creating liens, and engaging in mergers and acquisitions without the prior consent of the Bank. The New Loan Agreement also contains certain financial covenants relating to fixed charge coverage and the ratio of funded debt to EBITDA. As of December 31, 2008, we were not in compliance with our debt covenants. On February 5, 2009, we were granted a waiver from the Bank, with respect to our compliance covenants as of December 31, 2008. We are in discussions with the Bank in order to review, and potentially amend, our current debt covenants, in light of the current economic environment.

As of December 31, 2008, we did not have any “off-balance sheet” arrangements as that term is defined in Regulation S-K Item 303, nor do we have any material commitments for capital expenditures.

Management believes that funds from operations and our existing financing will be sufficient to meet our current operating and seasonal needs. However, if we were to expand operations through acquisitions, new licensing arrangements or both, we may need to obtain financing. There is no assurance that we could obtain such financing or what the terms of such financing, if available, would be. In addition, the current business environment may increase the difficulty of obtaining new financing, if needed.

If the economy were to significantly decline further, or if one or more of our major customers were to default on payments due to the Company, our liquidity could be negatively affected and our current credit facility could be affected, as we may not meet our debt covenant requirements, and we would need to obtain additional financing. There is no assurance that we could obtain such financing or what the terms of such financing, if available, would be. In addition, the current business environment may increase the difficulty of obtaining new financing, if needed.

Contractual Obligations

There were no material changes during the quarter ended December 31, 2008, in our contractual obligations previously disclosed in our Annual Report on Form 10-K for the year ended March 31, 2008.

Item 3.

Quantitative and Qualitative Disclosures About Market Risks.

During the quarter ended December 31, 2008, there have been no material changes to our exposures to market risks since March 31, 2008. Please refer to our Annual Report on Form 10-K for the year ended March 31, 2008, for a complete discussion of our exposures to market risk.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

11

Changes in Internal Control

Based on an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, there has been no change in our internal control over financial reporting during our last fiscal quarter, identified in connection with that evaluation, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

12

PART II. – OTHER INFORMATION

Item 1.

Legal Proceedings.

Litigation

On June 21, 2006, we were served with a stockholder derivative action (the “Derivative Action”) filed in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida by NECA-IBEW Pension Fund, purporting to act derivatively on behalf of the Company.

The Derivative Action named Parlux Fragrances, Inc. as a defendant, along with Ilia Lekach, Frank A. Buttacavoli, Glenn Gopman, Esther Egozi Choukroun, David Stone, Jaya Kader Zebede and Isaac Lekach, each of whom at that date was one of our directors. The Derivative Action related to the proposal from PF Acquisition of Florida LLC (“PFA”), which was owned by Ilia Lekach, to acquire all of the Company’s outstanding shares of common stock for $29.00 ($14.50 after the Stock Split) per share in cash (the “Proposal”).

The Derivative Action seeks to remedy the alleged breaches of fiduciary duties, waste of corporate assets, and other violations of law and seeks injunctive relief from the Court appointing a receiver or other truly neutral third party to conduct and/or oversee any negotiations regarding the terms of the Proposal, or any alternative transaction, on behalf of Parlux and its public shareholders, and to report to the Court and plaintiff’s counsel regarding the same. The Derivative Action alleges that the unlawful plan to attempt to buy out the public shareholders of Parlux without having proper financing in place, and for inadequate consideration, violates applicable law by directly breaching and/or aiding the other defendants’ breaches of their fiduciary duties of loyalty, candor, due care, independence, good faith and fair dealing, causing the complete waste of corporate assets, and constituting an abuse of control by the defendants. Before any response to the original complaint was due, counsel for plaintiffs indicated that an amended complaint would be filed. That First Amended Complaint (the "Amended Complaint") was served to the Company’s counsel on August 17, 2006.

The Amended Complaint continues to name the then Board of Directors as defendants along with Parlux, as a nominal defendant. The Amended Complaint is largely a collection of claims previously asserted in a 2003 derivative action, which the plaintiffs in that action, when provided with additional information, simply elected not to pursue. It adds to those claims, assertions regarding a 2003 buy-out effort and the recently abandoned buy-out effort of PFA. It also contains allegations regarding the prospect that our stock might be delisted because of a delay in meeting Securities and Exchange Commission (“SEC”) filing requirements. It relies in large measure on a bevy of media articles rather than facts known to the plaintiffs.

We and the other defendants engaged Florida securities counsel, including the counsel who successfully represented us in the previous failed derivative action, and on September 18, 2006, moved to dismiss the Amended Complaint. A Second Amended Complaint was filed on October 26, 2006, which added alleged violations of securities laws, which we moved to dismiss on December 1, 2006. A hearing on the dismissal was held on March 8, 2007. On March 22, 2007, the motion to dismiss was denied and the defendants were provided twenty (20) days to respond, and a response was filed on March 29, 2007. Since that time there has been extremely limited discovery conducted in the case. Some documents have been produced. Narrow interrogatories were answered. There have been no depositions and none has even been scheduled. A number of the factual allegations upon which the various complaints were based have fallen away, simply by op eration of time. A number of months ago, we were advised that one of the two plaintiffs was withdrawing from the case. No explanation was given. The remaining plaintiff then spent several months obtaining documents from our former auditors. The documents provide no support for any of the claims.

We then sought to take the deposition of the remaining plaintiff, who lives in Seattle. He declined to travel due to a long-standing “fear of flying” and filed a motion on August 4, 2008, for a protective order from the Court. The Court denied the motion and required him to appear here in Florida for his deposition. As a consequence of this ruling, his counsel then informed us that this plaintiff, too, was withdrawing from the case due to this travel requirement, leaving no plaintiff. We were then served with a motion on September 15, 2008, to further amend the complaint by inserting a new plaintiff. Our counsel opposed that motion on the grounds that a person not a party to the case has no standing to move to amend the complaint. A hearing on that motion was held on December 19, 2008, and the motion to amend was denied by the Court. The plaintiff’s counsel has indicated that they will now file a motion for a new plaintiff to intervene in the case and take over its direction. We have advised the plaintiff’s counsel that we intend to oppose that motion. No hearing has been scheduled on the latest motion.

13

Based on the allegations in the Second Amended Complaint, upon the information collected in the earlier litigation and upon the information provided in response to the limited discovery noted above, it is believed that the Second Amended Complaint is without merit.

Other

To the best of the Company’s knowledge, there are no other proceedings threatened or pending against the Company, which, if determined adversely to the Company, would have a material effect on the Company’s financial position or results of operations and cash flows.

Item 1A.

Risk Factors.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risks described in Part I, Item 1A in our Annual Report on Form 10-K for the year ended March 31, 2008, (“Form 10-K”). The risks described below supplements the risks described in our Form 10-K.

Perfumania’s inability to pay its accounts payable balance due to us could have an adverse effect on our financial condition and results of operations.

Perfumania is one of our largest customers. As of December 31, 2008, Perfumania had an account balance of $18.1 million due to us. As of January 31, 2009, we received an additional $6.0 million from Perfumania in payment of balances due to the Company. During the fiscal years ended March 31, 2008, 2007 and 2006, we had net sales from continuing operations of approximately $51.1 million, $11.7 million and $7.5 million, respectively, to Perfumania, which represented 33%, 9% and 7%, respectively, of our net sales from continuing operations for the periods. On January 28, 2009, Perfumania filed a Form 8-K with the SEC disclosing that it was not in compliance with a certain debt covenant under its Senior Credit Facility triggering an event of default. Perfumania reported that it has requested a waiver from their Senior Creditor, but there are no guarantees that the waiver will be received. If Perfu mania is unable to obtain a waiver or to refinance its credit facility, its operations and financial condition would be materially adversely affected. Any significant reduction in business with Perfumania as a customer of the Company would have a material adverse affect on our net sales. Perfumania’s inability to pay its account balance due to us at a time when it has a substantial accounts payable balance could have an adverse affect on our financial condition and results of operations.

The Paris Hilton and GUESS? lines are our primary sources of revenue following our sale of the Perry Ellis brand.

During the year ended March 31, 2008, licensed Paris Hilton and GUESS? brand products generated approximately $108 million and $37 million, respectively, in gross sales. The Paris Hilton and GUESS? brands of fragrances and accessories accounted for approximately 68% and 23%, respectively, of our gross sales from continuing operations during the fiscal year ended March 31, 2008. For the nine-months ended December 31, 2008, sales of Paris Hilton and GUESS? were approximately $70 million and $39 million or 55% and 30%, respectively, of our gross sales from continuing operations. If Paris Hilton's appeal as a celebrity were to diminish, or GUESS? would not approve shipments to our international distributors (See Note J to the accompanying condensed consolidated financial statements for further discussion) it could result in a material reduction in our sales of products licensed by them, adversely affecting o ur results of operations and operating cash flows. That risk has become more significant as these product lines have become our primary source of revenue. The Paris Hilton fragrance license is scheduled to expire on June 30, 2009. We have requested, and expect to receive, a renewal of this license for an additional five-year term. The GUESS? license is scheduled to expire on December 31, 2009. We anticipate that this license will not be renewed beyond its current expiration date.

Consumers have reduced discretionary purchases, including those of our products, as a result of the current general economic downturn.

We believe that consumer spending on fragrance and other accessory products is influenced to a great extent by general economic conditions and the availability of discretionary income. As a result of the recent severe economic downturn, we have experienced a decline in sales during our most recent quarter. In addition, this general economic downturn has resulted in reduced traffic in our customers’ stores which, in turn, resulted in reduced net sales to our customers. If this situation would continue, any significant long-term reduction in our sales could have a material adverse affect on our business, profitability or operating cash flows.  

14

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased		Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Program		Maximum Number of Shares that May Yet be Purchased Under the Program
October 1, 2008 – October 31, 2008		135,000	$3.42		135,000	865,000
November 1, 2008 – November 30, 2008		160,300	$3.35		160,300	704,700
December 1, 2008 – December 31, 2008		60,400	$2.89		60,400	644,300
Total		355,700			355,700

On November 3, 2008, we announced the authorization and implementation of a buyback of up to 1,000,000 shares of the Company’s common stock. This authorization is part of our existing share buyback program originally approved and announced in January 2007. There is no expiration date specified for this program. During the three-months ended December 31, 2008, we repurchased, in the open market, 355,700 shares at a cost of $1,172,622.

Item 3.

Defaults on Senior Securities.

None.

Item 4.

Submission of Matters to a Vote of Security Holders.

The Company held its Annual Meeting of Stockholders on October 16, 2008. The following is a summary of the proposals and corresponding votes.

Nomination and Election of Directors and Ratification of Appointment of Independent Auditors

All six nominees named in the proxy statement were elected with each director receiving votes as follows:

Nominee	For	Withheld
Neil J. Katz	16,481,123	229,758
Anthony D’Agostino	16,438,439	272,442
Esther Egozi Choukroun	16,345,533	365,348
Glenn H. Gopman	16,477,495	233,386
Robert Mitzman	16,438,939	271,942
David Stone	16,444,689	266,192

The ratification of our current auditors, Rachlin LLP, was approved by our stockholders as follows:

For	Against	Abstain
16,362,471	172,323	176,085

Item 5.

Other Information.

None.

Item 6.

Exhibits.

Exhibit #	Description
31.1	Certification of Chief Executive Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to §906 of the Sarbanes-Oxley Act of 2002.

15

PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2008			March 31, 2008
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	9,889,249		$	21,408,167
Trade receivables, net of allowance for doubtful accounts, sales returns and advertising allowances of approximately $9,014,000 and  $4,487,000, respectively		21,184,023			19,301,061
Trade receivables from related parties		18,102,390			15,392,112
Income tax receivable		4,694,372			2,743,694
Inventories		60,460,035			48,068,280
Prepaid expenses and other current assets, net		15,243,872			11,343,286
Deferred tax assets, net		4,088,823			4,076,358
TOTAL CURRENT ASSETS		133,662,764			122,332,958
Equipment and leasehold improvements, net		3,054,902			4,093,091
Trademarks and licenses, net		2,110,207			2,770,211
Deferred tax assets, net		1,619,071			1,619,071
Other		1,727,081			332,609
TOTAL ASSETS	$	142,174,025		$	131,147,940
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings, current portion	$	787,186		$	990,953
Accounts payable		24,984,436			11,447,992
Accrued expenses		7,434,227			2,600,777
TOTAL CURRENT LIABILITIES		33,205,849			15,039,722
Borrowings, less current portion		3,764			542,633
TOTAL LIABILITIES		33,209,613			15,582,355
COMMITMENTS  AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2008, and March 31, 2008		—			—
Common stock, $0.01 par value, 30,000,000 shares authorized, 29,993,789 shares issued at December 31, 2008, and 29,977,289 shares issued at March 31, 2008		299,938			299,773
Additional paid-in capital		101,800,139			101,575,691
Retained earnings		42,096,990			47,926,973
		144,197,067			149,802,437
Less 9,653,077 and 9,397,377 shares of common stock in treasury, at cost, at December 31, 2008, and March 31, 2008, respectively		(35,232,655	)		(34,236,852	)
TOTAL STOCKHOLDERS' EQUITY		108,964,412			115,565,585
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	142,174,025		$	131,147,940

See notes to condensed consolidated financial statements.

16

PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended December 31,						Nine Months Ended December 31,
	2008			2007			2008			2007
Net sales:
Unrelated customers, including licensing fees of $18,750 and $56,250 for the three and nine months ended December 31, 2008, and 2007, respectively	$	38,546,367		$	35,055,318		$	93,839,974		$	65,493,977
Related parties		8,746,155			9,488,470			29,148,863			47,783,702
		47,292,522			44,543,788			122,988,837			113,277,679
Cost of goods sold:
Unrelated customers		18,293,824			17,143,476			44,913,421			33,667,982
Related parties		5,269,761			5,009,970			14,397,501			24,448,783
		23,563,585			22,153,446			59,310,922			58,116,765
Operating expenses:
Advertising and promotional		18,370,026			12,454,247			39,734,565			23,687,391
Selling and distribution		4,936,975			3,358,058			13,041,895			8,575,452
Royalties		3,734,456			3,301,514			10,211,310			9,240,576
General and administrative, including share-based compensation expense of $210,764 and $278,352 for the three and nine months ended December 31, 2008, respectively, and $210,867 for the three and nine months ended December 31, 2007		3,416,942			1,975,670			8,357,841			7,500,119
Depreciation and amortization, including an impairment loss of $200,000 and $385,232 for the three and nine months ended December 31, 2007, respectively		627,550			807,013			1,884,109			2,220,881
Total operating expenses		31,085,949			21,896,502			73,229,720			51,224,419
Operating (loss) income		(7,357,012	)		493,840			(9,551,805	)		3,936,495
Other income (expense):
Interest income		58,065			4,959			303,977			5,052
Interest expense and bank charges		(17,433	)		(222,026	)		(65,915	)		(1,076,446	)
Other income		—			—			—			497,770
Foreign exchange (loss) gain		(20	)		11,875			(1,038	)		10,034
(Loss) income from continuing operations before income taxes		(7,316,400	)		288,648			(9,314,781	)		3,372,905
Income tax benefit (provision)		2,780,232			(109,686	)		3,539,617			(1,281,704	)
(Loss) income from continuing operations		(4,536,168	)		178,962			(5,775,164	)		2,091,201
Discontinued operations:
Income from operations of Perry Ellis fragrance brand		—			5,999			—			40,887
Income tax provision related to Perry Ellis brand		—			(2,280	)		—			(15,537	)
Income from discontinued operations		—			3,719			—			25,350
Net (loss) income	$	(4,536,168	)	$	182,681		$	(5,775,164	)	$	2,116,551
(Loss) income per common share:
Basic:
Continuing operations	$	(0.22	)	$	0.01		$	(0.28	)	$	0.11
Discontinued operations		0.00			0.00			0.00			0.00
Total	$	(0.22	)	$	0.01		$	(0.28	)	$	0.11
Diluted:
Continuing operations	$	(0.22	)	$	0.01		$	(0.28	)	$	0.10
Discontinued operations		0.00			0.00			0.00			0.00
Total	$	(0.22	)	$	0.01		$	(0.28	)	$	0.10

See notes to condensed consolidated financial statements.

17

PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED DECEMBER 31, 2008

(UNAUDITED)

	Common Stock				Additional Paid-In Capital			Retained Earnings			Treasury Stock						Total
	Number Issued		Par Value								Number of Shares			Cost
BALANCE at March 31, 2008		29,977,289	$	299,773	$	101,575,691		$	47,926,973			9,397,377		$	(34,236,852	)	$	115,565,585
Net loss		—		—		—			(5,775,164	)		—			—			(5,775,164	)
Excess tax deficiency		—		—		(114,189	)		—			—			—			(114,189	)
Issuance of common stock upon exercise of stock options and warrants		16,500		165		60,285			—			—			—			60,450
Issuance of common stock from treasury shares upon exercise of warrants		—		—		—			(54,819	)		(100,000	)		176,819			122,000
Share-based compensation from option grants		—		—		278,352			—			—			—			278,352
Purchase of treasury stock, at cost		—		—		—			—			355,700			(1,172,622	)		(1,172,622	)
BALANCE at December 31, 2008		29,993,789	$	299,938	$	101,800,139		$	42,096,990			9,653,077		$	(35,232,655	)	$	108,964,412

See notes to condensed consolidated financial statements.

18

PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended December 31,
	2008			2007
Cash flows from operating activities:
Net (loss) income	$	(5,775,164	)	$	2,116,551
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Share-based compensation expense		278,352			210,867
Depreciation and amortization		1,884,109			2,220,881
Provision for doubtful accounts		689,570			718,719
Write downs of prepaid promotional supplies and inventories		854,338			855,000
Deferred income tax provision		(12,465	)		—
Changes in assets and liabilities:
Increase in trade receivables - customers		(2,572,532	)		(10,311,468	)
(Increase) decrease in trade receivables - related parties		(2,710,278	)		1,944,073
Decrease in receivable from sale of fragrance brand		—			2,295,904
(Increase) decrease in income tax receivable		(1,950,678	)		5,627,930
(Increase) decrease in inventories		(12,710,256	)		8,686,375
(Increase) decrease in prepaid expenses and other current assets		(4,436,423	)		5,071,248
Decrease in inventories, non-current		—			9,249,000
Decrease in deferred tax asset		—			2,528,354
(Increase) decrease in other non-current assets		(1,394,472	)		120,639
Increase (decrease) in accounts payable		13,536,444			(4,725,152	)
Increase in accrued expenses and income taxes payable		4,833,450			1,362,386
Total adjustments		(3,710,841	)		25,854,756
Net cash (used in) provided by operating activities		(9,486,005	)		27,971,307
Cash flows from investing activities:
Net decrease in restricted cash		—			1,273,896
Purchases of equipment and leasehold improvements, net		(114,874	)		(327,799	)
Purchases of trademarks		(71,042	)		(205,412	)
Net cash (used in) provided by investing activities		(185,916	)		740,685
Cash flows from financing activities:
Repayments - line of credit, net		—			(16,775,318	)
Repayments on capital leases		(742,636	)		(687,995	)
Excess tax deficiency resulting from exercise of warrants		(114,189	)		(1,268,307	)
Purchases of treasury stock		(1,172,622	)		—
Proceeds from exercise of warrants		—			595,888
Proceeds from issuance of common stock		60,450			—
Proceeds from issuance of common stock from treasury shares		122,000			1,744,102
Net cash used in financing activities		(1,846,997	)		(16,391,630	)
Effect of exchange rate changes on cash		—			—
Net (decrease) increase in cash and cash equivalents		(11,518,918	)		12,320,362
Cash and cash equivalents, beginning of period		21,408,167			14,271
Cash and cash equivalents, end of period	$	9,889,249		$	12,334,633

See notes to condensed consolidated financial statements.

19

PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Parlux Fragrances, Inc., and its wholly-owned subsidiaries, Parlux, S.A., a French company (“S.A.”) and Parlux Ltd. (jointly referred to as “Parlux”, “Company”, “us”, and “we”). All material intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to those rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information presented not misleading. The financial information presented herein, which is not necessarily indicative of results to be expected for the current fiscal year, reflects all adjustments (consisting only of normal recurring accruals), which, in the opinion of management, are necessary for a fair presentation of the interim unaudited condensed consolidated financial statements. It is suggested that these condens ed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2008, as filed with the SEC on June 9, 2008.

B.

Share-Based Compensation, Stock Options and Other Plans

On October 11, 2007, the Company’s stockholders approved the Parlux Fragrances, Inc. 2007 Stock Incentive Plan (the “2007 Plan”), which reserved an additional 1,500,000 shares of common stock for equity-based awards to employees, officers, directors, consultants and/or independent contractors of the Company. The 2007 Plan was adopted by the Board of Directors on June 20, 2007, subject to stockholder approval and the shares underlying the options were registered with the Securities and Exchange Commission on a Form S-8 registration statement declared effective on December 28, 2007.

On October 11, 2007, the Company granted 240,000 options under the 2007 Plan to certain executives in connection with their July 2007 employment agreements, and 75,000 options (15,000 each) to its five non-employee directors, to acquire common stock during a five-year period at $4.60 per share, the closing price of stock on October 11, 2007. The directors’ options vested on the grant date, while the executives’ options vest over a three-year period at the annual rate of 40,000, 80,000 and 120,000, respectively. The fair value of the combined October 11, 2007, options was determined to be $728,784. The directors’ options were expensed in full as share-based compensation during the prior year, while the executives’ options are being expensed as share-based compensation over a three-year period in accordance with the applicable vesting periods.

The fair value of these options at the date of grant was estimated using a Black-Scholes option pricing model with the following weighted average assumptions.

Expected life (years)	3
Expected volatility	70	%
Risk-free interest rate	6	%
Dividend yield	0	%

On October 16, 2008, the Company granted 75,000 options (15,000 each, which vested on the grant date) under the 2007 Plan to its five non-employee directors, to acquire common stock during a five-year period at $3.70 per share, the closing price of the stock on October 16, 2008. The fair value of the options was determined to be $149,299, which was expensed during the quarter ended December 31, 2008.

20

The fair value of these options at the date of grant was estimated using a Black-Scholes option pricing model with the following weighted average assumptions.

Expected life (years)	4
Expected volatility	69	%
Risk-free interest rate	3	%
Dividend yield	0	%

Additionally, the Company has two stock option plans which provide for equity-based awards to its employees other than its directors and officers (collectively, the "Employee Plans"). Under the Employee Plans, the Company reserved 1,000,000 shares of common stock; 470,774 options (including 102,850 granted during August 2007 discussed below) were granted of which 369,774 were exercised. All stock options had an exercise price that was equal to the fair market value of the Company's stock on the date the options were granted. The term of the stock option awards is five years from the date of grant. In addition, the Company had previously issued 3,440,000 warrants to certain officers, employees, consultants and directors (384,000 of which are outstanding at December 31, 2008), all of which were granted at or in excess of the market value of the underlying shares at the date of grant, and are exercisable for a ten-year pe riod.

On August 22, 2007, the Company granted, to various employees, options under the Employee Plans to acquire 102,850 shares of common stock at $3.30 per share, the closing price of the stock on August 21, 2007. These options have a life of five years from the date of grant (or thirty days after termination for any reason), and vest 25% after each of the first two years, and 50% after the third year. The fair value of the options was determined to be $170,536, which are being expensed as share-based compensation over a three year period in accordance with the vesting period of the options.

The fair value of these options at the date of grant was estimated using a Black-Scholes option pricing model with the following weighted average assumptions.

Expected life (years)	3
Expected volatility	70	%
Risk-free interest rate	6	%
Dividend yield	0	%

On September 22, 2008, the Company granted, to an employee, options under the Employee Plans to acquire 2,500 shares of common stock at $5.55 per share, the closing price of the stock on September 22, 2008. These options have a life of five years from the date of grant (or thirty days after termination for any reason), and vest 25% after each of the first two years, and 50% after the third. The fair value of the options was determined to be $7,687, which will be expensed as share-based compensation over a three year period in accordance with the vesting period of the options.

On November 21, 2008, the Company granted, to various employees, options under the Employee Plans to acquire 131,725 shares of common stock at $2.71 per share, the closing price of the stock on November 21, 2008, with the same term and conditions noted above. The fair value of the options was determined to be $194,587, which will be expensed as share-based compensation over a three year period in accordance with the vesting period of the options.

The fair value of these options at the date of grant was estimated using a Black-Scholes option pricing model with the following weighted average assumptions.

Expected life (years)	4
Expected volatility	70	%
Risk-free interest rate	3	%
Dividend yield	0	%

The expected life of all of the various options and warrants represented the estimated period of time until exercise based on historical experience of similar awards, giving consideration to the remaining contractual terms and expectations of future employee behavior. The expected volatility was estimated using the historical volatility of the Company's stock, which management believes is the best indicator at this time. The risk-free interest rate was based on the implied yield available on U.S. Treasury zero coupon issues with an equivalent term. The Company has not paid dividends in the past and does not intend to in the foreseeable future.

21

As of December 31, 2008, 3,350 stock options were forfeited by terminated employees.

Share-based compensation included in general and administrative expenses for the three and nine-months ended December 31, 2008, was $210,764 and $278,352, respectively, and was $210,867 for the three and nine-months ended December 31, 2007.

A summary of stock option and warrant activity during the nine-months ended December 31, 2008, follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding as of March 31, 2008		901,850		$	2.64		3.57	$	826,400
Granted		209,225		$	3.10		5.00		—
Exercised		(116,500	)	$	1.57		3.27	$	(211,595	)
Forfeited		(3,350	)	$	3.30		4.23		—
Outstanding as of December 31, 2008		991,225		$	2.86		3.30	$	674,382
Exercisable as of December 31, 2008		583,500		$	2.24		2.70	$	646,720

Prior to July 24, 2007, upon exercise of options and warrants, the Company issued previously authorized but unissued common stock to the holders. Commencing July 24, 2007, upon exercise the Company issued shares from treasury shares to the holders, including the 100,000 warrants exercised during the first quarter of fiscal 2009. The difference between the original cost of the treasury shares ($176,819) and the proceeds received from the warrant holder ($122,000) was recorded as a reduction in retained earnings.

The intrinsic value of the options and warrants exercised during the nine-months ended December 31, 2008, was approximately $211,595 and the tax benefit from the exercise of such options and warrants is expected to approximate $80,000 for income tax purposes. As of March 31, 2008, a deferred tax benefit of $192,470 was provided on the warrants in connection with the share-based compensation charge from fiscal 2007. During the nine-months ended December 31, 2008, the Company adjusted the deferred tax asset and reduced additional paid-in capital by $114,189 as a result of the exercise.

The following table summarizes information about the stock options and warrants outstanding at December 31, 2008, of which 583,500 are exercisable:

			Options and Warrants Outstanding
Range of Exercise Prices			Amount		Weighted Average Exercise Price	Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
$1.04	-	$1.22		364,000	$1.20	1.84	$	624,320
		$1.80		20,000	$1.80	4.25		22,400
		$2.71		131,725	$2.71	5.00		27,662
		$3.30		98,000	$3.30	3.75		—
		$3.70		60,000	$3.70	5.00		—
		$4.60		315,000	$4.60	3.75		—
		$5.55		2,500	$5.55	4.75		—
				991,225	$2.86	3.30	$	674,382

Proceeds relating to the exercise of all stock options and warrants during the nine-months ended December 31, 2008 and 2007, were $182,450 and $2,339,990, respectively.

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C.

Inventories

The components of inventories are as follows:

	December 31, 2008		March 31, 2008
Finished products:
Fragrances	$	34,288,222	$	28,625,862
Watches		1,874,032		2,390,603
Handbags		96,523		377,917
Components and packaging material:
Fragrances		20,373,341		14,889,115
Watches		18,733		25,343
Raw material		3,809,184		1,759,440
	$	60,460,035	$	48,068,280

Inventories are stated at the lower of cost (using the first-in, first-out method) or market. The cost of inventories includes product costs, inbound freight and handling charges, including an allocation of the Company’s applicable overhead in an amount of approximately $2,801,000 and $4,170,000 at December 31, 2008, and March 31, 2008, respectively. The Company classifies certain inventories as non-current when projected sales indicate that such inventory will not be sold within the next twelve month period.

The lead time for certain of our raw materials and components inventory (up to 180 days) requires us to maintain at least a three to six-month supply of some items in order to ensure production schedules. In addition, when we launch a new brand or Stock Keeping Unit (“SKU”), we frequently produce a six to nine-month supply to ensure adequate inventories if the new products exceed our forecasted expectations. We believe that the gross margins on our products outweigh the additional carrying costs. However, if future sales do not reach forecasted levels, it could result in excess inventories and may cause us to decrease prices to reduce inventory levels.

The Company performs a review of its inventory each quarter in order to ascertain whether the carrying amount of the inventory reasonably reflects net realizable value. During the nine-months ended December 31, 2008, and 2007 the carrying value of certain inventory was reduced by $318,501 and $675,000, respectively, as slower-moving inventory would need to be discounted in order to sell the product. These adjustments are included in cost of goods sold in the accompanying condensed consolidated statements of operations. In addition, the Company maintains inventory of collateral items such as, testers, samples, gifts with purchases and other advertising materials to support the sales of our products. This inventory is classified as prepaid advertising, which is included in prepaid expenses and other current assets, net in the accompanying condensed consolidated balance sheets. A review similar to the one noted above is also performed for this inventory. During t he nine-months ended December 31, 2008, and 2007 the carrying value of collateral items inventory was reduced by $535,837 and $180,000, respectively, as excess collateral items for older brands were marked down to net realizable value. These adjustments are included in advertising and promotional expense in the accompanying condensed consolidated statements of operations.

As is more fully described in Note J, in December 2006 one of the Company’s licensors, GUESS? Inc., brought an action against the Company alleging that GUESS? fragrance products were being sold in unauthorized retail channels. The Company entered into a settlement agreement with GUESS? that, among other things, requires pre-approval of each international customer to whom the Company sells GUESS? fragrances. If the Company were to be found in breach of its agreement with GUESS?, at any point in the future, some of the remedies that GUESS? could pursue would include the termination or modification of the license agreement.

As of December 31, 2008, our inventories of GUESS? products totaled $22.8 million ($22.8 million at March 31, 2008). If the licensing agreement were to be terminated or modified at any time in the future, the Company 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.

23

D.

Trademarks and Licenses

Trademarks and licenses are attributable to the following brands:

	December 31, 2008			March 31, 2008			Estimated Life (in years)
XOXO	$	4,285,495			4,285,495		5
Fred Hayman Beverly Hills (“FHBH”)		2,820,361			2,820,361		10
Paris Hilton		815,166			744,124		5
Other		216,546			216,546		5-25
		8,137,568			8,066,526
Less: accumulated amortization		(6,027,361	)		(5,296,315	)
	$	2,110,207		$	2,770,211

Intangible assets are reviewed annually for impairment under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, during the Company’s fourth quarter of each fiscal year, or sooner, if events indicate a potential impairment. The identification and measurement of impairment of indefinite-lived intangible assets involves the estimation of the fair value of the related asset. The estimates of fair value are based on the best information available as of the date of the assessment, which primarily incorporates management assumptions about discounted expected future cash flows. Future cash flows can be affected by changes in industry or market conditions.

At March 31, 2007, the Company performed its annual review of all of its intangible assets. As a result of this process, the Company noted that, in connection with the XOXO license, the estimated future net cash flows for the remaining period of the license were determined to be less than the license’s carrying value. As a result, during the years ended March 31, 2008, and 2007, the Company recorded impairment charges of $385,232 and $1,129,273, respectively. Given the current economic environment, the Company performed a review of all of its intangible assets at December 31, 2008. As a result, the Company determined that there were no impairment charges that needed to be recorded during the nine-months ended December 31, 2008. During the nine-months ended December 31, 2007, the Company recorded an impairment charge of $385,232. As of March 31, 2007, the Company determined that a review of its tradem ark and license intangible assets would be performed quarterly. An analysis of the XOXO intangible assets as of December 31, 2008, is as follows:

Initial fair value	$	5,800,000
Impairment charge recorded March 31, 2007		(1,129,273	)
Impairment charge recorded September 30, 2007		(185,232	)
Impairment charge recorded December 31, 2007		(200,000	)
		4,285,495
Less: accumulated amortization		(3,445,915	)
Balance as of December 31, 2008	$	839,580

E.

Borrowings

The composition of borrowings is as follows:

	December 31, 2008		March 31, 2008
Capital leases payable to Provident Equipment Leasing, collateralized by certain equipment and leasehold improvements, payable in equal quarterly installments of $257,046, including imputed interest at 7.33%, through July 2009.	$	748,092	$	1,456,266
Capital lease payable to IBM, collateralized by certain computer equipment, payable in equal monthly installments of $3,648, including imputed interest at 3.94%, through December 2009.		42,858		77,320
		790,950		1,533,586
Less: long-term portion		3,764		542,633
Borrowings, current portion	$	787,186	$	990,953

24

On July 20, 2001, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with GMAC Commercial Credit LLC (“GMACCC”). On January 4, 2005, the Loan Agreement was extended through July 20, 2006. Under the Loan Agreement, the Company was able to borrow, depending on the availability of a borrowing base, on a revolving basis, up to $20,000,000 at an interest rate of LIBOR plus 2.75% or the Bank of New York’s prime rate, at the Company’s option.

On January 10, 2006, the Loan Agreement was amended, increasing the loan amount to $30,000,000 with an additional $5,000,000 available at the Company’s option. In addition, the maturity was extended through July 20, 2008, and the interest rate was reduced to 0.25% below the prime rate. During May 2006, the Company exercised its option and increased the line of credit to $35,000,000. On September 13, 2006, the Loan Agreement was further amended, temporarily increasing the loan amount to $40,000,000 until December 13, 2006, at which time the maximum loan amount reverted back to $35,000,000. On July 20, 2008, the Company’s Loan Agreement with GMACCC expired.

As of July 20, 2008, substantially all of the assets of the Company, excluding the New Jersey warehouse equipment discussed below, collateralized the credit line borrowing. The Loan Agreement contained customary events of default and covenants which prohibit, among other things, incurring additional indebtedness in excess of a specified amount, paying dividends, creating liens, and engaging in mergers and acquisitions without the prior consent of GMACCC. The Loan Agreement also contained certain financial covenants relating to net worth, interest coverage and other financial ratios. On July 22, 2008, the Company signed a new Loan and Security Agreement (the “New Loan Agreement”) with Regions Bank (the “Bank”). The New Loan Agreement provides up to $20,000,000, depending upon the availability of a borrowing base, at an interest rate of LIBOR plus 2.00% or the Bank’s prime rate, at the Company’s option, o f which no amounts were outstanding at December 31, 2008.

Substantially all of the Company’s assets collateralize the New Loan Agreement. The New Loan Agreement contains customary events of default and covenants which prohibit, among other things, incurring additional indebtedness in excess of a specified amount, paying dividends, creating liens, and engaging in mergers and acquisitions without the prior consent of the Bank. The New Loan Agreement also contains certain financial covenants relating to fixed charge coverage and the ratio of funded debt to EBITDA. As of December 31, 2008, we were not in compliance with our debt covenants. On February 5, 2009, we were granted a waiver from the Bank, with respect to our compliance covenants as of December 31, 2008. We are in discussions with the Bank in order to review, and potentially amend, our current debt covenants, in light of the current economic environment.

During May 2006, the Company entered into an agreement with Provident Equipment Leasing (“Provident”) covering approximately $2,761,000 of certain warehouse equipment and leasehold improvements to be purchased for the Company’s new leased distribution center in New Jersey. Provident advanced, on behalf of the Company, progress payments to various suppliers based on the work completed. In accordance with the terms of the agreement, the advances bore interest at a rate of 1% per month until all payments were made, at which time the arrangement converted to a thirty-six month lease, which has been classified as a capital lease. The Company has an option to purchase the equipment and leasehold improvements at the end of the lease term for $1.

On December 15, 2006, the Company entered into a lease agreement with International Business Machines (“IBM”) covering approximately $124,000 of computer equipment which has been classified as a capital lease. The Company has an option to purchase the computer equipment at the end of the lease term for $1.

The Company believes that funds from operations and its existing financing will be sufficient to meet the Company’s current operating and seasonal needs. However, if the Company were to expand operations through acquisitions, new licensing arrangements or both, the Company may need to obtain financing. There is no assurance that the Company could obtain such financing or what the terms of such financing, if available, would be. In addition, the current business environment may increase the difficulty of obtaining new financing, if needed.

25

F.

Related Party Transactions

Related party transactions include the following balances:

	December 31, 2008		March 31, 2008
Accounts receivable from related parties:
Perfumania	$	18,102,390	$	15,392,112
Other related parties		—		—
	$	18,102,390	$	15,392,112
	Three Months Ended December 31,				Nine Months Ended December 31,
	2008		2007		2008		2007
Sales from continuing operations to related parties:
Perfumania	$	8,746,155	$	9,488,470	$	29,148,863	$	39,778,788
Other related parties		—		—		—		8,004,914
	$	8,746,155	$	9,488,470	$	29,148,863	$	47,783,702

The Company had net sales from continuing operations of $29,148,863 and $39,778,788 during the nine-month periods ended December 31, 2008 and 2007, respectively, ($8,746,155 and $9,488,470 during the three- months ended December 31, 2008 and 2007, respectively), to Perfumania, Inc. (“Perfumania”), a wholly-owned subsidiary of Perfumania Holdings, Inc., formerly known as E Com Ventures, Inc., a company in which the Company’s former Chairman and Chief Executive Officer had an ownership interest and held identical management positions until February 2004. Perfumania is one of the Company’s largest customers, and transactions with Perfumania are closely monitored by management, and any unusual trends or issues are brought to the attention of the Company’s Audit Committee and Board of Directors. Perfumania offers the Company the opportunity to sell its products in approximately 339 retail o utlets and its terms with Perfumania take into consideration the relationship existing between the companies for over 15 years. Pricing and terms with Perfumania reflect (a) the volume of Perfumania’s purchases, (b) a policy of no returns from Perfumania, (c) minimal spending for advertising and promotion, (d) exposure of the Company’s products provided in Perfumania’s store windows and (e) minimal distribution costs to fulfill Perfumania orders shipped directly to their distribution center.

During August and September 2006, Perfumania Holdings, Inc.’s majority shareholders acquired an approximate 12.2% ownership interest in the Company at that time (10.1% at December 31, 2008), and accordingly, transactions with Perfumania will continue to be presented as related party transactions.

While the Company’s invoice terms to Perfumania are stated as net ninety days, for over ten years, management has granted longer payment terms, taking into consideration the factors discussed above. Management evaluates the credit risk involved, which is determined based on Perfumania’s reported results and comparable store sales performance. Management monitors the account activity to ensure compliance with their limits. Net trade accounts receivable owed by Perfumania to the Company totaled $18,102,390 and $15,392,112 at December 31, 2008, and March 31, 2008, respectively. As of January 31, 2009, the Company had received an additional $6,000,000 from Perfumania in payment of balances due to the Company.

On January 28, 2009, Perfumania filed a Form 8-K with the SEC disclosing that it was not in compliance with a certain debt covenant under its Senior Credit Facility triggering an event of default. Perfumania reported that it has requested a waiver from their Senior Creditor, but there are no guarantees that the waiver will be received. If Perfumania is unable to obtain a waiver or to refinance its credit facility, its operations and financial condition would be materially adversely affected. Any significant reduction in business with Perfumania as a customer of the Company would have a material adverse effect on our net sales. Management closely monitors the Company’s activity with Perfumania and holds periodic discussions with Perfumania in order to review the anticipated payments for each quarter.

Prior to July 1, 2007, sales to parties related to the Company’s former Chairman and CEO were treated as related party sales. During the year ended March 31, 2008, the former Chairman and CEO’s beneficial ownership interest in the Company declined to less than 5% (0% at December 31, 2008). Accordingly, effective July 1, 2007, transactions with parties related to the former Chairman and CEO are no longer considered to be related party transactions. During the nine-months ended December 31, 2007, net sales to related parties included $8,004,914 from these customers.

26

G.

Basic and Diluted Earnings Per Common Share

The following is the reconciliation of the numerators and denominators of the basic and diluted net income per common share calculations:

	Three Months Ended December 31,
	2008			2007
(Loss) income from continuing operations	$	(4,536,168	)	$	178,962
Income from discontinued operations		—			3,719
Net (loss) income	$	(4,536,168	)	$	182,681
Weighted average number of shares issued		29,990,039			29,977,289
Weighted average number of treasury shares		(9,486,550	)		(10,042,703	)
Weighted average number of shares outstanding used in basic earnings per share calculation		20,503,489			19,934,586
Basic net (loss) income per common share – continuing operations	$	(0.22	)	$	0.01
Basic net income per common share – discontinued operations	$	0.00		$	0.00
Weighted average number of shares outstanding used in basic earnings per share calculation		20,503,489			19,934,586
Effect of dilutive securities:
Stock options and warrants(1)		—			819,778
Weighted average number of shares outstanding used in diluted earnings per share calculation		20,503,489			20,754,364
Diluted net (loss) income per common share – continuing operations(1)	$	(0.22	)	$	0.01
Diluted net income per common share – discontinued operations	$	0.00		$	0.00
Antidilutive securities not included in diluted earnings per share computation: (1)
Options and warrants to purchase common stock		991,225			417,850
Exercise price	$	1.04 to $5.55		$	3.30 to $4.60

	Nine Months Ended December 31,
	2008			2007
(Loss) income from continuing operations	$	(5,775,164	)	$	2,091,201
Income from discontinued operations		—			25,350
Net (loss) income	$	(5,775,164	)	$	2,116,551
Weighted average number of shares issued		29,981,675			29,801,689
Weighted average number of treasury shares		(9,374,354	)		(10,771,850	)
Weighted average number of shares outstanding used in basic and fully diluted earnings per share calculation		20,607,321			19,029,839
Basic net (loss) income per common share – continuing operations	$	(0.28	)	$	0.11
Basic net income per common share – discontinued operations	$	0.00		$	0.00
Weighted average number of shares outstanding used in basic earnings per share calculation		20,607,321			19,029,839
Effect of dilutive securities:
Stock options and warrants(1)		—			1,502,774
Weighted average number of shares outstanding used in diluted earnings per share calculation(1)		20,607,321			20,532,613
Diluted net (loss) income per common share – continuing operations(1)	$	(0.28	)	$	0.10
Diluted net income per common share – discontinued operations	$	0.00		$	0.00
Antidilutive securities not included in diluted earnings per share computation: (1)
Options and warrants to purchase common stock		991,225			417,850
Exercise price	$	1.04 to $5.55		$	3.30 to $4.60

27

———————

(1)

In accordance with paragraph 15 of SFAS No. 128, Earnings Per Share, the number of shares utilized in the calculation of diluted (loss) earnings per share from continuing operations and net income were the same as those used in the basic calculation of earnings per share for the three and nine-months ended December 31, 2008, as we incurred a loss from continuing operations for the three and nine-month periods.

H.

Cash Flow Information

The Company considers temporary investments with an original maturity of three months or less to be cash equivalents. Supplemental disclosures of cash flow information are as follows:

	Nine Months Ended December 31,
	2008		2007
Cash received for:
Income taxes	$	1,500,000	$	5,999,964
Cash paid for:
Interest	$	65,915	$	1,274,274
Income taxes	$	38,943	$	854,420

I.

Income Taxes for Continuing Operations

The tax benefit/(provision) for the periods reflect an estimated effective rate of 38%. Actual tax benefits realized may be greater or less than the amounts recorded, and such differences may be material. Income tax receivable at December 31, 2008, includes $2,743,694 of recoverable income taxes previously paid and $1,950,678 of estimated recoverable income taxes that will be offset by estimated income tax payable at year-end.

J.

License and Distribution Agreements

During the nine-months ended December 31, 2008, the Company held exclusive worldwide licenses to manufacture and sell fragrance and other related products for Marc Ecko, Paris Hilton, GUESS?, Jessica Simpson, Nicole Miller, Josie Natori, Queen Latifah, Ocean Pacific (“OP”), Andy Roddick, babyGund, and XOXO. During December 2006, the Company sold its Perry Ellis licensing rights and other related assets to Perry Ellis International, its licensor. See Note N for further discussion. On June 30, 2008, the Company’s license with Maria Sharapova expired. The Company elected not to renew this contract.

On January 7, 2005, the Company entered into a purchase and sale agreement, effective January 6, 2005, (the “Purchase Agreement”) with Victory International (USA), LLC (“Victory”), whereby it acquired the exclusive worldwide licensing rights, along with inventories, molds, designs and other assets, relating to the XOXO fragrance brand. As consideration, Victory was paid approximately $7.46 million, of which $2.55 million was in the form of a 60-day promissory note payable in two equal installments on February 6, and March 6, 2005. The payments were made as scheduled.

On December 1, 2003, Victory had entered into a license agreement with Global Brand Holdings, LLC (the “Fragrance License”) to manufacture and distribute XOXO branded fragrances. The first XOXO fragrances were introduced by Victory during December 2004. Under the Purchase Agreement, Victory assigned its rights, and the Company assumed the obligations, under the Fragrance License. During June 2006, the Company negotiated renewal terms which, among other items, reduced minimum royalty requirements and have extended the Fragrance License for an additional three years through June 30, 2010.

On January 26, 2005, the Company entered into an exclusive worldwide license agreement with Paris Hilton Entertainment, Inc. (“PHEI”), to develop, manufacture and distribute watches and other time pieces under the Paris Hilton name. The initial term of the agreement expires on June 30, 2010, and is renewable for an additional five-year period. The first “limited edition” watches under this agreement were launched during December 2005 and a line of “fashion watches” were launched during spring 2006.

Effective April 6, 2005, the Company entered into an exclusive license agreement with GUND, Inc., to develop, manufacture and distribute children’s fragrances and related products on a worldwide basis under the babyGund trademark. The agreement continues through June 2010, and is renewable for an additional two years if certain sales levels are met.

28

On May 11, 2005, the Company entered into an exclusive worldwide license agreement with PHEI, to develop, manufacture and distribute cosmetics under the Paris Hilton name. The initial term of the agreement expires on January 15, 2011, and is renewable for an additional five-year period. To date, no products have been launched under this license.

On May 13, 2005, the Company entered into an exclusive worldwide license agreement with PHEI, to develop, manufacture and distribute handbags, purses, wallets and other small leather goods, under the Paris Hilton name. The initial term of the agreement expires on January 15, 2011, and is renewable for an additional five-year period. The first products under this agreement were launched during summer 2006. During fiscal 2008, the Company sublicensed the international rights under this license.

On April 5, 2006, the Company entered into an exclusive worldwide license agreement with PHEI, to develop, manufacture and distribute sunglasses under the Paris Hilton name. The initial term of the agreement expires on January 15, 2012, and is renewable for an additional five-year period. In January 2009, the Company entered into an agreement with Gripping Eyewear, Inc. (”GEI”), assigning the worldwide exclusive licensing rights with PHEI, for the production and distribution of Paris Hilton Sunglasses.

On June 21, 2007, the Company entered into an exclusive license agreement with VCJS, LLC, to develop, manufacture and distribute prestige fragrances and related products under the Jessica Simpson name. The initial term of the agreement expires five years from the date of the first product sales and is renewable for an additional five years if certain sales levels are met. The Company launched the first fragrance under this agreement during August 2008.

On August 1, 2007, the Company entered into an exclusive license agreement with Kobra International, Ltd., to develop, manufacture and distribute prestige fragrances and related products under the Nicole Miller name. The initial term of the agreement expires on September 30, 2013, and is renewable for two additional terms of three years each, if certain sales levels are met. The Company anticipates launching a new fragrance under this license in the spring of 2009, and has resumed the manufacturing of certain previously developed Nicole Miller fragrances.

Effective May 1, 2008, the Company entered into an exclusive license agreement with J.N. Concepts, Inc., to develop, manufacture and distribute prestige fragrances and related products under the Josie Natori name. The initial term of the agreement expires on September 30, 2012, or December 31, 2012, depending on the first product launch date, and is renewable for an additional three-year term if certain sales levels are met. The Company anticipates launching a new fragrance under this license in the fall of 2009 or early 2010.

Effective May 22, 2008, the Company entered into an exclusive license agreement with Queen Latifah Inc., to develop, manufacture and distribute prestige fragrances and related products under the Queen Latifah name. The initial term of the agreement expires on March 31, 2014, and is renewable for an additional five-year term if certain sales levels are met. The Company anticipates launching a new fragrance under this license in the fall of 2009 or early 2010.

Effective November 5, 2008, the Company entered into an exclusive license agreement with Ecko Complex LLC, to develop, manufacture and distribute fragrances under the Marc Ecko marks. The initial term of the agreement expires on December 31, 2014, and is renewable for an additional three-year term if certain sales levels are met. The Company anticipates launching a new fragrance under this license in the fall of 2009.

Under all of these license agreements, we must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based on sales volume. Except as discussed below, the Company believes it is presently in compliance with all material obligations under the above agreements.

In December 2006, the Company received a complaint from GUESS?, Inc. (“GUESS?”) alleging that GUESS? fragrance products were being sold in unauthorized retail channels. Although the Company did not sell such products directly to these channels, it still represents a violation of the Company’s license agreement with GUESS?. On May 7, 2007, the Company entered into a settlement agreement with GUESS? which, among other items, requires GUESS?’s reapproval of all international distributors selling GUESS? fragrance products, liquidating damages in the amount of $500,000, payable in nine equal monthly installments of $55,556, as well as requiring the Company to strictly monitor distribution channels. Any further violations surrounding unapproved distribution could result in termination of the license agreement. During the quarter ended March 31, 2007, the Company suspended shipments to international distributor s. GUESS? has subsequently approved certain international distributors and the Company has commenced shipments to these approved distributors. The Company continues to submit approval requests for additional international distributors in accordance with procedures outlined in the license agreement.

29

This license is scheduled to expire on December 31, 2009. The Company anticipates that this license will not be renewed beyond its current expiration date.

K.

Segment Information

Prior to the quarter ended December 31, 2005, the Company operated in one industry segment as a manufacturer and distributor of one product line consisting of prestige fragrances and beauty related products. During December 2005 and March 2006, the Company commenced sales of watches and handbags, respectively, both of which are under license agreements with Paris Hilton Entertainment, Inc. Revenues from the sale of watches and handbags during the nine- months ended December 31, 2008, totaled $1,597,819 and $58,543, respectively ($3,074,741 and $307,111 for the nine-months ended December 31, 2007, respectively). Included in inventories at December 31, 2008, is approximately $1,892,765 and $96,523 relating to watches and handbags, respectively ($2,415,946 and $377,917 for watches and handbags at March 31, 2008). The Company anticipates preparing full segment disclosure if these operations become more significa nt.

L.

Legal Proceedings

Litigation

On June 21, 2006, the Company was served with a stockholder derivative action (the “Derivative Action”) filed in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida by NECA-IBEW Pension Fund, purporting to act derivatively on behalf of the Company.

The Derivative Action named Parlux Fragrances, Inc. as a defendant, along with Ilia Lekach, Frank A. Buttacavoli, Glenn Gopman, Esther Egozi Choukroun, David Stone, Jaya Kader Zebede and Isaac Lekach, each of whom at that date was one of our directors. The Derivative Action related to the proposal from PF Acquisition of Florida LLC (“PFA”), which was owned by Ilia Lekach, to acquire all of the Company’s outstanding shares of common stock for $29.00 ($14.50 after the Stock Split) per share in cash (the “Proposal”).

The Derivative Action seeks to remedy the alleged breaches of fiduciary duties, waste of corporate assets, and other violations of law and seeks injunctive relief from the Court appointing a receiver or other truly neutral third party to conduct and/or oversee any negotiations regarding the terms of the Proposal, or any alternative transaction, on behalf of Parlux and its public shareholders, and to report to the Court and plaintiff’s counsel regarding the same. The Derivative Action alleges that the unlawful plan to attempt to buy out the public shareholders of Parlux without having proper financing in place, and for inadequate consideration, violates applicable law by directly breaching and/or aiding the other defendants’ breaches of their fiduciary duties of loyalty, candor, due care, independence, good faith and fair dealing, causing the complete waste of corporate assets, and constituting an abuse of control by the defendants. Before any response to the original complaint was due, counsel for plaintiffs indicated that an amended complaint would be filed. That First Amended Complaint (the "Amended Complaint") was served to the Company’s counsel on August 17, 2006.

The Amended Complaint continues to name the then Board of Directors as defendants along with Parlux, as a nominal defendant. The Amended Complaint is largely a collection of claims previously asserted in a 2003 derivative action, which the plaintiffs in that action, when provided with additional information, simply elected not to pursue. It adds to those claims, assertions regarding a 2003 buy-out effort and the recently abandoned buy-out effort of PFA. It also contains allegations regarding the prospect that the Company's stock might be delisted because of a delay in meeting SEC filing requirements.

The Company and the other defendants engaged Florida securities counsel, including the counsel who successfully represented the Company in the previous failed derivative action, and on September 18, 2006, moved to dismiss the Amended Complaint. A Second Amended Complaint was filed on October 26, 2006, which added alleged violations of securities laws, which the Company moved to dismiss on December 1, 2006. A hearing on the dismissal was held on March 8, 2007. On March 22, 2007, the motion to dismiss was denied and the defendants were provided twenty (20) days to respond, and a response was filed on March 29, 2007. Since that time there has been extremely limited discovery conducted in the case. Some documents have been produced. Narrow interrogatories were answered. There have been no depositions and none has even been scheduled. A number of the factual allegations upon which the various complaints were based hav e fallen away, simply by operation of time. A number of months ago, the Company was advised that one of the two plaintiffs was withdrawing from the case. No explanation was given. The remaining plaintiff then spent several months obtaining documents from our former auditors. The documents provide no support for any of the claims.

30

The Company then sought to take the deposition of the remaining plaintiff, who lives in Seattle. He declined to travel due to a long-standing “fear of flying” and filed a motion on August 4, 2008, for a protective order from the Court. The Court denied the motion and required him to appear here in Florida for his deposition. As a consequence of this ruling, his counsel then informed us that this plaintiff, too, was withdrawing from the case due to this travel requirement, leaving no plaintiff. The Company was then served with a motion on September 15, 2008, to further amend the complaint by inserting a new plaintiff. Our counsel opposed that motion on the grounds that a person not a party to the case has no standing to move to amend the complaint. A hearing on that motion was held on December 19, 2008, and the motion to amend was denied by the Court. The plaintiff’s counsel has indicated that they will now file a motion for a new plaintiff to intervene in the case and take over its direction. The Company has advised the plaintiff’s counsel that we intend to oppose that motion. No hearing has been scheduled on the latest motion.

Based on the allegations in the Second Amended Complaint, upon the information collected in the earlier litigation and upon the information provided in response to the limited discovery noted above, it is believed that the Second Amended Complaint is without merit.

Management believes that the ultimate outcome of these matters will not have a material effect on the Company’s financial position or results of operations.

M.

Recent Accounting Pronouncement

Effective April 1, 2008, we adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosure requirements about fair value measurements. In accordance with the Financial Accounting Standards Board (“FASB”) Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), we will defer the adoption of SFAS 157 for our non-financial assets and non-financial liabilities, except those items recognized or disclosed at fair value on an annual or more frequent recurring basis, until April 1, 2009. In October 2008, the FASB issued Staff Position FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS 157 in a market that is not active. It is effec tive upon issuance, including prior periods for which financial statements have not been issued. The adoption of SFAS 157 did not have a material impact on our fair value measurements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB No. 115 (“SFAS 159”). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for the Company's fiscal year ending March 31, 2009. The Company adopted the provisions of SFAS 159 effective April 1, 2008. The adoption of SFAS 159 did not have a material impact on our condensed 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. We are currently assessing the financial impact, if any, of SFAS 141(R) on our condensed 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. We are currently assessing the financial impact, if any, of SFAS 160 on our condensed consolidated financial statements.

31

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). The current GAAP hierarchy, as set forth in the American Institute of Certified Public Accountants (“AICPA”) Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, has been criticized because (1) it is directed to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB Statements of Financial Accounting Concepts. The FASB believes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Accordingly, the FASB concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and is issuing this Statement to achieve that result. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We are currently reviewing the provisions of SFAS 162 to determine the impact, if any, on our condensed consolidated financial statements.

During April 2008, the FASB issued FASB Staff Position (FSP) FAS No. 142-3, Determination of the Useful Life of Intangible Assets (“FAS 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 FASB Statement 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 GAAP. FAS 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. We are currently assessing the financial i mpact, if any, of the statement on our condensed consolidated financial statements.

N.

Discontinued Operations

On November 28, 2006, the Company’s Board of Directors approved the sale of the Perry Ellis fragrance brand license back to Perry Ellis International (“PEI”) at a price of approximately $63 million, including approximately $21 million for inventory and promotional products relating to the brand. A definitive agreement was signed on December 6, 2006, and the closing took place shortly thereafter. The sale included all inventory, promotional products, molds and other intangibles. The transaction generated proceeds of approximately $63 million, and resulted in a pre-tax gain of approximately $34.3 million.

Beginning with the quarter ended December 31, 2006, the Perry Ellis brand activity has been presented as discontinued operations. Prior period statements of operations have been retrospectively adjusted. The activity for this discontinued operation is summarized as follows:

	Three Months Ended December 31,				Nine Months Ended December 31,
	2008		2007		2008		2007
Net revenues	$	—	$	5,999	$	—	$	40,887
Operating income	$	—	$	5,999	$	—	$	40,887
Income from discontinued operations	$	—	$	3,719	$	—	$	25,350

* * * *

32

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.

PARLUX FRAGRANCES, INC.

/s/ NEIL J. KATZ

Neil J. Katz, Chairman and Chief Executive Officer

(Principal Executive Officer)

/s/ RAYMOND J. BALSYS

Raymond J. Balsys, Chief Financial Officer

(Principal Financial and Principal Accounting Officer)

Date: February 9, 2009

33

EXHIBIT INDEX

Exhibit #	Description
31.1	Certification of Chief Executive Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to §906 of the Sarbanes-Oxley Act of 2002.

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS PURSUANT TO

RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Neil J. Katz, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Parlux Fragrances, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and  have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated: February 9, 2009

/s/ Neil J. Katz

Neil J. Katz,

Chairman and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS PURSUANT TO

RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Raymond J. Balsys, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Parlux Fragrances, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and  have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant’s internal control over  financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated: February 9, 2009

/s/ Raymond J. Balsys

Raymond J. Balsys,

Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATIONS PURSUANT TO CHAPTER 63 OF TITLE 18 U.S.C. SECTION 1350 AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Parlux Fragrances, Inc. (the "Company") on Form 10-Q for the period ending December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Neil J. Katz, Chief Executive Officer of the Company, certify, pursuant to Chapter 63 of Title 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/s/ Neil J. Katz
	Neil J. Katz
	Chairman and Chief Executive Officer

February 9, 2009

EX-32.2

EXHIBIT 32.2

CERTIFICATIONS PURSUANT TO CHAPTER 63 OF TITLE 18 U.S.C. SECTION 1350 AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Parlux Fragrances, Inc. (the "Company") on Form 10-Q for the period ending December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Raymond J. Balsys, Chief Financial Officer of the Company, certify, pursuant to Chapter 63 of Title 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

  February 9, 2009

By:	/s/ Raymond J. Balsys
	Raymond J. Balsys, Chief Financial Officer