10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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ü	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
	ACT OF 1934
For the fiscal year ended: March 31, 2010
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)	(I.R.S. Employer Identification No.)

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

(Address of Principal Executive Offices) (Zip Code)

 Registrant’s Telephone Number, Including Area Code (954) 316-9008

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common stock (par value $0.01 per share)	The NASDAQ Stock Market LLC (NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 Act). Yes ¨ No þ

As of September 30, 2009, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $28,551,452 based on a closing sale price of $2.16 as reported on the National Association of Securities Dealers Automated Quotation System. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock, based on Schedule 13D and 13G filings, have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination of affiliate status for other purposes.

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

Class	Outstanding at June 29, 2010
Common Stock, $ .01 par value per share	20,489,812 shares

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III (Items 10, 11, 12, 13 & 14) is incorporated by reference from the registrant’s definitive proxy statement related to its 2010 Annual Meeting of Stockholders. 

PARLUX FRAGRANCES, INC.

TABLE OF CONTENTS

PAGE

PART I

PART II

PART III

PART IV

PART I

Item 1.

BUSINESS.

Introduction

Parlux Fragrances, Inc. is engaged in the business of creating, designing, manufacturing, distributing and selling prestige fragrances and beauty related products marketed primarily through specialty stores, national department stores and perfumeries on a worldwide basis. The fragrance market is generally divided into a prestige segment (distributed primarily through department and specialty stores) and a mass market segment (distributed primarily through chain drug stores, mass merchandisers, smaller perfumeries and pharmacies). Our fragrance products are positioned primarily in the prestige segment.

During the fiscal year ended March 31, 2010, we engaged in the manufacture (through sub-contractors), distribution and sale of Paris Hilton, Jessica Simpson, Queen Latifah, Marc Ecko, Josie Natori, GUESS?, Nicole Miller, XOXO, Ocean Pacific (“OP”), Andy Roddick, and babyGUND fragrances and grooming items on an exclusive basis as a licensee. During the fiscal year ended March 31, 2010, we entered into sublicensing agreements for the fragrance licenses of entertainers Rihanna and Kanye West.

During 2005, we expanded our product offerings under the Paris Hilton brand into the accessory market, specifically, watches, handbags, purses, and small leather goods. To date, revenues and expenses for these product lines have been immaterial.

We were incorporated as a Delaware corporation in 1984. Our common stock, par value $0.01, is listed on the National Association of Securities Dealers Automatic Quotation System (“Nasdaq”) Global Select Market under the symbol "PARL." For information concerning our financial condition, results of operations and related financial data, you should refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Financial Statements and Supplementary Data” sections of this Annual Report on Form 10-K. For information concerning gross sales by international region, you should refer to Note 13 of the Financial Statements and Supplementary Data section of this Annual Report on Form 10-K. You should also review and consider the risks relating to our business, operations, financial performance and cash flows that we describe below under “Risk Factors.& #148;

Availability of Reports and Other Information

Our corporate website is www.parlux.com. We make available on this website, free of charge, access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically submit such material to the Securities and Exchange Commission (the “SEC”). We also make available on our website copies of materials regarding our corporate governance policies and practices. You also may obtain a printed copy of the foregoing materials by s ending a written request to: Corporate Secretary, Parlux Fragrances, Inc. 5900 N. Andrews Avenue, Suite 500, Fort Lauderdale, Florida 33309. In addition, the SEC’s website is http://www.sec.gov. The SEC makes available on this website, free of charge, reports, proxy and information statements and other information regarding issuers, such as us, that file electronically with the SEC. Information on our website or the SEC’s website is not part of this Annual Report on Form 10-K.

Recent Developments

Second Amendment to Loan Agreement and Amendment to Forbearance Agreement

On October 29, 2009, we entered into a Second Amendment to Loan Agreement and Amendment to Forbearance Agreement (the “Second Amendment”) with Regions Bank (“Regions”) extending the forbearance period through February 15, 2010, and calling for us to repay the remaining loan balance over the course of the extension period. The Second Amendment required us to continue to comply with certain covenants with Regions under the Loan and Security Agreement (“Loan Agreement”), dated as of July 22, 2008, as amended by the Second Amendment.

On February 16, 2010, we repaid the remaining outstanding principal balance plus interest and fees, and the Loan Agreement, as amended by the Second Amendment, was terminated.

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GE Capital Corporate Finance Credit Facility

On June 25, 2010, we entered into a Loan Agreement (the “New Loan Agreement”) with General Electric Capital Corporation (“GE Capital”), as lender, administrative agent and collateral agent.  The New Loan Agreement provides a credit line of up to $20.0 million, depending upon the availability of a borrowing base and certain reserves established by GE Capital from time to time, at an interest rate of the highest of (a) the prime rate, (b) the federal funds rate plus 3.0%, or (c) the LIBOR rate over one minus any Eurodollar reserve requirement (the "Eurodollar Rate"), in each case plus 3.50%; or the Eurodollar Rate plus 4.50%, at our option except in certain circumstances including defaults in the payment of any amounts under the loan facility or the unavailability of the LIBOR rate.  The term of the loan facility under the New Loan Agreement is two years.

The New Loan Agreement is secured by all of our assets and the assets of our subsidiary, Parlux Ltd., pursuant to a Guaranty and Security Agreement.  In addition, GE Capital has a security interest in and to certain of our patents and trademarks, as well as those of our subsidiary, Parlux Ltd., pursuant to a Patent Security Agreement and Trademark Security Agreement, respectively.  We have provided to GE Capital a full guaranty of payment of the obligations under the New Loan Agreement.  See “Liquidity and Capital Resources” and Note 7 to the accompanying Consolidated Financial Statements for further discussion.

Designer Vince Camuto Fragrance License

On June 4, 2010, we entered into an exclusive fragrance licensing agreement with Vince Camuto, Chief Designer and Chief Executive Officer of Camuto Group, to develop, manufacture and distribute prestige fragrances and related products under the Vince Camuto trademark, the initial term of the agreement expires on March 31, 2016, 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 2011.

New Chairman and Chief Executive Officer

On January 26, 2010, we announced the resignation of Neil J. Katz from his positions as Chairman and Chief Executive Officer of the Company. Mr. Katz had held these positions since July 2007. On May 4, 2010, we entered into a Separation and Release Agreement (“Separation Agreement”) with Mr. Katz. Pursuant to the terms of the Separation Agreement, the parties acknowledged that Mr. Katz’s employment terminated effective January 25, 2010, and we agreed to make severance payments to Mr. Katz equivalent to Mr. Katz’s base salary for a period of twelve months from the termination date. In addition, we agreed to accelerate the vesting of Mr. Katz’s unvested options as of the termination date. On May 4, 2010, Mr. Katz resigned from the Board of Directors, effective immediately, pursuant to the terms of the Separation Agreement.

On January 26, 2010, we announced that Frederick E. Purches, one of the founders of the Company, and previous Chairman, had assumed the position of Chairman and Chief Executive Officer of the Company. Mr. Purches was previously the President and Chief Executive Officer of Helena Rubinstein/Giorgio Armani Fragrances before founding Parlux, and has served as a consultant to Parlux for over fifteen years.  As previously disclosed on a Form 8-K, on April 1, 2010, we entered into an employment agreement with Mr. Purches.

Special Stockholders Meeting

On December 18, 2009, our stockholders approved all proposals presented at our special stockholders meeting. The proposals included the following: (1) a proposal to approve an amendment to our certificate of incorporation to increase the total number of shares of common stock that we are authorized to issue from 30,000,000 to 40,000,000 shares and (2) a proposal to approve, in accordance with Nasdaq Marketplace Rule 5635(d), the issuance of warrants to purchase an aggregate of up to an additional 8,000,000 shares of our common stock at an exercise price of $5.00 per share in connection with the licenses sublicensed to us by Artistic Brands Development, LLC (“Artistic Brands”) formerly known as Iconic Fragrances, LLC. See Notes 6 and 10 to the accompanying Consolidated Financial Statements for further discussion.

Artistic Brands Development Agreement

On April 3, 2009, we entered into an agreement with Artistic Brands, a licensing company in which entertainment mogul and icon Shawn “JAY-Z” Carter and Rene Garcia are principals. The agreement includes worldwide fragrance licenses with entertainers Rihanna and Kanye West, which were sublicensed by Artistic Brands

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to us.  At that time, Artistic Brands was also in the final stage of negotiations for a worldwide fragrance license with Shawn Carter, and in discussions with a well-established female artist, both of which, if executed, would also have been sublicensed to us.

The agreement provides for the payment of royalties and profit sharing on these new fragrance products, and the issuance of warrants to purchase shares of our common stock at a strike price of $5.00 per share. The warrants to purchase 6,000,000 shares issued in connection with the licenses for Rihanna and Kanye West were issued to Artistic Brands, the two celebrities and their respective affiliates. See Note 6 and 10 to the accompanying Consolidated Financial Statements for further discussion.

The Garcia Group

On June 14, 2010, certain persons related to Rene Garcia (the “Garcia Group”) acquired 2,718,728 shares of our common stock.  The Garcia Group refers to that certain group comprised of JM-CO Capital Fund, LLC, Irrevocable Trust for Victor Garcia, Jacqueline Marie Garcia, Jacavi Investments, LLC, Carolina Marie Garcia 2006 Family Trust, Jacqueline Marie Garcia 2006 Family Trust, Carolina Marie Garcia and Aqua Capital Fund, LLC, which filed a Schedule 13G on June 23, 2010. The Garcia Group reports having beneficial ownership of a total of 2,995,527 shares, or  approximately 14.7% of our outstanding shares as of June 14, 2010, excluding warrants owned by the Garcia Group.

The Products

At present, our principal products are fragrances, which are distributed in a variety of sizes and packaging. In addition, beauty-related products such as body lotions, creams, shower gels, deodorants, soaps, and dusting powders complement the fragrance line. Our basic fragrance products generally retail at prices ranging from $29 to $110 per item.

We design and create fragrances using our own staff and independent contractors. We supervise the design of our packaging by independent contractors to create products appealing to the intended customer base. The creation and marketing of each product line is closely linked with the applicable brand name, its positioning and market trends for the prestige fragrance industry. This development process usually takes twelve to eighteen months to complete. During fiscal year 2010, we completed the design process, and launched production and distribution of PARIS HILTON “Siren”, JESSICA SIMPSON “Fancy Love”, QUEEN LATIFAH “Queen”, and JOSIE NATORI “Natori” women’s fragrances, as well as MARC ECKO “Ecko” men’s fragrance.

During the last three fiscal years, the following brands have accounted for 10% or more of our sales:

	Fiscal 2010	Fiscal 2009	Fiscal 2008
PARIS HILTON (including accessories)	42%	55%	68%
GUESS? (license expired in December 2009)	28%	30%	23%
JESSICA SIMPSON	15%	13%	N/A

Under a separate license agreement with Paris Hilton Entertainment, Inc. (“PHEI”), we developed a line of “fashion watches” available for sale, which retail at prices ranging from $85 to $200 per item. We sell these watches to a limited number of U.S. retailers and international markets utilizing third party distributors. This license expires on June 30, 2010, and we have not exercised our option to renew.

In addition, we entered into various distribution agreements with PHEI for handbags, purses, wallets, and other small leather goods (“handbags”), which have been shipped in the U.S. and certain international markets, as well as cosmetics and sunglasses. We continue to analyze different options for these additional licenses to determine the most efficient and profitable method to produce and distribute such products, including assignment or sublicensing of our rights thereunder. During the year ended March 31, 2008, we sublicensed the international rights for Paris Hilton handbags. Although we remain contingently liable for the minimum guaranteed royalty from our assignment of the license, we generated $0.4 million in fiscal years 2010 and 2009, and $0.5 million in fiscal year 2008 in sublicense revenue. We anticipate minimum revenues of $0.3 million under this sublicense for fiscal year 2011, as this license expi res on January 15, 2011. In addition, during January 2009, we sublicensed the worldwide exclusive licensing rights for Paris Hilton sunglasses through January 15, 2012, the expiration date of this license. Although we remain contingently liable for the minimum guaranteed royalty from our assignment of the license, we generated $0.3 million in fiscal year 2010 in sublicense revenue. We anticipate minimum revenues of $0.4 million

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under this sublicense for fiscal year 2011.  The license for Paris Hilton cosmetics is due to expire on January 15, 2011, and all remaining royalty obligations under this license have been accrued and expensed in fiscal year 2010.

Marketing and Sales

In the United States, we have our own fragrance sales and marketing staff, and utilize independent commissioned sales representatives for sales to domestic U.S. military bases and mail order distribution. We sell directly to retailers, primarily national and regional department stores, whom we believe will maintain the image of our products as prestige fragrances. Our products are sold in over 2,500 retail outlets in the United States. Additionally, we sell a number of our products to Perfumania, Inc. (“Perfumania”), which is a specialty retailer of fragrances with approximately 370 retail outlets principally located in manufacturers’ outlet malls and regional malls in the U.S. and in Puerto Rico, and to Quality King Distributors, Inc. (“Quality King”). Perfumania is a wholly-owned subsidiary of Perfumania Holdings, Inc.  The majority shareholders of Perfumania Holdings, Inc. are also the owners of Quality King, a privately-held, wholesale distributor of pharmaceuticals and beauty care products. Perfumania is one of our Company’s largest customers, and transactions with Perfumania are closely monitored by management. Any unusual trends or issues with Perfumania are brought to the attention of our Company’s Audit Committee and Board of Directors. During fiscal year 2007, Perfumania Holdings, Inc.’s majority shareholders acquired an approximate 12.2% ownership interest in our Company at that time (10.1% at March 31, 2010), and accordingly, transactions with Perfumania and Quality King are included as related party sales in the accompanying Consolidated Statements of Operations.

During the year ended March 31, 2010, in addition to sales to Perfumania and Quality King, we sold a number of our products to Jacavi Beauty Supply, LLC (“Jacavi”), a fragrance distributor. Jacavi’s managing member is Rene Garcia. Rene Garcia owns approximately 9.1% of the outstanding stock of Perfumania Holdings, Inc. as of March 31, 2010, and is one of the principals of Artistic Brands. Also, on June 14, 2010, certain persons related to Mr. Garcia, the Garcia Group, acquired 2,718,728 shares of our common stock. The Garcia Group reports having beneficial ownership of a total of 2,995,527 shares, or approximately 14.7% of our outstanding shares as of June 14, 2010, excluding warrants owned by the Garcia Group. Sales to Jacavi are also included as related party sales in the accompanying Consolidated Statements of Operations for the year ended March 31, 2010.

Outside the United States, marketing and sales activities for all of our products are conducted through distribution agreements with independent distributors, whose activities are monitored by our international sales staff. We presently market our fragrances through distributors in Canada, Europe, the Middle East, Asia, Australia, Latin America, the Caribbean and Russia, covering over 80 countries. Sales to unrelated international customers amounted to approximately 31%, 37%, and 40% of our total net sales from continuing operations during the fiscal years ended March 31, 2010, 2009, and 2008, respectively.

We advertise directly, and through cooperative advertising programs in association with major retailers, in fashion media on a national basis and through retailers’ statement enclosures and catalogues. We are required to spend certain minimum amounts for advertising under certain licensing agreements. See “Licensing Agreements” and Note 8B to the accompanying Consolidated Financial Statements.

Raw Materials

Raw materials and components (“raw materials”) for our fragrance products are available from sources in the United States, Europe, and the Far East. We source the raw materials, which are delivered from independent suppliers directly to third party contract manufacturers who produce and package the finished products, based on our estimates of anticipated needs for finished goods. As is customary in our industry, we do not have long-term agreements with our contract manufacturers. We purchase almost all of our watch finished products from the Far East. We believe we have good relationships with our manufacturers and there are alternative sources available should one or more of these manufacturers be unable to produce at competitive prices.

To date, we have had little difficulty obtaining raw materials at competitive prices. There is no reason to believe that this situation will change in the near future, but there can be no assurance this will continue.

The lead time for certain of our raw materials 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. These lead times are most affected for glass and plastic components orders, as many of our unique designs require the production of molds in addition to the normal production process. This may take 180 to 240 days, or longer, to receive in stock. We have

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experienced delays in obtaining critical components, particularly glass and plastics, which most recently negatively impacted our first quarter of fiscal year 2009. 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. Generally gross margins on our products outweigh the potential loss due to out-of-stock situations, and the additional carrying costs to maintain higher inventory levels. Also, the composition of our inventory at any given point can vary considerably depending on whether there is a launch of a new product, or a planned sale of a significant amount of product to one or more of our major distributors. 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.

Seasonality

Typical of the fragrance industry, we have our highest sales as our customers purchase our products in advance of the Mother’s and Father’s Day periods and the calendar year-end holiday season, which fall during our first fiscal quarter, and our third fiscal quarter. Lower than projected sales during these periods could have a material adverse effect on our operating results.

Industry Practices

It is an industry practice in the United States for businesses that market fragrances to department stores to provide the department stores with rights to return merchandise. Our fragrance products are subject to such return rights. It is our practice to establish reserves and provide allowances for product returns at the time of sale based on historical return patterns. We believe that such reserves and allowances are adequate based on experience; however, we cannot provide assurance that reserves and allowances will continue to be adequate or that returns will not increase. Consequently, if product returns are in excess of the reserves and allowances provided, net sales will be reduced when such fact becomes known.

Customers

We concentrate our fragrance sales efforts in the United States in a number of national and regional department store retailers which include, among others, Belk, Bloomingdales, Bon Ton, Boscovs, Carson’s, Dillards, J.C. Penney, Macy’s, Neiman Marcus, Saks, and Sears. We also sell directly to perfumery and cosmetic retailers, including Perfumania, Sephora and Ulta retail stores. Retail distribution has been targeted by brands to maximize potential revenue and minimize overlap between each of these distribution channels. During the three years ended March 31, 2010, our sales to Macy’s accounted for more than 10% of our sales. Sales to Macy’s for the years ended March 31, 2010, 2009, and 2008, were $33.8 million, $34.6 million and $20.6 million, or 21%, 22%, and 13% of our total sales, respectively. The loss of either Macy’s or Perfumania as our customer would have a material adverse effect on o ur total sales and results of operations.

Our international sales efforts are carried out through distributors in over 80 countries, the main focus of which has been in Latin America, Canada, Europe, Asia, Australia, the Middle East, the Caribbean and Russia. These distributors sell our products to the local department stores, as well as to numerous perfumeries in the local markets. Some of these distributors may also sell our watches.

Perfumania offers us the opportunity to sell our products in approximately 370 retail outlets and our terms with Perfumania take into consideration the relationship existing between the companies for almost 20 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 our products provided in Perfumania’s store windows, and (e) minimal distribution costs to fulfill Perfumania orders shipped directly to their distribution center. During the three years ended March 31, 2010, our sales to Perfumania accounted for more than 10% of our sales. Our sales to Perfumania were as follows:

	For the Years Ended March 31,
	2010		2009		2008
(in millions)
Sales to Perfumania	$	37.6	$	41.5	$	51.2
As a % of total sales		25%		27%		33%

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While our invoice terms to Perfumania are stated as net ninety (90) days, for over fifteen years, management has granted longer payment terms taking into consideration the factors discussed above. We evaluate 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 us amounted to $10.5 million and $12.4 million at March 31, 2010, and 2009, respectively. Between April 1, 2010, and June 25, 2010, we received $6.7 million from Perfumania in payment of its outstanding balance. Trade accounts receivable from Perfumania are non-interest bearing, and are paid in accordance with the terms established by management. See “Liquidity and Capital Resources” for further discussion of this receivable.

We continue to evaluate our credit risk and assess the collectability of the Perfumania receivables. Perfumania’s reported financial information, as well as our payment history with Perfumania, indicates that, historically, their first quarter ending approximately April 30, is Perfumania’s most difficult operating quarter as is the case with most U.S. based retailers. We have, in the past, received significant payments from Perfumania during the last three months of the calendar year, and have no reason to believe that this will not continue. Based on our evaluation, no allowances have been recorded as of March 31, 2010, and 2009. We will continue to evaluate Perfumania’s financial condition on an ongoing basis and consider the possible alternatives and effects, if any, on our business.

Foreign and Export Sales

We record sales, cost of sales, and other direct expenses in three main categories: Domestic, International and Related Parties. Domestic includes sales generated by our Domestic Sales Division and generally includes sales to department and specialty stores in the United States that are not deemed to be related parties. International covers all sales other than domestic and related party sales that are processed by way of our International Sales Division to international distributors that are not deemed to be related parties for the sale of products in markets outside of the United States. Related parties are those parties that are known to us as having a related party relationship. See Note 2 to the accompanying Consolidated Financial Statements for additional information regarding related party transactions. Because of the substantial margins generated by fragrance sales, some products intended for sale in certain i nternational territories are re-exported to the United States, a common practice in the fragrance industry. Also, prior season gift sets, refurbished returns and other slow moving products, are sold at substantially discounted prices, and as such, can find their way into mass market channels. Additionally, where the licensor does not restrict distribution, sales are made in all markets deemed appropriate for the brand.

	For the Years Ended March 31,
(in millions)	2010		2009		2008
Sales to unrelated international customers	$	46.3	$	55.8	$	61.5

	For the Years Ended March 31,
(in millions)	2010		2009		2008
Sales to other international related parties (1)	$	—	$	—	$	8.0

———————

⁽¹⁾

Excludes Perfumania’s, Quality King’s and Jacavi’s related party sales.

During the years ended March 31, 2010, 2009, and 2008, sales from continuing operations to unrelated international customers were $46.3 million, $55.8 million, and $61.5 million, respectively. Gross sales from continuing operations to international distributors owned and operated by individuals related to Ilia Lekach, our former Chairman and CEO, during the fiscal year ended March 31, 2008, which are included in related party sales until June 30, 2007, amounted to approximately $8.0 million.

Prior to July 1, 2007, sales to parties related to Ilia Lekach, our former Chairman and CEO, were treated as related party sales. During the fiscal year ended March 31, 2008, Mr. Lekach’s beneficial ownership interest in the Company declined to less than 5% (0% at March 31, 2010). Accordingly, effective July 1, 2007, transactions with parties related to Mr. Lekach are no longer considered to be related party transactions, and there were no such sales in fiscal years 2009 and 2010.

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Licensing Agreements

See “The Products” beginning on page 3 for further discussion of the relative importance of our licensing agreements.

RIHANNA: Effective April 7, 2009, we entered into a sublicense agreement with Artistic Brands for the exclusive worldwide rights to develop, manufacture and distribute prestige fragrances and related products under the Rihanna name. The initial term of the agreement expires on the fifth anniversary of the first date products are shipped and is renewable for an additional three-year term if certain sales levels are met. We anticipate launching a new fragrance under this license in the spring of 2011.

KANYE WEST: Effective April 7, 2009, we entered into a sublicense agreement with Artistic Brands for the exclusive worldwide rights to develop, manufacture and distribute prestige fragrances and related products under the Kanye West name. The initial term of the agreement expires on the fifth anniversary of the first date products are shipped, but in no event later than April 30, 2015, and is renewable for an additional three-year term if certain sales levels are met. We anticipate launching a new fragrance under this license in the fiscal year 2012.

MARC ECKO: 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 trademarks. 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 launched the first fragrance under this license in late September 2009.

QUEEN LATIFAH: 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 launched the first fragrance under this license in late June 2009.

JOSIE NATORI: 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, 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 launched the first fragrance under this license in July 2009.

NICOLE MILLER: Effective August 1, 2007, we 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. 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 recently launched a new fragrance under this license in April 2010.

JESSICA SIMPSON: Effective June 21, 2007, we 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. 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 launched the first fragrance under this agreement during August 2008.

PARIS HILTON: Effective June 1, 2004, we entered into a definitive license agreement with PHEI, to develop, manufacture and distribute prestige fragrances and related products, on an exclusive basis, under the Paris Hilton name, which was scheduled to expire on June 30, 2009. During fiscal year 2009, the license agreement was renewed for an additional five-year period through June 30, 2014. The first Paris Hilton women’s fragrance was launched during November 2004, and was followed by a launch of a men’s fragrance in April 2005.

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On January 26, 2005, we entered into an exclusive worldwide license agreement with 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, at the mutual agreement of both parties. The first “limited edition” watches under this agreement were launched during December 2005 and a line of “fashion watches” was launched during spring 2006. We have not exercised our option to renew this license.

On May 11, 2005, we 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, at the mutual agreement of both parties. To date, no products have been launched under this license. The cosmetics license is due to expire in fiscal year 2011, and all remaining royalty obligations have been accrued and expensed in fiscal year 2010. We do not anticipate any further renewals of this license.

On May 13, 2005, we 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, at the mutual agreement of both parties. The first products under this agreement were launched during summer 2006. During fiscal year 2008, we sublicensed the international rights under this agreement. We remain contingently liable for the minimum guaranteed royalties due through the remainder of this agreement. We do not anticipate any further renewals of this 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 our worldwide rights with PHEI, for the production and distribution of Paris Hilton sunglasses. We remain contingently liable for the minimum guaranteed royalties due through the remainder of this agreement. We do not anticipate any further renewals of this license.

Under all of the PHEI 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.

babyGUND: Effective April 6, 2005, we 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 Spetember 30, 2010, and is renewable for an additional two years if certain sales levels are met. The first products under this agreement were produced during fall 2007. Under the agreement, we must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based on sales volume. We do not anticipate renewing this license.

XOXO: Effective January 6, 2005, we entered into a purchase and sale agreement with Victory International (USA), LLC (“Victory”), whereby we acquired the exclusive worldwide licensing rights (the “Fragrance License”), along with inventories, molds, designs and other assets, relating to the XOXO fragrance brand. The initial term of the Fragrance License continued through June 30, 2007, and was renewable for an additional three-year period, at the mutual agreement of both parties. The Fragrance License requires the payment of a minimum royalty, whether or not any product sales are made, and the spending of certain minimum amounts for advertising.

During June 2006, we extended the Fragrance License through June 30, 2010, and negotiated renewal terms which, among other items, reduced minimum royalty requirements. We do not anticipate any further renewals of this license.

ANDY RODDICK: Effective December 8, 2004, we entered into an exclusive worldwide license agreement with Mr. Andy Roddick, to develop, manufacture and distribute prestige fragrances and related products under his name. The initial term of the agreement, as amended, expired on March 31, 2010, and was renewable for an additional three-year period, at the mutual agreement of both parties. The first fragrance under this agreement was produced during March 2008. Under the agreement, we were required to pay a minimum royalty, whether or not any product sales were made, and spend minimum amounts for advertising based on sales volume. We notified the licensor of our election not to renew this license.

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GUESS?: Effective November 1, 2003, we entered into an exclusive license agreement with GUESS? and GUESS? IP HOLDER L.P., to develop, manufacture and distribute prestige fragrances and related products on a worldwide basis.

In December 2006, we received a complaint from GUESS?, Inc. (“GUESS?”) alleging that GUESS? fragrance products were being sold in unauthorized retail channels. Although we did not sell such products directly to these channels, this represented a violation of our license agreement with GUESS?. On May 7, 2007, we entered into a settlement agreement with GUESS? which, among other items, required 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 us to strictly monitor distribution channels. This license expired on December 31, 2009, and was not renewed. The termination of this agreement resulted in the recording of significant costs. See Note 3 to the accompanying Consolidated Financial Statements for further discussion.

OCEAN PACIFIC: In August 1999, we entered into an exclusive worldwide licensing agreement with Ocean Pacific Apparel Corp., to manufacture and distribute men’s and women’s fragrances and other related products under the OP label. The initial term of the agreement extended through December 31, 2003, and was automatically renewed for two additional three-year periods, with the latest term ending December 31, 2009. We initially had six additional three-year renewal options, of which the first two contained automatic renewals at our option, and the last four required the achievement of certain minimum net sales. The license required the payment of minimum royalties, whether or not any product sales were made, which declined as a percentage of net sales as net sales volume increased, and the spending of certain minimum amounts for advertising based upon annual net sales of the products. This license expi red on December 31, 2009, and was not renewed.

FRED HAYMAN: In June 1994, we entered into an Asset Purchase Agreement with Fred Hayman Beverly Hills, Inc. (“FHBH”), purchasing substantially all of the assets and liabilities of the FHBH fragrance division. In addition, FHBH granted us an exclusive royalty free 55-year license to use FHBH’s United States Class 3 trademarks Fred Haymanâ, 273â, Touchâ, With Loveâ and Fred Hayman Personal Selectionsâ and the corresponding international registrations. There are no minimum sales or advertising requirements.

On March 28, 2003, we entered into an exclusive agreement to sublicense the FHBH rights to Victory for a royalty of 2% of net sales, with a guaranteed minimum annual royalty of $50,000 (the “Sublicense”). The initial term of the Sublicense was for five years, and is automatically renewable every five years at the sublicensee’s option. The Sublicense excluded the right to “273 Indigo” for men and women, the latest fragrance introduction for the FHBH brand, as well as all new FHBH product development rights.

On October 17, 2003, the parties amended the Sublicense, granting all new FHBH product development rights to the sublicensee. In addition, the guaranteed minimum annual royalty increased to $75,000 and the royalty percentage on sales of new FHBH products was increased to 3% of net sales. We received licensing fees under this sublicense of $75,000 during each fiscal year ended March 31, 2010, 2009, and 2008.

We believe we are currently in compliance with all material obligations under the above agreements. There can be no assurance that we will be able to continue to comply with the terms of these agreements in the future.

Trademarks

We have exclusive licenses, as discussed above, to use trademark and tradename rights in connection with the packaging, marketing and distribution of our products, both in the United States and internationally where such products are sold. See “The Products” above for further discussion of the relative importance of these licenses.

In addition, we own the worldwide distribution rights to LIMOUSINE fragrances. There are no licensing agreements requiring the payment of royalties to us for this trademark. We do not anticipate distributing fragrance products under the LIMOUSINE brand in the near future.

Product Liability

We have insurance coverage for product liability in the amount of $2 million per policy period. We maintain an additional $10 million of coverage under an “umbrella” policy. We believe that the manufacturers of the products sold by us also carry product liability coverage and that we effectively are protected thereunder.

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There are no pending and, to the best of our knowledge, no threatened product liability claims of a material nature. Over the past ten years, we have not been presented with any significant product liability claims. Based on this historical experience, management believes that its insurance coverage is adequate.

In connection with our Paris Hilton fashion watch business, we provide a one-year warranty on the watch mechanism and anticipate that repair service would be handled by an outside third party, as necessary. We may opt to replace the watch if we consider this action to be more cost effective.

Government Regulations

A fragrance is defined as a “cosmetic” under the Federal Food, Drug and Cosmetics Act (the “FDC Act”). A fragrance must comply with the labeling requirements of the FDC Act as well as the Fair Packaging and Labeling Act and its regulations. Under U.S. law, a product may be classified as both a cosmetic and a drug. If we produce such products, there would be additional regulatory requirements for products which are “drugs” including additional labeling requirements, registration of the manufacturer and the semi-annual update of a drug list.

Effective March 11, 2005, we were required to comply with the labeling, durability and non-animal testing guidelines from the European Cosmetic Toiletry and Perfumery Association (“COLIPA”) Amendment No. 7, to distribute our products in the European Union (“EU”). We created “safety assessor approved” dossiers for all our products to be distributed in the EU, and have filed such documentation both domestically and with our agent in France. In addition to the EU specific requirements, we comply with all other significant international requirements.

We adhere to the Canadian Food and Drug Act (the “CFD Act”) and the Canadian Cosmetic Regulations (the “CCRs”). All cosmetics sold to consumers in Canada must meet the requirements of the CFD Act and the current CCRs, and all other applicable legislation to ensure that the products are safe to use and do not pose any health risk. The CCRs of the CFD Act requires that cosmetics sold in Canada must be manufactured, prepared, preserved, packed and stored under sanitary conditions. The manufacturer must notify Health Canada that it is selling the product in Canada and provide a list of the product’s ingredients.

We are not aware of any violations or issues with the regulations above, or any other significant regulations to which we may be subject.

Competition

The markets for fragrance and beauty related products, as well as watches, handbags and other accessories, are highly competitive and sensitive to changing consumer preferences and demands. We believe that the quality of our products, as well as our ability to develop, distribute and market new products, will enable us to continue to compete effectively in the future and to continue to achieve positive product reception, position and inventory levels in retail outlets. We believe we compete primarily on the basis of product recognition and emphasis on providing in-store customer service. However, there are products, which are better known than the products distributed by us, and we do not presently have the extent of experience in the accessories market to compete effectively. There are also companies, which are substantially larger and more diversified. The top 28 beauty manufacturing companies, as listed in the August 2009 issue of
47;WWD Beauty Biz”, each have sales levels exceeding $1 billion and have substantially greater financial and marketing resources than we have, as well as greater name recognition, with the ability to develop and market products similar to, and competitive with, those distributed by us.

Employees

As of March 31, 2010, we had a total of 156 employees, consisting solely of full-time employees, all of which were located in the United States. Of these, 67 were engaged in worldwide sales activities, 58 in operations, marketing, administrative and finance functions and 31 in warehousing and distribution activities. None of our employees are covered by a collective bargaining agreement and we believe that our relationship with our employees is satisfactory. We also use the services of independent contractors in various capacities, including sales representatives both domestically and internationally, as well as temporary agency personnel to assist with seasonal distribution requirements.

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Item 1A.

RISK FACTORS.

Our business, financial condition, results of operations, cash flows and prospects, and the prevailing market price and performance of our common stock, may be adversely affected by a number of factors, including the matters discussed below. Certain statements and information set forth in this Annual Report on Form 10-K, as well as other written or oral statements made from time to time by us or by our authorized officers on our behalf, constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should note that forward-looking statements in this document speak only as of the date of this Annual Report on Form 10-K and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations, plans, intentions and projections reflected in our forward-looking statements are reasonable, such statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks, uncertainties and other factors that our stockholders and prospective investors should consider include the following:

 The Paris Hilton line is our primary source of revenue following the expiration of our GUESS? license.

During the year ended March 31, 2010, licensed Paris Hilton and GUESS? brand products generated approximately $68.4 million and $46.2 million, respectively, in gross sales. The Paris Hilton and GUESS? brands of fragrances and accessories accounted for approximately 42% and 28%, respectively, of our gross sales from continuing operations during the fiscal year ended March 31, 2010. The GUESS? license expired on December 31, 2009, and was not renewed. As a result, licensed Paris Hilton brand products are expected to account for the majority of our gross sales and constitute our primary source of revenue for the year ending March 31, 2011. If Paris Hilton's appeal as a celebrity were to diminish it could result in a material reduction in our sales of licensed Paris Hilton brand products, adversely affecting our results of operations and operating cash flows. The Paris Hilton fragrance license is scheduled to exp ire on June 30, 2014.

If we are unable to acquire or license additional brands, secure additional distribution arrangements, or obtain the required financing for these agreements and arrangements, the growth of our business could be impaired.

Our business strategy contemplates growing our portfolio of licensed brands. Our future expansion through acquisitions or new product licensing arrangements, if any, is dependent on the availability of capital resources and working capital. We may be unsuccessful in identifying, negotiating, financing and consummating such acquisitions and licensing arrangements on commercially acceptable terms, or at all, which could hinder our ability to increase revenues and grow our portfolio of licensed brands and our business. Additionally, even if we are able to consummate such acquisitions and licensing arrangements, we may not be able to successfully integrate them with our existing operations and portfolio of licenses of generate the expected levels of increased revenue as a result of such acquisitions and licensing arrangements.

The development of new products by us involves considerable costs and any new product may not generate sufficient consumer interest and sales to become a profitable brand or to cover the costs of its development.

Generally, a significant number of new prestige fragrance products have been introduced annually on a worldwide basis. The beauty industry in general is highly competitive and consumer preferences 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 tend to lose sales to the mass market as a product matures. To counter the effect of lower department store sales, companies strategically introduce new products quickly, which requires additional spending for development, advertising and promotional expenses. Our success with new fragrance products depends on our products’ appeal to a broad range of consumers whose preferences are subject to change and cannot be predicted with certainty, and on our ability to anticipate and respond to market trends through product innovation. 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 dramatically, either positively or negatively, based on a single event. If one or more of our new product introductions were to be unsuccessful, or if the appeal of the celebrity related to a product were to diminish, it could result in a reduction in profitability and operating cash flows.

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We depend on a relatively small number of customers for most of our revenue, therefore if any of our significant customers reduced their demand for our products or became financially unstable it may have a material adverse effect on our business.

We derive a significant portion of our revenue from two customers, Perfumania and Macy's. During the fiscal years ended March 31, 2010, 2009, and 2008, we had sales of $37.6 million, $41.5 million, and $51.2 million, respectively, to Perfumania, which represented 25%, 27%, and 33%, respectively, of our total sales for these periods. During the fiscal years ended March 31, 2010, 2009 and 2008, we had sales of $33.8 million, $34.6 million and $20.6 million, respectively, to Macy's, which represented 21%, 22%, and 13%, respectively, of our total sales. The loss of either Perfumania or Macy's as a customer, for any reason, could materially decrease our net sales and have an adverse effect on our results of operations.

The loss of or interruption in our arrangements with our manufacturers, suppliers and customers could have a material adverse affect on our sales, profitability, and operating cash flow.

We generally do not have long-term or exclusive contracts with our domestic customers, international distributors or suppliers. Virtually all of our finished products are assembled from multiple components and manufactured by third parties. If we were to experience delays in the delivery of the finished products or the raw materials or components used to make such products, or if these suppliers were unable to supply such products, or if there were transportation problems between the suppliers and our distribution center, our sales, profitability, and operating cash flow could be negatively impacted. In addition, the loss of key distributors or customers, such as Macy’s or Perfumania, or a change in our relationship with such distributors or customers, could result in excess inventory and reduced sales, profitability, and operating cash flows.

The fragrance and cosmetic industry is highly competitive, and if we are unable to compete effectively it could have a material adverse effect on our sales, profitability, operating cash flow, and many other aspects of our business, prospects, results of operations and financial condition.

The fragrance and cosmetic industry is highly competitive and, at times, changes rapidly due to consumer preferences and industry trends. We compete primarily with global prestige fragrance companies, most of whom have significantly greater resources than we have and may be able to respond to changes in business and economic conditions quicker or more effectively than us. Competition in the fragrance and cosmetic industry is based on a number of factors including innovation and new product introductions, pricing of products, promotional activities and advertising, special events and electronic commerce initiatives. Our products compete for consumer recognition and shelf space with products that have achieved significant international, national and regional brand name recognition and consumer loyalty. Our products also compete with new products that often are accompanied by substantial promotional campaigns. In addition, these factors, as well as demographic trends, economic conditions and discount pricing strategies by competitors, could result in increased competition and could have a material adverse effect on our profitability, operating cash flow, and many other aspects of our business, prospects, results of operations and financial condition.

Our net sales, operating income and inventory levels fluctuate on a seasonal basis and a decrease in sales or margins during our peak seasons could have a disproportionate effect on our overall financial condition and results of operations.

Our net sales and operating income fluctuate seasonally, with a significant portion of our operating income typically realized during peak holiday gift-giving seasons. Any decrease in sales or margins during these periods could have a disproportionate effect on our financial condition and results of operations. We provide allowances for sales returns based on our historical “sell-through” experience, economic trends and changes in our assessment of customer demand. Our customers generally request approval for the return of unsold items after a specific holiday gift-giving season and fluctuations in the allowance balance are generally higher after holiday gift-giving seasons. An increase in sales returns due to a change in economic conditions, or otherwise, may result in our estimated allowances being insufficient or may have a material adverse impact on our operations. Seasonal fluctuations also affect our inventory levels. We must carry a significant amount of inventory, especially before the holiday season selling period. If we are not successful in selling our inventory, we may have to write down our inventory or sell it at significantly reduced prices or we may not be able to sell such inventory at all, which could have a material adverse effect on our financial condition and results of operations.

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The continued consolidation of the U.S. department store segment could have a material adverse effect on our sales and profitability.

Over the last few years, the United States department store market has encountered a significant amount of consolidation, the most recent significant example of which is the consolidation of Macy’s various regional divisions into one centralized purchasing function. Such consolidations have resulted in us becoming increasingly dependent on key retailers, who have increased their bargaining strength and implemented measures such as store closings, increased inventory control and management changes, as well as changes in administrative and purchasing responsibilities. This consolidation trend has also resulted in an increased risk related to the concentration of our customers. This consolidation, if unsuccessful, could have a material adverse effect on our sales and profitability.

Our customers inability to pay their accounts payable balance due to us could have an adverse effect on our financial condition and results of operations.

We continuously monitor the collectability of our receivables by analyzing the aging of our accounts receivable, assessing our customers credit worthiness, and evaluating the impact of changes in economic conditions on our customers. While our invoice terms to Perfumania are stated as net ninety (90) days, for over ten years, our management has granted longer payment terms to Perfumania. As of March 31, 2010 and 2009, Perfumania had an account balance of $10.5 million and $12.4 million, respectively, due to us. Trade accounts receivable from Perfumania are non-interest bearing, and are paid in accordance with the terms established by management. We continue to evaluate our Perfumania credit risk, based on Perfumania's reported results and comparable store sales performance, and assess the collectability of the Perfumania receivables. Based on our evaluation, no allowances for Perfumania have been recorded as of March 31, 2010, and 2009. Significant changes in the factors that affect the collectability of our receivables, including the Perfumania receivables, could have a material adverse effect on our financial condition and results of operations.

Consumers have reduced discretionary purchases of our products as a result of the general economic downturn, and may further reduce discretionary purchases of our products in the event of further economic decline, terrorism threats or other external factors.

Consumer spending is generally affected by a number of factors beyond our control, including general economic conditions, inflation, interest rates, energy costs and consumer confidence generally. Consumer purchases of discretionary items, such as fragrance products, tend to decline during recessionary periods, when disposable income is lower, and may impact sales of our products. As a result of the severe economic downturn, we have experienced a decline in sales since the quarter ended December 31, 2008. 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. We face continued economic challenges in fiscal year 2011 because consumers may continue to have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to credit and falling home prices, among other things. If current eco nomic conditions continue or worsen, we could experience further declines in sales, profitability and operating cash flows due to reduced orders, payment delays, supply chain disruptions or other factors caused by the economic challenges faced by customers, prospective customers and suppliers. In addition, sudden disruptions in business conditions as a result of a terrorist attack, retaliation and the threat of further attacks or retaliation, war, adverse weather conditions or other natural disasters, or pandemic situations can have a short or, sometimes, long-term impact on consumer spending.

Our New Loan Agreement contains restrictive and financial covenants that could adversely affect our ability to borrow funds under the New Loan Agreement or adversely affect our business by limiting our flexibility.

Our New Loan Agreement contains certain restrictive and financial covenants. Among other things, these covenants limit our ability to:

·

incur additional indebtedness;

·

pay dividends;

·

create or incur liens; or

·

engage in mergers or acquisitions.

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Additionally, we have to maintain a minimum net liquidity balance throughout the term of the New Loan Agreement and in order to borrow funds under the New Loan Agreement.  If we fall below the net liquidity requirements at any point, the New Loan Agreement contains additional financial covenants relating to minimum consolidated EBITDA, minimum consolidated interest coverage ratios and maximum capital expenditure limits.  These covenants could place us at a disadvantage compared to some of our competitors which may have fewer restrictive and financial covenants and may not be required to operate under these restrictions.  Further, these covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisitions or other opportunities.  Our ability to comply with financial covenants could be affected by events beyond our control.  If our actual results deviate significantly from our projections, we may not remain in compliance with the financial covenants and would not be allowed to borrow under the New Loan Agreement.  If we are not able to borrow under the New Loan Agreement or if our financing needs increase, we may have to seek an alternative or additional source of financing. If we were to fail to obtain an alternative or additional source of financing in such circumstances, we could experience cash flow difficulties and disruptions in our supply chain or be unable to pursue our business strategy or fund capital expenditures.

Failure to manage inventory effectively could negatively impact our operations.

The composition of our inventory at any given time may vary considerably depending on launches of new products, planned sales of significant amounts of our products, during the peak holiday gift-giving seasons and as a result of termination or expiration of our fragrance licenses and sub-licenses. If we misjudge consumer preferences or demands or future sales do not reach forecasted levels, we could have excess inventory that may need to be held for a long period of time, written down, sold at prices lower than expected, or discarded in order to clear excess inventory at the end of a selling season. Conversely, if we underestimate consumer demand, we may not be able to provide products to our customers to meet their demand. Either event could have a material adverse impact on our business, financial condition and results of operations. The termination or expiration of our fragrance licenses may result in inventory which we may need to write d own to the amounts which we estimate could be realized upon their sale or liquidation. During the year ended March 31, 2010, we recorded additional charges of $7.6 million to cost of sales to reduce the recorded value of inventories related to our GUESS? license as a result of the expiration of this license on December 31, 2009. In addition, inventory shrink (inventory theft or loss) rates can also significantly impact our business performance and financial results.

The value of our long-lived assets, including brand licenses and trademarks, may be adversely affected if we experience declines in operating results or experience significant negative industry or economic trends.

The majority of our long-lived assets are the result of the acquisition of existing license brands. For newly launched brands our long-lived assets are generally the result of our investment in trademarking brand names and designs, and are generally not a material portion of our assets. At least on an annual basis, long-lived assets are reviewed for impairment. Impairment losses are recognized if expected undiscounted future cash flows of the long-lived assets are less than their carrying values. Future cash flows can be affected by changes in industry or market conditions. The assumptions used include an analysis by license, and by fragrance produced under each license, which may vary depending on the age of the product. Expected sales along with related costs of sales, direct expenses and certain allocated charges are projected through the end of each given license period. Expected sales estimates incorporate the age of a product and its ma rket distribution. If actual operating results differ from management’s estimates, or if we experience the impact of negative industry or economic trends, write downs of our long-lived assets, including brand licenses and trademarks, may be required which could have a material adverse effect on our operating results.

If we are unable to protect our intellectual property rights, specifically trademarks and trade names, our ability to compete could be negatively impacted.

The market for our products depends to a significant extent upon the value associated with our trademarks and trade names. We own, or have licenses or other rights to use, the material trademark and trade name rights used in connection with the packaging, marketing and distribution of our major products both in the United States and in other countries where such products are principally sold; therefore, trademark and trade name protection is important to our business. Although most of our brand names are registered in the United States and in certain foreign countries in which we operate, we may not be successful in asserting trademark or trade name protection. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. The costs required to protect our trademarks and trade names may be substantial.

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If other parties infringe on our intellectual property rights or the intellectual property rights that we license, the value of our brands in the marketplace may be diluted. Any infringement of our intellectual property rights would also likely result in a commitment of our time and resources to protect these rights through litigation or otherwise. Additionally, we may infringe or be accused of infringing on others’ intellectual property rights and one or more adverse judgments with respect to these intellectual property rights could negatively impact our ability to compete and could materially adversely affect our business, prospects, results of operations, financial condition or cash flows.

The accessories market, specifically, watches, handbags, and sunglasses, is also highly competitive and if we are unable to compete effectively it could have a material adverse effect on our profitability, operating cash flow, and many other aspects of our business, prospects, results of operations and financial condition.

As with fragrances and cosmetics, the accessories market is highly competitive and also changes rapidly due to consumer preferences and industry trends. In addition, we do not have the extent of experience in this market as we do in fragrances. We may have difficulty in sourcing these accessory items, all of which will be manufactured by independent third parties, and may not meet the quality standards expected by the licensor and/or the consumer. Consumer awareness and a positive image of the licensor could also be impacted by adverse publicity, which could negatively impact retailer and consumer attitudes. Additionally, we are obligated to make required minimum royalty payments even if sales do not reach the required contractual minimum sales levels, and to date we have not generated sufficient sales of accessories to offset the minimum royalty payments. Our lack of experience in these highly competitive markets could result in a material a dverse effect on our profitability, operating cash flow, and many other aspects of our business, prospects, results of operations and financial condition.

The loss of, or disruption in our distribution facility, could have a material adverse effect on our sales and our relationships with our customers.

We have one distribution facility, located in New Jersey, which is close to where our fragrance products are manufactured and packaged. The loss of, or any damage, to our New Jersey facility, as well as the inventory stored therein, would require us to find replacement facilities. In addition, weather conditions, such as hurricanes or other natural disasters, could disrupt our distribution operations. Certain of our components require purchasing lead times in excess of ninety days. If we cannot replace our distribution capacity and inventory in a timely, cost-efficient manner, it could reduce the inventory we have available for sale, adversely affecting our profitability and operating cash flows, as well as damaging relationships with our customers who are relying on deliveries of our products.

Our success depends, in part, on the quality and safety of our fragrance and related products.

Our success depends, in part, on the quality and safety of our fragrance and related products. If our products are found to be unsafe or defective, or if they otherwise fail to meet customers or consumers’ standards and expectations, our relationships with customers or consumers could suffer, the appeal of one or more of our brands could be diminished, our sales could be adversely affected and/or we may become subject to liability claims, any of which could result in a material adverse effect on our business, results of operations and financial condition.

We are subject to risks related to our international operations.

We operate on a global basis, with sales in approximately 80 countries. Our international operations could be adversely affected by:

·

import and export license requirements;

·

trade restrictions;

·

changes in tariffs and taxes;

·

product registration, permitting and regulatory compliance;

·

restrictions on repatriating foreign profits back to the United States;

·

the imposition of foreign and domestic governmental controls;

·

changes in, or our unfamiliarity with, foreign laws and regulations;

·

difficulties in staffing and managing international operations;

·

changes in economic, social, legal and other conditions;

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·

the volatility or weakening of the U.S. dollar against other currencies;

·

greater difficulty enforcing intellectual property rights and weaker laws protecting such rights; and

·

geo-political conditions, such as terrorist attacks, war or other military action, public health  problems and natural disasters.

Reductions in worldwide travel could hurt sales volumes in our duty-free related business.

We depend on consumer travel for sales to our “duty free” customers in airports and other locations throughout the world. Any reductions in travel, including as a result of general economic downturns, natural disasters, or acts of war or terrorism, or disease epidemics, could result in a material decline in sales and profitability for this channel of distribution, which could negatively affect our operating cash flow.

If we lose the services of our executive officers and senior management, it could have a negative impact on our business.

Our success is dependent upon the continued service and skills of our executive officers and senior management. If we lose the services of our executive officers and senior management, it could have a negative impact on our business because of their skills, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

If we lose our key personnel, or fail to attract and retain additional qualified experienced personnel, we will be unable to continue to develop our prestige fragrance products and attract and obtain new licensing partners.

We believe that our future success depends upon the continued contributions of our highly qualified sales, creative, marketing, and management personnel and on our ability to attract and retain those personnel. These individuals have developed strong reliable relationships with customers and suppliers. There can be no assurance that our current employees will continue to work for us or that we will be able to hire any additional personnel necessary for our growth. Our future success also depends on our continuing ability to identify, hire, train and retain other highly qualified managerial personnel. Competition for these employees can be intense. We may not be able to attract, assimilate or retain qualified managerial personnel in the future, and our failure to do so would limit the growth potential of our business and potential licensing partners may not be as attracted to our organization.

We may unknowingly infringe on others’ intellectual property rights which could result in litigation.

We may unknowingly produce and sell products in a country where another party has already obtained intellectual property rights. One or more adverse judgments with respect to these intellectual property rights could negatively impact our ability to compete and continue to sell products in the worldwide marketplace and may require the destruction of inventory produced under the infringed name, both of which would adversely affect profitability, and, ultimately operating cash flow.

We are involved in litigation from time to time in the ordinary course of business, which, if the outcome of such litigation is adverse to us, could materially adversely affect our business, results of operations, financial condition, and cash flows.

Given the nature of our business, we are involved in litigation from time to time in the ordinary course of business. Except as set forth under Part I, Item 3 - “Legal Proceedings”, we are not presently a party to any material legal proceedings, although legal proceedings could be filed against us in the future. No assurance can be given as to the final outcome of any legal proceedings or that the ultimate resolution of any legal proceedings will not have a material adverse effect on our business, results of operations, financial condition, and cash flows.

Our quarterly results of operations could fluctuate significantly due to retailing peaks related to gift giving seasons and delays in new product launches, which could adversely affect our stock price.

We may experience variability in net sales and net income on a quarterly basis as a result of a variety of factors, including timing of customer orders and returns, sell-through of our products by the retailer to the ultimate consumer or gift giver, delays in new product launches, as well as additions or losses of brands or distribution rights. Any resulting material reduction in our sales could have an adverse effect on our business, its profitability and operating cash flows, and correspondingly, the price of our common stock.

16

Our business is subject to regulation in the United States and internationally.

The manufacturing, distribution, formulation, packaging and advertising of our fragrance and related products are subject to numerous federal, state and foreign governmental regulations. Compliance with these regulations is costly and difficult. If we fail to adhere, or are alleged to have failed to adhere, to any applicable federal, state or foreign laws or regulations, our business, prospects, results of operation, financial condition or cash flows may be adversely affected. In addition, our future results could be adversely affected by changes in applicable federal, state and foreign laws and regulations, or the interpretation or enforcement thereof, including those relating to product liability, trade rules and customs regulations, intellectual property, consumer laws, privacy laws and product regulation, as well as accounting standards and taxation requirements (including tax-rate changes, new tax laws and revised tax law interpretat ions).

Our stock price has been volatile.

The price of our common stock has been and likely will continue to be subject to wide fluctuations in response to a number of events, such as:

·

quarterly variations in operating results;

·

acquisitions, capital commitments or strategic alliances by us or our competitors;

·

legal and regulatory matters that are applicable to our business;

·

the operating and stock price performances of other companies that investors may deem comparable to us;

·

news reports relating to trends in our markets; and

·

the amount of shares constituting our public float.

In addition, the stock market in general has experienced significant price and volume fluctuations that often have been unrelated to the performance of specific companies. The broad market fluctuations may adversely affect the market price of our common stock.

Item 1B.

UNRESOLVED STAFF COMMENTS.

None.

Item 2.

PROPERTIES.

Our corporate headquarters are located at 5900 N. Andrews Avenue, Suite 500, Fort Lauderdale, FL 33309 and our distribution center is located in Keasbey, New Jersey.

On November 30, 2007, we entered into a sublease agreement, commencing during February 2008, for 19,072 square feet of office space in Fort Lauderdale, Florida, to serve as our new corporate headquarters. We moved into this space in February 2008. The sublease was for eight years, commencing on February 1, 2008, at an annual cost of approximately $0.6 million, increasing 3% per annum. On January 31, 2009, the sublease was terminated and we assumed the sublessor’s obligations under their lease directly with the landlord. The terms of the lease are substantially the same as our previous sublease.

On April 17, 2006, we leased 198,500 square feet of warehouse space in Keasbey, New Jersey. The lease is for a five-year term and had an initial annual cost of approximately $1.4 million, with minimal increases after the second and fourth year of the lease. We have relocated substantially all of our fragrance warehousing and distribution activities to this facility, and established a backup information technology site in case of an unplanned disruption to our South Florida headquarters.

We currently maintain a lease for our former corporate headquarters and distribution center in Ft. Lauderdale, Florida. During May 2006, we entered into a five-year lease on the 99,000 square foot property, commencing October 1, 2006, at an initial annual cost of approximately $0.9 million, increasing approximately 3% per annum. On January 29, 2009, we entered into a sublease agreement to sublease 40,000 square feet of space in the facility at the approximate per square foot cost as we have under our lease. The sublease commenced on April 1, 2009, and will terminate on September 30, 2011, which is our lease expiration date. We are actively seeking to sublease the remaining space in the facility.

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Item 3.

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 June 2006 proposal from PF Acquisition of Florida LLC (“PFA”), which was owned by Ilia Lekach, to acquire all of our outstanding shares of common stock for $29.00 ($14.50 after the Stock Split) per share in cash (the “Proposal”).

The original Derivative Action sought to remedy the alleged breaches of fiduciary duties, waste of corporate assets, and other violations of law and sought 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 alleged that the unlawful plan to attempt to buy out the public shareholders of Parlux without having proper financing in place, and for inadequate consideration, violated 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 o f 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 on August 17, 2006.

The Amended Complaint continued to name the then Board of Directors as defendants along with Parlux, as a nominal defendant. The Amended Complaint was 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 added to those claims, assertions regarding a 2003 buy-out effort and an abandoned buy-out effort of PFA. It also contained allegations regarding the prospect that our stock might be delisted because of a delay in meeting SEC filing requirements.

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.  During fiscal year 2008, there followed extremely limited discovery.  A number of the factual allegations upon which the various complaints were based have fallen away, simply by operation of time. We were then advised that one of the two plaintiffs was withdrawing from the case. No explanation was gi ven. The remaining plaintiff then spent several months obtaining documents. We believe 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 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 was given leave to amend the complaint and intervene on behalf of a new plaintiff. Counsel also moved to amend the complaint yet again. After a lengthy hearing, the Court permitted the new plaintiff to intervene and to file a Third Amended Complaint on July 29, 2009.

The Third Amended Complaint claims damages to us based on allegations of (1) insider trading; (2) failing to have proper internal controls resulting in delays in the filing of an Annual Report on Form 10-K for 2006 and a Quarterly Report on Form 10-Q for June 2006 and (3) intentionally stifling our independent outside auditors in the commencement of our Sarbanes-Oxley review.

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Based on preliminary review and discussions with the directors and detailed discussions with our counsel, we believe that there are meaningful defenses to the claims although discovery will be required to reach a final conclusion as to these matters. An answer was filed to the Third Amended Complaint on September 14, 2009, essentially denying the substantive allegations.

Discovery has commenced. A number of depositions were taken of the brokerage firms through which the stock trades were conducted by the then Board of Directors. Two representatives of our former independent outside auditors, as well as one of our consultants have been deposed. A deposition of the new plaintiff was completed in February 2010. The new plaintiff had no personal knowledge of any of the basic factual allegations and was simply unhappy that our stock declined in value.

On January 19, 2010, the plaintiff filed a motion for leave to file under seal a motion for partial summary judgment. That motion was granted. The motion for partial summary judgment was filed and was initially scheduled for hearing on June 25, 2010. That hearing was postponed until September 17, 2010. The motion seeks a ruling that one of our directors engaged in insider trading. A comprehensive opposing memorandum has been filed on behalf of the director. It directly rebuts the facts upon which the motion was based.

Based on the manner in which this case has been conducted to date, and based on the investigations into the earlier complaint we feel the Third Amended Complaint is without merit and subject to challenge and to an effective defense.

Other

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

Item 4.

REMOVED AND RESERVED.

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PART II

Item 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our Common Stock, par value $0.01 per share, commenced trading on the National Association of Securities Dealers Automatic Quotation System (“Nasdaq”) National Small Cap market on February 26, 1987, and commenced trading on the Nasdaq National Market on October 24, 1995 under the symbol "PARL." On August 1, 2006, the Nasdaq National Market changed its name to the Nasdaq Global Market, with some of its members, including Parlux, being listed on Nasdaq’s Global Select Market.

The following chart, as reported by the National Association of Securities Dealers, Inc., shows the high and low sales prices for our securities available for each quarter of the last two years.

	Common Stock
	High	Low
Quarter – Fiscal Year 2009:
First (April/June) 2008	5.29	2.91
Second (July/Sept.) 2008	7.15	2.42
Third (Oct./Dec.) 2008	5.39	2.50
Fourth (Jan./Mar.) 2009	3.10	0.59
Quarter – Fiscal Year 2010:
First (April/June) 2009	2.57	0.77
Second (July/Sept.) 2009	2.50	1.52
Third (Oct./Dec.) 2009	2.61	1.88
Fourth (Jan./Mar.) 2010	2.18	1.52

On June 25, 2010, the closing price of our common stock was $1.73 per share as reported by Nasdaq. As of June 25, 2010, there were approximately 60 holders of record of our common stock, which does not include common stock held in street name.

We have not paid a cash dividend on our common stock nor do we contemplate paying any dividend in the near future. Our prior loan agreement with Regions restricted payment of dividends without prior approval. Our current loan agreement with GE Capital restricts payment of dividends without prior approval.

The following chart outlines the Company’s equity compensation plan information as of March 31, 2010.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		2,783,150	(1)		$4.50		7,280,275	(2)
Equity compensation plans not approved by security holders		4,234,000	(3)		$4.79		—
Total		7,017,150			$4.70		7,280,275

———————

⁽¹⁾

Represents 783,150 shares to be issued upon the exercise of outstanding options under our 2007 Stock Incentive Plan (the “2007 Plan”) and our 2000 Stock Option Plan (the “2000 Plan”), which were approved by our stockholders on October 11, 2007, and October 12, 2000, respectively, and 2,000,000 shares to be issued upon the exercise of warrants granted in connection with the Artistic Brands licenses, which was approved by our stockholders on December 18, 2009. See Note 10 to the accompanying Consolidated Financial Statements included with this filing for further discussion.

⁽²⁾

Represents 912,000 and 368,275 shares available for grant under our 2007 Plan and our 2000 Plan, which were approved by our stockholders as discussed in footnote 1 above, and 6,000,000 shares, which may be issued upon the exercise of warrants that may be issued in the future, if and when the sublicense agreement is entered into for Shawn “Jay Z” Carter and the fourth artist in connection with the Artistic Brands

20

Development, LLC licenses, which was approved by our stockholders on December 18, 2009. See Note 10 to the accompanying Consolidated Financial Statements included with this filing for further discussion.

⁽³⁾

Represents warrants to purchase 200,000 shares granted in connection with previous employment and consulting agreements and warrants to purchase 34,000 shares granted in connection with previous annual Board of Directors’ compensation. In addition, it represents warrants granted on April 7, 2009, to purchase 4,000,000 shares of our common stock in connection with the Artistic Brands Development, LLC licenses.  See Note 10 to the accompanying Consolidated Financial Statements included with this filing for further discussion.

On November 3, 2008, we announced the authorization and implementation of a buy-back program of up to 1,000,000 shares of the Company’s common stock. This authorization is part of our existing share buy-back program originally approved and announced in January 2007. There is no expiration date specified for this program. We did not repurchase any of our common stock during the quarter ended March 31, 2010. (see “Liquidity and Capital Resources” in Item 7 for further discussion).

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STOCKHOLDER RETURN PERFORMANCE: FIVE YEAR GRAPH

Set forth below is a performance graph comparing the cumulative total return on our common stock with the cumulative total return on the Standard and Poors 500 Index, and the Standard and Poors Personal Products 500 Index for the fiscal years of 2005 through 2010.

Cumulative Total Return

	3/05		3/06		3/07		3/08		3/09		3/10
Parlux Fragrances, Inc.	$	100.0	$	148.96	$	51.55	$	27.16	$	7.94	$	18.48
S&P 500	$	100.0	$	111.73	$	124.95	$	118.60	$	73.43	$	109.97
S&P Personal Products	$	100.0	$	113.29	$	143.04	$	149.98	$	76.79	$	160.36

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Item 6.

SELECTED FINANCIAL DATA.

The following data has been derived from audited consolidated financial statements, adjusted for the two-for-one stock split effected on June 16, 2006, for stockholders of record on May 31, 2006. Consolidated balance sheets at March 31, 2010, and 2009, and the related consolidated statements of operations and of cash flows for each of the three years in the period ended March 31, 2010, and notes thereto appear elsewhere in this Annual Report on Form 10-K. Historical results are not necessarily indicative of the results that may be expected for any future period. Future periods will not include net sales from GUESS? brand products, as a result of the GUESS? license having expired on December 31, 2009. Please refer to “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a more detailed discussion of the expirati on of the GUESS? license.

Statement of Operations Data:	For the Years Ended March 31,
	2010			2009			2008		2007(3)			2006
		(in thousands of dollars, except per share data)
Continuing Operations:
Net sales	$	148,102		$	151,155		$	153,696	$	134,365		$	106,364
Costs/operating expenses		171,611			157,958			145,096		177,601			104,703
Operating (loss) income		(23,509	)		(6,803	)		8,600		(42,742	)		1,661
(Loss) income from continuing operations		(14,759	)		(4,284	)		5,011		(27,864	)		693
Income from discontinued operations (1)		—			—			25		30,746			22,043
Net (loss) income	$	(14,759	)	$	(4,284	)	$	5,036	$	2,882		$	22,736
(Loss) income per share:
Basic:
Continuing operations	$	(0.73	)	$	(0.21	)	$	0.26	$	(1.53	)	$	0.04
Discontinued operations		—			—			—		1.69			1.23
Total	$	(0.73	)	$	(0.21	)	$	0.26	$	0.16		$	1.27
Diluted: (2)
Continuing operations	$	(0.73	)	$	(0.21	)	$	0.24	$	(1.53	)	$	0.03
Discontinued operations		—			—			—		1.69			1.04
Total	$	(0.73	)	$	(0.21	)	$	0.24	$	0.16		$	1.07
Weighted average number of shares outstanding:
Basic	20,330,395			20,537,624			19,344,953		18,154,190			17,904,768
Diluted	20,330,395			20,537,624			20,603,256		18,154,190			21,098,773

———————

⁽¹⁾

Represents operations relating to the Perry Ellis brand, which was sold during December 2006. See Note 14 to the accompanying Consolidated Financial Statements included in this filing for further discussion as prior period information presented in this Annual Report on Form 10-K has been reclassified accordingly.

⁽²⁾

The number of shares utilized in the calculation of diluted loss per share from continuing operations, discontinued operations and net income were the same as those used in the basic calculation of earnings per share for the years ended March 31, 2010, 2009, and 2007, as we incurred a loss from continuing operations for each of those periods.

⁽³⁾

Concurrent with the stock split (“Stock Split”) in fiscal year 2007, we modified the outstanding warrants, doubling the number of warrants and reducing the exercise price in half to reflect the Stock Split. Since the warrant terms did not contain an anti-dilution provision, we were required to record share-based compensation expense in the amount of $16.2 million, reflecting the change in the warrants’ fair value immediately before and after the Stock Split. This non-cash charge was included in operation expenses for the year ended March 31, 2007. We also recorded a tax benefit of $5.2 million as a result of the charge, which reduced income tax expense for the period.

Balance Sheet Data:	March 31,
	2010		2009		2008		2007		2006
	(in thousands)
Current assets	$	103,373	$	128,674	$	122,333	$	114,065	$	153,940
Current liabilities		14,532		26,220		15,040		34,605		71,068
Working capital		88,841		102,454		107,293		79,460		82,872
Trademarks and licenses, net		4,654		1,885		2,770		3,913		12,120
Long-term borrowings, net		—		—		543		1,537		—
Total assets		114,332		136,704		131,148		144,896		167,292
Total liabilities		14,532		26,220		15,583		36,142		73,578
Stockholders’ equity	$	99,800	$	110,484	$	115,565	$	108,755	$	93,714

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Item 7.

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

The following discussion should be read in conjunction with Part I, including matters set forth in the “Risk Factors” section of this Annual Report on Form 10-K, and our Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K.

Overview

Parlux Fragrances, Inc. is engaged in the business of creating, designing, manufacturing, distributing and selling prestige fragrances and beauty related products marketed primarily through specialty stores, national department stores and perfumeries on a worldwide basis. The fragrance market is generally divided into a prestige group (distributed primarily through department and specialty stores) and a mass market group (primarily chain drug stores, mass merchandisers, smaller perfumeries and pharmacies). Our fragrance products are positioned primarily in the prestige group.

As a result of the economic downturn over the past two years and the impact of the expiration of the GUESS? license on December 31, 2009, we have incurred significant net losses of $14.8 million and $4.3 million for the years ended March 31, 2010 and 2009, respectively. Net cash used in operations during the year ended March 31, 2009, was $13.1 million, while net cash provided by operations during the year ended March 31, 2010, was $13.9 million. As reflected in the accompanying Consolidated Balance Sheet as of March 31, 2010, we had unrestricted cash and cash equivalents of approximately $17.6 million and positive working capital of $88.8 million.

During fiscal years 2009 and 2010, we implemented a number of cost reduction initiatives including a targeted reduction in staff, along with a reduction in committed advertising and promotional spending, and reduced our production levels. The reductions during fiscal year 2010 were partially offset by approximately $1.7 million in advertising and promotional expense relating to the write-off of our remaining GUESS? collateral material. Management will continue to implement various operational efficiencies and monitor all facets of our operations.

On February 16, 2010, we repaid the remaining outstanding principal balance plus interest and fees under our Loan Agreement with Regions, and the Loan Agreement, as amended, was terminated.  On June 25, 2010, we entered into the New Loan Agreement with GE Capital.  The New Loan Agreement provides a credit line of up to $20.0 million, depending upon the availability of a borrowing base and certain reserves established by GE Capital from time to time, at an interest rate of the highest of (a) the prime rate, (b) the federal funds rate plus 3.0%, or (c) the Eurodollar Rate, in each case plus 3.50%; or the Eurodollar Rate plus 4.50%, at our option except in certain circumstances including defaults in the payment of any amounts under the loan facility or the unavailability of the LIBOR rate.  The term of the loan facility under the New Loan Agreement is two years.  See “Liquidity and Capital Resources 8; and Note 7 to the accompanying Consolidated Financial Statements for further discussion.

Management believes that the actions taken, along with the new credit facility will provide us an opportunity to improve liquidity and profitability, and our new 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 additional financing.  There can be no assurances that we could obtain additional financing or what the terms of such financing, if available, would be. In addition, the current business environment may increase the difficulty of obtaining additional financing, if necessary.

We distribute certain brands through Perfumania, a specialty retailer of fragrances in the United States and Puerto Rico, and Quality King. Perfumania is a wholly-owned subsidiary of Perfumania Holdings, Inc.  The majority shareholders of Perfumania Holdings, Inc. are also the owners of Quality King, a privately-held, wholesale distributor of pharmaceuticals and beauty care products. Perfumania is one of our largest customers, and transactions with Perfumania are closely monitored by management, and any unusual trends or issues are brought to the attention of our Audit Committee and Board of Directors. During fiscal year 2007, Perfumania Holdings, Inc.’s majority shareholders acquired an approximate 12.2% ownership interest in our Company at that time (10.1% at March 31, 2010), and accordingly, transactions with Perfumania and Quality King are included as related party sales in the accompanying Consolidated Statements of Operat ions.

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During the year ended March 31, 2010, in addition to sales to Perfumania and Quality King, we sold a number of our products to Jacavi, a fragrance distributor. Jacavi’s managing member is Rene Garcia. Rene Garcia owns approximately 9.1% of the outstanding stock of Perfumania Holdings, Inc. as of March 31, 2010, and is one of the principals of Artistic Brands. Also, on June 14, 2010, certain persons related to Mr. Garcia, the Garcia Group, acquired 2,718,728 shares of our common stock. The Garcia Group reports having beneficial ownership of a total of 2,995,527 shares, or approximately 14.7% of our outstanding shares as of June 14, 2010, excluding warrants owned by the Garcia Group. Sales to Jacavi are also included as related party sales in the accompanying Consolidated Statement of Operations for the year ended March 31, 2010.

During the fiscal year ended March 31, 2010, we engaged in the manufacture (through sub-contractors), distribution and sale of Paris Hilton, Jessica Simpson, Queen Latifah, Marc Ecko, Josie Natori, GUESS?, Nicole Miller, XOXO, Ocean Pacific (“OP”), Andy Roddick, and babyGUND fragrances and grooming items on an exclusive basis as a licensee. During the fiscal year ended March 31, 2010, we entered into sublicensing agreements for the fragrance licenses of entertainers Rihanna and Kanye West.

The Paris Hilton and GUESS? brands of fragrances and accessories accounted for approximately 42% and 28%, respectively, of our gross sales from continuing operations during the fiscal year ended March 31, 2010, and 55% and 30%, respectively, of our gross sales from continuing operations during the year ended March 31, 2009.  The GUESS? license expired on December 31, 2009, and was not renewed. As a result, licensed Paris Hilton brand products are expected to account for the majority of our gross sales and constitute our primary source of revenue for the year ending March 31, 2011. If Paris Hilton's appeal as a celebrity were to diminish, it could result in a material reduction in our sales of licensed Paris Hilton brand products, adversely affecting our results of operations and operating cash flows. The Paris Hilton fragrance license is scheduled to expire on June 30, 2014.

As of March 31, 2010, the carrying value of our inventories of GUESS? products totaled $1.0 million ($27.7 million at March 31, 2009). During the year ended March 31, 2010, we recorded additional charges of $7.6 million to cost of sales to reduce the recorded value of such inventories to the amounts which we estimate could be realized upon their sale or liquidation. In addition, during the year ended March 31, 2010, we wrote-off approximately $1.7 million of collateral material related to the GUESS? brand products, which was recorded as advertising and promotional expense. At December 31, 2009, the end of the license period, GUESS? and/or its new fragrance licensee had the option of purchasing the remaining inventory, or the inventory must be destroyed. The new fragrance licensee is in the process of purchasing the remaining inventory balance at March 31, 2010.

We expect to partially offset the reduction in sales of GUESS? products by increased sales of fragrances launched during fiscal years 2009 and 2010, including our Paris Hilton fragrances, Fairy Dust and Siren, Jessica Simpson fragrances, Fancy and Fancy Love, Queen Latifah fragrance, Queen, Josie Natori fragrance, Natori, and Marc Ecko fragrance, Ecko, as well as sales from anticipated new fragrances under the Paris Hilton, Jessica Simpson, Queen Latifah, Marc Ecko and Nicole Miller fragrance licenses in fiscal year 2011. In addition, we anticipate launching a new fragrance under our recently signed Rihanna sublicense in the spring of fiscal year 2011.

We expanded our product licenses under the Paris Hilton brand into the accessory market in 2005, specifically, watches, handbags, purses, small leather goods, cosmetics and sunglasses. We believed such products, which have similar distribution channels to our fragrance products, could strengthen our position with our current customers and distributors while providing incremental sales volume. Our sales under such accessory licenses have not offset the minimum annual royalties paid to the licensor. During the year ended March 31, 2008, we sublicensed the international rights for handbags, purses, wallets, and other small leather goods. We generated $0.4 million in fiscal year 2010, $0.4 million in fiscal year 2009, and $0.5 million in fiscal year 2008 in sublicense revenue. We anticipate minimum revenues of $0.3 million under this sublicense for fiscal year 2011. In addition, during January 2009, we sublicensed th e worldwide exclusive licensing rights for Paris Hilton sunglasses through January 15, 2012, and remain contingently liable for the minimum guaranteed royalty from our assignment of the license. We generated $0.3 million in fiscal year 2010 in sublicense revenue and anticipate minimum revenues of $0.4 million under this sublicense for fiscal year 2011. As of March 31, 2010, we determined that the license for Paris Hilton cosmetics, which is due to expire on January 15, 2011, was no longer a viable business line and all remaining royalty obligations were accrued and expensed in fiscal year 2010.

Critical Accounting Policies and Estimates

SEC Financial Reporting Release No. 60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies (“FRR 60”), suggests companies provide additional disclosure and commentary on those

25

accounting policies considered most critical. FRR 60 considers an accounting policy to be critical if it is important to the company’s financial condition and results, and requires significant judgment and estimates on the part of management in its application. We believe the accounting policies described below represent our critical accounting policies as contemplated by FRR 60. See Note 1 to the accompanying Consolidated Financial Statements for a detailed discussion on the application of these and other accounting policies.

Accounting for Long-Lived Assets. The majority of our long-lived assets are the result of the acquisition of existing license brands. For newly launched brands our long-lived assets are generally the result of our investment in trademarking brand names and designs, and are generally not a material portion of our assets. The value of our long-lived assets, including brand licenses and trademarks, is exposed to future adverse changes if we experience declines in operating results or experience significant negative industry or economic trends. On an annual basis, long-lived assets are reviewed for impairment, or sooner, if events or circumstances have occurred that indicate a potential impairment. Impairment losses are recognized if expected undiscounted future cash flows of the long-lived assets are less than their carrying values. Future cash flows can be affected by changes in industry or market conditions. The assumptions used include an analysis by license, and by fragrance produced under each license, which may vary depending on the age of the product. Expected sales along with related costs of sales, direct expenses and certain allocated charges are projected through the end of each given license period. Expected sales estimates incorporate the age of a product and its market distribution. Although certain products may not be widely distributed, we may have certain distribution channels, such as specialty discount stores, where the product is in demand. Direct expenses, including cost of goods and royalties, vary by product, but generally range between 35% to 50%. Allocated charges include selling and distribution costs, marketing expenses and depreciation of molds. Although these costs vary by brand, management anticipates that these costs would range between 15% and 25%. The net unamortized balance of our trademarks and licenses at March 31, 2010, is approximately $4.7 million. Management does not anticipate any further ma terial write down will be required going forward, however, if actual results differ from management’s estimates, or if the economic environment should deteriorate, additional write downs may be required which could have a material adverse effect on our operating results.

We recorded a non-cash impairment charge for the XOXO fragrance license of $0.4 million in fiscal year 2008. The impairment charge is included in depreciation and amortization expense in the accompanying Consolidated Statements of Operations. Our management determined that this asset would be reviewed on a quarterly basis going forward. As a result of our quarterly review, we determined that there was no further impairment charges recorded during the years ended March 31, 2010, and 2009.

Allowance for Sales Returns. As is customary in the prestige fragrance industry, we grant most of our unrelated U.S. department store customers the right to return a product which does not “sell-through” to consumers. At the time of sale, we record a provision for estimated product returns based on our historical “sell-through” experience, economic trends and changes in our assessment of customer demand. Based upon this information, we provide an allowance for sales returns. It is generally after the specific gift-giving season (Mother’s Day, Christmas, etc.) that our customers request approval for the return of unsold items. We decide to accept returns on a case-by-case basis. There is considerable judgment used in evaluating the factors influencing the provision for returns, and additional allowances in any particular period may be needed, if actual returns received exceed estimates, reducing net sales. All o ther customers have no right to return products unless they are damaged or otherwise.

The allowance for sales returns was $2.3 million and $1.3 million at March 31, 2010, and 2009, respectively. Fluctuations in the allowance balance are generally higher after gift-giving seasons and are estimated based on a three-month period, as it generally takes between two to three-months for us to receive such returns. Historically, our estimated allowances have been sufficient to cover the amount of returns subsequently received. However, an increase in sales returns due to a change in economic conditions, or otherwise, could have a material impact on our operating results.

Allowances for Doubtful Accounts Receivable. We maintain allowances for doubtful accounts to cover anticipated uncollectible accounts receivable, and we evaluate our accounts receivable to determine if they will ultimately be collected. This evaluation includes significant judgments and estimates, including a customer-by-customer review for large accounts. If the financial condition of our customers, or any one customer, deteriorates resulting in an impairment of their ability to pay, additional allowances may be required.

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The allowance for doubtful accounts receivable was $0.7 million and $0.4 million at March 31, 2010, and 2009, respectively. We continuously monitor the collectability of our receivables by analyzing the aging of our accounts receivable, assessing our customers credit worthiness, and evaluating the impact of the changes in economic conditions. Historically, our estimated allowances have been sufficient to cover our uncollectible receivables. However, significant changes in the circumstances that affect the collectability of our receivables could have a material impact on our cash flows and operating results.

We have an ongoing relationship with Perfumania for almost 20 years. All activities with Perfumania are reported as related party activities, due to certain common stockholders. Management evaluates the credit risk involved, which is determined based on Perfumania’s reported results and comparable store sales performance. Our management holds discussions with Perfumania’s management on a regular on-going basis in order to monitor their activity. On an annual basis, as well as quarterly, sales projections to Perfumania are reviewed along with a planned payment program, in order to ensure that Perfumania’s receivable balance is maintained at acceptable levels. Based upon these facts, management believes that no reserves are required for the receivable due from Perfumania.

Inventory Write-downs. 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 our applicable overhead in an amount of $3.2 million and $3.3 million at March 31, 2010, and 2009, respectively.

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. These lead times are most affected for glass and plastic components orders, as many of our unique designs require the production of molds in addition to the normal production process. This may take 180 to 240 days, or longer, to receive in stock. 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. Generally gross margins on our products outweigh the potential loss due to out-of-stock situations, and the additional carrying costs to maintain higher inventory levels. Also, the composition of our inventory at any given point can vary considerably depending on wheth er there is a launch of a new product, or a planned sale of a significant amount of product to one or more of our major distributors. 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.

We classify our inventory into three major categories: finished goods, raw materials, and components and packaging materials. Finished goods include items that are ready for sale to our customers, or essentially complete and ready for use in value sets or other special offers. Raw materials consist of fragrance oils or bulk. Components and packaging materials (such as bottles, caps, boxes, etc.) are the individual elements used to manufacture our finished goods. The levels of our inventory maintained vary depending on the age of a brand, its commercial success and market distribution. We normally carry higher levels of new products and older products for which demand remains high. Older, slower moving products are periodically reviewed, and inventory levels adjusted, based upon expected future sales. If inventory levels exceed projected demand, our management determines whether a product requires a markdown in order to sell the inventory at discounted prices. Our management also reviews whether there are any excess components which should be marked down or scrapped due to decreased product demand.

Our inventories and write-downs, by major categories, as of March 31, 2010, and 2009, are as follows:

	March 31, 2010
	Finished Goods		Components and Packaging Material		Raw material		Total
	(in millions)
Inventories	$	28.2	$	22.2	$	2.6	$	53.0
Less write-downs		4.9		6.0		0.3		11.2
Net inventories	$	23.3	$	16.2	$	2.3	$	41.8
						&n bsp;
	March 31, 2009
	Finished Goods		Components and Packaging Material		Raw material		Total
	(in millions)
Inventories	$	44.1	$	21.4	$	4.2	$	69.7
Less write-downs		1.9		0.9		0.2		3.0
Net inventories	$	42.2	$	20.5	$	4.0	$	66.7

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We perform a review of our inventory on a quarterly basis, unless events or circumstances indicate a need for review more frequently. The write-down of inventory results from the application of an analytical approach that incorporates a comparison of our sales expectations to the amount of inventory on hand. Other qualitative reasons for writing down selected inventory may include, but is not limited to, product expiration, licensor restrictions, damages, and general economic conditions. As of March 31, 2010, and 2009, of our total inventories of $53.0 million and $69.7 million, respectively, management determined that approximately $9.5 million and $3.9 million, respectively, of the finished goods inventory was either selling slower than anticipated or showed signs of deterioration. This inventory was written down by $4.9 million and $1.9 million in fiscal year 2010 and 2009, respectively. Components and packaging materials are reviewed in light of estimated future sales for finished goods or damages sustained during the production of finished goods. As of March 31, 2010, and 2009, approximately $7.7 million and $12.8 million, respectively, were identified as problematic and the inventory was written down by $6.0 million and $0.9 million, respectively. Raw materials are usually scrapped due to spoilage or stability issues. As of March 31, 2010, and 2009, approximately $0.3 million and $0.3 million were identified as problematic and the inventory was written down by $0.3 million and $0.2 million, respectively.

As of March 31, 2010, our inventories of GUESS? products totaled $1.0 million ($27.7 million at March 31, 2009). As our license with GUESS? expired on December 31, 2009, and was not renewed. We recorded charges of $7.6 million, which is included in the $11.2 million write-down noted in the table above, as of March 31, 2010, to cost of sales to reduce the recorded value of such inventories to the amounts, which we estimate could be realized upon their sale or liquidation. We do not anticipate further write-downs of the remaining GUESS? inventory.

During the years ended March 31, 2010, 2009, and 2008, the carrying value of certain inventory was reduced by $11.2 million (including $7.6 million relating to GUESS? products), $0.2 million, and $0.9 million, respectively, which was recorded in cost of goods sold in the accompanying Consolidated Statements of Operations. Based upon this review, management has determined that its inventory is stated at the lower of cost or market value, however, if we are not successful in selling our inventory, we may need to write down our inventory further or sell it at significantly reduced prices or we may not be able to sell such inventory at all, which could have a material adverse affect on our financial condition and results of operations.

Demonstration and Cooperative Advertising Allowances. We record allowances for demonstration chargebacks and cooperative advertising costs. The demonstration chargebacks are recorded based on demonstration programs with specific U.S. department stores. The allowance for demonstration chargebacks was $0.6 million and $1.1 million at March 31, 2010, and 2009, respectively. Fluctuations in the allowance balance are generally higher after gift-giving seasons and are estimated based on a three-month period. Cooperative advertising, which is under the direct control of our customer and includes a percentage rebate or deduction based on net sales to the customer, is accrued and recorded as a reduction of net sales at the time of sale. Cooperative advertising with our customers, which is under our direct control, and at our option, including catalogue and other forms of print advertising, are included in advertising and pro motional expenses in the accompanying Consolidated Statements of Operations. The costs associated with the specific advertisements are recorded as incurred, and when applicable, are applied against trade accounts receivable. The allowance for cooperative advertising was $0.5 million and $0.6 million at March 31, 2010, and 2009, respectively. Historically, our estimated allowances have been sufficient to cover the amount of our chargebacks and cooperative advertising costs.

Income Taxes and Valuation Allowance. If warranted, we record a valuation allowance to reduce deferred tax assets to the amount that is more-likely-than-not to be realized. We consider projected future taxable income and ongoing tax planning strategies in assessing the valuation allowance. In the event we determine that we may not be able to realize all or part of our deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to earnings in the period of such determination, which such adjustment could be material.

The accounting for uncertainty in income taxes recognized in the financial statements prescribes a recognition threshold of more-likely-than-not and a measurement attribute on all tax positions taken or expected to be taken in a tax return in order to be recognized in the financial statements. In making this assessment, a company must determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based solely on the technical merits of the position and must

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assume that the tax position will be examined by appropriate taxing authority that would have full knowledge of all relevant information. Once the recognition threshold is met, the tax position is then measured to determine the actual amount of benefit to recognize in the financial statements. In addition, the recognition threshold of more-likely-than-not must continue to be met in each reporting period to support continued recognition of the tax benefit. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the financial reporting period in which that threshold is no longer met. We did not recognize a liability for unrecognized tax benefits or adjust any recorded liabilities for uncertain tax positions. As of the years ended March 31, 2010, and 2009, there was no material liability for income tax associated with unrecognized tax benefits. We do not anticipate any material adjustments relating to unrecognized tax benefits within the next twelve months, however, the outcome of tax matters is uncertain and unforeseen results can occur.

Stock-Based Compensation. We recognize the cost of share-based compensation expense in the accompanying Consolidated Financial Statements for stock options and warrants granted, based on the fair values of the awards at the date of grant over the vesting period. We use the Black-Scholes valuation model to determine the compensation expense. When estimating forfeitures, we consider an analysis of actual option forfeitures, as well as management judgment. The forfeiture rate used when calculating the value of stock options granted in 2010 and 2009 was approximately 5%.

Since April 2008, we have not made any changes of these critical accounting policies, nor have we made any material changes in any of the critical accounting estimates underlying these accounting policies.

Recent Accounting Updates

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Codification Accounting Standards Update No. 2009-01 (“ASU No. 2009-01”), an amendment based on Statement of Financial Accounting Standard No. 168, The FASB Accounting Standards Codification (“Codification”) and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, under Topic 105, Generally Accepted Accounting Principles. Under this update, the Codification has become the source of accounting principles generally accepted in the United States of America (“US GAAP”) recognized by the FASB to be applied by nongovernmental entities. The rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of ASU No. 2009-01, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification has become non-authoritative. The provisions of ASU No. 2009-01 are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of ASU No. 2009-01 did not have a material impact on our consolidated financial statements.

In August 2009, the FASB issued Codification Accounting Standards Update No. 2009-05 (“ASU No. 2009-05”), Measuring Liabilities at Fair Value, under Topic 820, Fair Value Measurements and Disclosures, to provide guidance on the fair value measurement of liabilities. This update provides clarification in circumstances in which a quoted price in an active market for the identical liability is not available. It also clarifies the inputs relating to the existence of a restriction that prevents the transfer of the liability and clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. ASU No. 2009-05 is effective for financial statements issued for interim and ann ual periods beginning after its issuance. The adoption of ASU No. 2009-05 did not have a material impact on our consolidated financial statements.

In January 2010, the FASB issued Codification Accounting Standards Update No. 2010-01 (“ASU No. 2010-01”), Accounting for Distributions to Shareholders with Components of Stock and Cash, under Topic 505, Equity. This update amends the accounting for a distribution to shareholders that allows the ability to elect to receive the distribution in cash or shares of equivalent value with a potential limitation on the total amount of cash that shareholders can elect to receive in the aggregate. This update clarifies that the stock portion of the distribution is to be reflected in earnings per share prospectively and is not a stock dividend for purposes of applying Topics 505 and 206, Equity and Earnings Per Share. ASU No. 2010-01 is effective for financial statements issued for interim and

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annual periods ending on or after December 15, 2009, and is applied retrospectively. The adoption of ASU No. 2010-01 did not have a material impact on our consolidated financial statements.

In January 2010, the FASB issued Codification Accounting Standards Update No. 2010-02 (“ASU No. 2010-02”), Accounting and Reporting for Decreases in Ownership of a Subsidiary-a Scope Clarification, under Topic 810, Consolidation, to amend the accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity or that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity. This update also expands the disclosure about the deconsolidation of a subsidiary or group of assets within the scope of Subtopic 810-10 (originally issued as FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements). ASU No. 2010-02 is effective for financial statements issued for interim or annual periods ending on or after December 15, 2009. The adoption of ASU No. 2010-02 did not have a material impact on our consolidated financial statements.

In January 2010, the FASB issued Codification Accounting Standards Update No. 2010-06 (“ASU No. 2010-06”), Improving Disclosure about Fair Value Measurements, under Topic 820, Fair Value Measurements and Disclosures, to improve and provide new disclosures for recurring and nonrecurring fair value measurements under the three-level hierarchy of inputs for transfers in and out of Levels 1 and 2, and activity in Level 3. This update also clarifies existing disclosures of the level of disaggregation for the classes of assets and liabilities and the disclosure about inputs and valuation techniques. ASU No. 2010-06 new disclosures and clarification of existing disclosure is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements . Those disclosures are effective for financial statements issued for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We are currently accessing the impact, if any, of ASU No. 2010-06 disclosures on our consolidated financial statements.

In February 2010, the FASB issued Codification Accounting Standards Update No. 2010-09 (“ASU No. 2010-09”), Amendments to Certain Recognition and Disclosure Requirements, under Topic 855, Subsequent Events, to amend the requirement to disclose the date that the financial statements are issued for subsequent events to align with SEC’s reporting requirements.  This update amendment includes the definition of an SEC filer and requires an SEC filer to evaluate subsequent events through the date that the financial statements are issued.  Further, the amendment no longer requires that an SEC filer disclose the date financial statements were issued. ASU No. 2010-09 is effective upon issuance. The adoption of ASU No. 2010-09 did not have a material impact on our consolidated financial statements.

Significant Trends

A significant number of new prestige fragrance products continue to be introduced on a worldwide basis. The beauty industry, in general, is highly competitive and consumer preferences often change rapidly. The initial appeal of these new fragrances, launched for the most part in U.S. department stores, fuels the growth of our industry. Department stores generally lose sales to the mass market as a product matures. To counter the effect of lower department store sales, companies introduce new products, 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. If one or more of our new product introductions is unsuccessful, or the appeal of a celebrity tha t is tied to any of our fragrances or accessory product brands diminishes, it could result in a substantial reduction in profitability and operating cash flows.

Certain U.S. department store retailers have consolidated operations resulting in the closing of retail stores, as well as implementing various inventory control initiatives. The result of these consolidation efforts include lower inventories maintained by the retailers and higher levels of returns after each gift-giving holiday season. Store closings, inventory control initiatives, and the current global economic conditions may continue to affect our sales in the short-term. During fiscal years 2009 and 2010, we implemented a number of cost reduction initiatives including a targeted reduction in staff, along with a reduction in committed advertising and promotional spending, and reduced our production levels.

Since late 2008, 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.

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

In light of the downturn in the global economy, we have performed a quarterly review of our intangible long-lived assets during the years ended March 31, 2010, and 2009. This review was based upon the estimated future undiscounted net cash flows for the remaining period of each license. Based upon our review, no impairment charges are deemed necessary.

Looking forward to fiscal year 2011, our license with GUESS? expired on December 31, 2009, and was not renewed. We expect to partially offset the reduction in sales of GUESS? products by increased sales of fragrances launched during fiscal years 2009 and 2010, including our Paris Hilton fragrances, Fairy Dust and Siren, Jessica Simpson fragrances, Fancy and Fancy Love, Queen Latifah fragrance, Queen, Josie Natori fragrance, Natori, and Marc Ecko fragrance, Ecko, as well as sales from anticipated new fragrances under the Paris Hilton, Jessica Simpson, Queen Latifah, Marc Ecko and Nicole Miller fragrance licenses in fiscal year 2011. We anticipate launching a new fragrance under our recently signed Rihanna sublicense in fiscal year 2011.

It is always difficult to predict sales levels, and is even more difficult in a challenging economic environment. We continue to take steps to reduce our expenses by reducing employee headcount and advertising expenses, where feasible, as we anticipate launching two newly licensed brands in fiscal year 2011, as compared to three newly licensed brands in fiscal year 2010, and are cautiously optimistic that we are positioned for a profitable fiscal year 2011 with our expected product mix and revised cost structure.

Results of Operations

On November 28, 2006, our Board of Directors approved the sale of the Perry Ellis fragrance brand license and related assets back to PEI. A definitive agreement was signed on December 6, 2006, and the sale closed shortly thereafter. See Note 14 to the accompanying Consolidated Financial Statements for further discussion.

During December 2006, we sold the Perry Ellis fragrance rights and other related assets to the licensor, Perry Ellis International. The results presented in the accompanying Consolidated Statements of Operations for the fiscal year ended March 31, 2008, includes activity relating to the Perry Ellis brand as discontinued operations. For comparison purposes, prior period financial information has been restated accordingly. Our discussions below exclude Perry Ellis activities, which are addressed separately in the discussion of discontinued operations.

During our fiscal year ended March 31, 2008, we did business with fragrance distributors owned/operated by individuals related to Ilia Lekach, our Chairman and CEO through February 2007. Through June 30, 2007, these sales were included as related party sales in the accompanying Consolidated Statements of Operations. As of June 30, 2007, Mr. Lekach’s beneficial ownership interest in our Company was approximately 7.6%. During the fiscal year ended March 31, 2008, his beneficial ownership declined to less than 5% (0% at March 31, 2010). 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, and there were no such sales in fiscal years 2009 and 2010.

During the year ended March 31, 2010, we experienced a 2% decrease in overall sales, as compared to the prior year ended March 31, 2009. The decrease is primarily due to the challenging global economic climate in both our domestic and international markets. Our domestic department store net sales decreased over the prior year, as we experienced larger than expected product returns during this difficult retail climate. Further, the domestic department store retailers have drastically reduced inventory levels due to declining consumer traffic. Our international sales decreased during the year ended March 31, 2010, as compared to the year ended March 31, 2009, primarily due to a shift in our focus from international to domestic sales.  However, this decrease in overall sales was partially offset by an increase in related party sales. Our overall sales for the current year continued to be negatively affected by the global economic climate.

Our license with GUESS? expired on December 31, 2009, and was not renewed. As of March 31, 2010, our inventories of GUESS? products totaled $1.0 million ($27.7 million at March 31, 2009). During the year ended March 31, 2010, we recorded charges of $7.6 million to cost of sales to reduce the recorded value of such inventories to the amounts which we estimate could be realized upon their sale or liquidation. In addition, during the

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year ended March 31, 2010, we wrote-off approximately $1.7 million of collateral material related to the GUESS? brand products, which was recorded as advertising and promotional expense. At December 31, 2009, the end of the license period, GUESS? and/or its new fragrance licensee had the option of purchasing the remaining inventory, or the inventory must be destroyed. The new fragrance licensee is in the process of purchasing the remaining inventory balance at March 31, 2010. We do not anticipate further write-downs of the remaining GUESS? inventory.

During the year ended March 31, 2010, we transferred $4.6 million of GUESS? brand inventory to its new fragrance licensee at our original cost, as stipulated in our license agreement with GUESS?. This transfer of inventory, along with the cost of sales and the $7.6 million of inventory write-downs, have been classified as “Sales-expired license” and “Cost of sales-expired license” in the accompanying Consolidated Statements of Operations for the year ended March 31, 2010.

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 years ended March 31, 2010, 2009, and 2008, included $4.4 million, $4.9 million, and $4.7 million, respectively, relating to the cost of warehouse operations not allocated to inventories and other related distribution expenses (excluding shipping expenses which are recorded as cost of goods sold). A portion of these costs is allocated to inventory in accordance with US GAAP.

Comparisons of the year ended March 31, 2010 to March 31, 2009, and of the year ended March 31, 2009 to March 31, 2008.

Net Sales

	For the Years Ended March 31,
	2010		% Change			2009		% Change			2008
					(in millions)
Domestic sales	$	47.6		(12	)%	$	53.9		63	%	$	33.0
International sales		46.3		(17	)%		55.8		(9	)%		61.5
Unrelated customer sales		93.9		(14	)%		109.7		16	%		94.5
Related sales		49.6		20	%		41.5		(30	)%		59.2
Sales – expired license		4.6		100	%		—		N/A			—
Total net sales	$	148.1		(2	)%	$	151.2		(2	)%	$	153.7

———————

*

% change is based on unrounded numbers

During fiscal year 2010, net sales from continuing operations decreased 2% to $148.1 million, as compared to $151.2 million for the prior year. The decrease in net sales was primarily due to an increase of $6.9 million in our sales returns and allowances, as compared to the prior year, resulting from the recent holiday season and the continuing effect of the global economic environment. During the holiday season, U.S. department store retailers continued to experience reductions in consumer traffic, resulting in lower sales, a decrease in retail re-orders, and an increase in subsequent returns.  During fiscal year 2010, the decrease in net sales was partially offset by additional net sales of $4.6 million from the transition of the GUESS? brand products sold to its new fragrance licensee, at cost, as a result of the expiration of the GUESS? fragrance license, which is classified as Sales-expired license in the accompanying Consolidated Statements of Operations. Excluding these sales, our net sales from continuing operations would have decreased by 5%. See Note 3 to the accompanying Consolidated Financial Statements for further discussion.

Net sales to unrelated customers, which represented 63% of our total net sales for fiscal year 2010, decreased 14% to $93.9 million, as compared to $109.7 million for the prior year, primarily due to a decrease in international and domestic sales, resulting from the current global economic conditions. Net sales to the U.S. department store sector decreased 12% to $47.6 million for fiscal year 2010, as compared to $53.9 million for the prior year, while net sales to international distributors decreased 17% to $46.3 million from $55.8 million for the prior year. The decrease in our domestic market was primarily due to an increase in sales returns and allowances

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resulting from a difficult retail climate with store retailers drastically reducing inventory levels due to declining consumer traffic, as well as the GUESS? license transition, as discussed above. Our sales of GUESS? products to all of our customers, except for sales to GUESS? and its new fragrance licensee, ceased during the quarter ended December 31, 2009. The decrease in domestic sales was partially offset by the sales of our new Jessica Simpson fragrance, Fancy Love, our new Paris Hilton fragrance, Siren, and our new Queen Latifah fragrance, Queen, resulting in an increase in gross sales of $12.7 million, $8.7 million, and $13.7 million, respectively, and sales of our new Marc Ecko men’s fragrance, Ecko, resulting in an increase in gross sales of $7.0 million.  The decrease in international net sales was primarily due to a shift in our focus from international to domestic sales, as our new licen ses were initially launched in the domestic channel, where these new products have more appeal. The continuing challenging global economic environment also negatively affected our sales.

Net sales to related parties, which represented 34% of our total net sales for fiscal year 2010, increased 20% to $49.6 million, as compared to $41.5 million for the prior year. The increase is primarily due to an increase in gross sales of $9.6 million of GUESS? brand fragrances to Perfumania. In addition to our sales to Perfumania and Quality King, we had net sales of $3.0 million to Jacavi. See Note 2 to the accompanying Consolidated Financial Statements for further discussion of related party transactions.

During fiscal year 2009, net sales from continuing operations decreased 2% to $151.2 million, as compared to $153.7 million for the prior year. The decrease in net sales was primarily due to an increase of $2.7 million in our sales returns and allowance, as compared to the prior year, resulting from the difficult holiday season and the global economic environment. During the holiday season, U.S. department store retailers experienced a reduction in consumer traffic, resulting in lower sales, a decrease in retail re-orders, and an increase in subsequent returns. In addition, delays in obtaining critical components, particularly glass and plastics, negatively impacted our first quarter of fiscal year 2009.

Our GUESS? brand fragrances gross sales increased $10.2 million during fiscal year 2009 to $47.2 million, as compared to $37.0 million in the prior year, primarily due to the lifting of certain distribution restrictions placed by GUESS?, in fiscal year 2008, on international shipments and to the launch of GUESS? by Marciano for Women in February 2008 and GUESS? by Marciano for Men in February 2009, which generated gross sales of $11.9 million and $3.2 million, respectively. In August 2008, we launched our new Jessica Simpson fragrance, Fancy, resulting in an increase in gross sales of $20.7 million. Our Paris Hilton fragrances gross sales of $85.4 million decreased $18.3 million in fiscal year 2009, as compared to $103.7 million in the prior year, primarily due to a decrease in international sales. The decrease in Paris Hilton fragrances gross sales was partially offset by the launch , in late September 2008, of our new Paris Hilton fragrance, Fairy Dust, resulting in an increase in gross sales of $10.2 million, primarily in our domestic market.

Net sales to unrelated customers, which represented 73% of our total net sales for fiscal year 2009, increased 16% to $109.7 million, as compared to $94.5 million for the prior year, mainly as a result of an increase in gross sales of $13.2 million 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 63% to $53.9 million for fiscal year 2009, as compared to $33.0 million for the prior year, while net sales to international distributors decreased 9% to $55.8 million, as compared to $61.5 million for the prior year. The increase in domestic sales is primarily due to the launch of our Fancy and Fairy Dust, noted above. Additionally, in the domestic market we benefited from our investments in promotional activities and our domestic sales force, coup led with higher levels of sell-through in difficult economic conditions. The decrease in international net sales was primarily a result of a decrease of $9.7 million in international gross sales of our Paris Hilton brand fragrances, the negative impact of the current recessionary economic conditions, and the volatility of the U.S. dollar against other currencies. Sales to related parties decreased 30% to $41.5 million for fiscal year 2009, as compared to $59.2 million for the prior year, 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. Included in related parties sales are sales to Perfumania in the amount of $41.5 million and $51.2 million, for the years ended March 31, 2009 and 2008, respectively (see Note 2 to the accompanying Consolidated Financial Statements for further discussion). Sales to Perfumania during the year ended Mar ch 31, 2008, included a number of close-out sales of slower moving products, which were sold at discounted prices.

33

Effective July 1, 2007, related party sales include sales to Perfumania, Quality King and Jacavi as sales to certain distributors related to Ilia Lekach, that were previously reported as related parties, are now included as unrelated international customer sales (see Note 2 to the accompanying Consolidated Financial Statements for further discussion of related party transactions).

Cost of Goods Sold

	For the Years Ended March 31,
	2010			% Change *			2009			% Change *			2008
	(in millions)
Unrelated customers	$	44.9			(12	)%	$	51.3			7	%	$	48.1
As a % of unrelated customer net sales		48	%					47	%					51	%
Related parties		29.2			51	%		19.3			(34	)%		29.1
As a % of related parties net sales		59	%					46	%					49	%
Cost of sales – expired license		11.9			100	%		—			N/A			—
As a % of expired license net sales		257	%					0	%					0	%
Total cost of goods sold	$	86.0			22	%	$	70.6			(9	)%	$	77.2
As a % of net sales		58	%					47	%					50	%

———————

*

% change is based on unrounded numbers

During fiscal year 2010, we incurred additional cost of goods sold of $11.9 million, from the transition of the GUESS? brand products sold to its new fragrance licensee, including $4.6 million from the sale of the products, at cost. Included therein is a provision of $7.6 million for the write-down of the remaining GUESS? inventory resulting from the expiration of the GUESS? fragrance license, which is classified as Cost of sales-expired license in the accompanying Consolidated Statements of Operations. See Note 3 to the accompanying Consolidated Financial Statements for further discussion.

During fiscal year 2010, our overall cost of goods sold increased as a percentage of net sales to 58%, as compared to 47% for the prior year. Cost of goods sold as a percentage of net sales to unrelated customers and related parties was 48% and 59%, respectively, in 2010, as compared to 47% and 46%, respectively, for the prior year. Our sales to U.S. department store customers generally have a higher margin than sales to international distributors, which generally reflect a lower margin. As is common in the industry, we offer international customers more generous discounts, which are generally offset by reduced advertising expenditures for those sales, as the international distributors are responsible for advertising in their own territories. International distributors have no rights to return merchandise. During fiscal year 2010, sales of slower moving merchandise to our unrelated international customers resulted in lower margins , as compared to the prior year. This was partially offset by our newly launched products sold primarily in our domestic market which resulted in higher margins. During fiscal year 2010, cost of goods sold to related parties increased primarily due to an increase in related party sales of slower-moving merchandise and excess inventory, which resulted in lower margins. In addition, due to the expiration of our GUESS? license, we offered additional incentives in order to reduce our GUESS? inventory.

During fiscal year 2009, our overall cost of goods sold as a percentage of net sales decreased to 47%, as compared to 50% for the prior year. Cost of goods sold as a percentage of net sales to unrelated customers and related parties approximated 47% and 46%, respectively, in 2009, as compared to 51% and 49%, respectively, for the prior year. Fiscal year 2009 includes a higher percentage of sales to U.S. department store customers, which sales generally have a higher margin than sales of these products to international distributors, which generally reflect a lower margin. As is common in the industry, we offer international customers higher discounts, which are generally offset by reduced advertising expenditures for those sales, as the international distributors are responsible for advertising in their own territories. International distributors have no rights to return merchandise.

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Operating Expenses

	For the Years Ended March 31,
	2010			% Change *			2009			% Change *			2008
	(in millions)
Advertising and promotional	$	44.9			(1	)%	$	45.4			54	%	$	29.6
As a % of net sales		30	%					30	%					19	%
Selling and distribution		14.2			(11	)%		15.9			32	%		12.0
As a % of net sales		10	%					11	%					8	%
Royalties		13.4			3	%		13.0			6	%		12.3
As a % of net sales		9	%					9	%					8	%
General and administrative		10.3			(2	)%		10.6			(6	)%		11.2
As a % of net sales		7	%					7	%					7	%
Depreciation and amortization		2.9			15	%		2.5			(11	)%		2.8
As a % of net sales		2	%					2	%					2	%
Total operating expenses	$	85.7			(2	)%	$	87.4			29	%	$	67.9
As a % of net sales		58	%					58	%					44	%

———————

*

% change is based on unrounded numbers

In fiscal year 2010, total operating expenses decreased 2% to $85.7 million from $87.4 million, remaining constant as a percentage of net sales at 58%, while at the same time launching five new products in fiscal year 2010 as compared to three new products in the prior year. In fiscal year 2009, total operating expenses increased by 29% to $87.4 million from $67.9 million, increasing as a percentage of net sales to 58% from 44% in the prior year. However, certain individual components of our operating expenses discussed below experienced more significant changes than others.

Advertising and Promotional Expenses

Advertising and promotional expenses decreased 1% to $44.9 million for the year ended March 31, 2010, as compared to $45.4 million for the prior year, remaining constant as a percentage of net sales at 30%. The decrease in advertising and promotional expense is primarily due to targeted reductions in advertising and demonstration costs of $2.7 million, as compared to the prior year. The decrease was partially offset by an increase in promotional expense relating to the launches of the Jessica Simpson fragrance, Fancy Love, and the Paris Hilton fragrance, Siren, in June 2009, as well as our product launches of the new fragrances under our Queen Latifah, Josie Natori, and Marc Ecko licenses during the second quarter of fiscal year 2010, as compared to the launch of three fragrances, Jessica Simpson fragrance, Fancy, and Paris Hilton fragrance, Fairy Dust, in the fall of 2008 and GUESS? by Marciano for Men in Febr uary 2009 in the prior year. In addition, during fiscal year 2010 we wrote-off approximately $1.7 million of collateral material related to the GUESS? brand products upon expiration of this license, which was recorded as advertising and promotional expense.

Advertising and promotional expenses increased 54% to $45.4 million for the year ended March 31, 2009, as compared to $29.6 million for the prior year, increasing as a percentage of net sales to 30% from 19%, primarily due to the launches and advertising campaigns for our new Jessica Simpson and Paris Hilton fragrances in the fall of 2008, the launch of GUESS? by Marciano for Men in February 2009, and the investments we made with our promotional activities in our domestic markets. During the prior year, we incurred advertising and promotional costs in connection with the launch of our Paris Hilton Can Can fragrance. During the third quarter of fiscal year 2009, we anticipated significantly higher sales and we committed our spending accordingly. However, during the last five weeks of the third quarter, retailers experienced a significant drop in consumer business and re-orders were negatively affected. We decreased our promotional spending for all brands during the fourth quarter of fiscal year 2009, and continued to monitor our promotional spending in fiscal year 2010 in response to the current economic climate.

Selling and Distribution Costs

Selling and distribution costs decreased 11% to $14.2 million for the year ended March 31, 2010, as compared to $15.9 million for the prior year, decreasing as a percentage of net sales to 10% from 11%. The decrease in selling and distribution costs was primarily due to a decrease in sales personnel, and the related benefits and

35

insurance expenses both in our domestic and international markets, and a decrease in individual sales representative commissions in our international markets. In addition, we incurred lower warehouse operational costs of $4.4 million, as compared to $4.9 million, in the prior year.

Selling and distribution costs increased ­32% to $15.9 million for the year ended March 31, 2009, as compared to $12.0 million for the prior year, 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.

Royalties

Royalties increased by 3% to $13.4 million for the year ended March 31, 2010, as compared to $13.0 million for the prior year, remaining constant as a percentage of net sales at 9%. The increase in royalties reflects contractual royalty rates on actual sales coupled with minimum royalty requirements, most notably for Paris Hilton cosmetics, sunglasses, and handbags, as well as XOXO and Andy Roddick fragrances, for which minimum sales levels were not achieved. The license for Paris Hilton cosmetics is due to expire on January 15, 2011, and all remaining royalty obligations have been accrued and expensed in fiscal year 2010.  In fiscal year 2009, we assigned the worldwide exclusive licensing rights for the production and distribution of Paris Hilton sunglasses, which began generating sublicensing revenues in August 2009. In fiscal year 2008, we sublicensed the international rights for the handbags, wh ich continues to absorb a portion of the minimum royalty. We generated sublicense revenue for these two licenses of $0.6 million in fiscal year 2010, as compared to $0.4 million, for the prior year, which has been recorded as a reduction in royalty expense.

Royalties increased by 6% to $13.0 million for the year ended March 31, 2009, as compared to $12.3 million for the prior year, increasing as a percentage of net sales to 9% from 8%. The increase reflects contractual royalty rates on actual sales coupled with minimum royalty requirements, most notably for Paris Hilton cosmetics, sunglasses, and handbags, as well as XOXO and Andy Roddick fragrances, for which minimum sales levels were not achieved. During the year ended March 31, 2008, we sublicensed the international rights for the handbags. We generated $0.4 million in fiscal year 2009 and $0.5 million in fiscal year 2008 in sublicense revenue, which has been recorded as a reduction in royalty expense.

General and Administrative Expenses

General and administrative expenses decreased 2% to $10.3 million for the year ended March 31, 2010, as compared to $10.6 million for the prior year, remaining constant as a percentage of net sales at 7%. The decrease in general and administrative expenses was primarily due to a decrease in personnel and the related benefit and insurance expenses, partially offset by an increase in professional fees and severance costs, as compared to the prior year.

General and administrative expenses decreased 6% to $10.6 million for the year ended March 31, 2009, as compared to $11.2 million for the prior year, remaining constant as a percentage of net sales at 7%. The decrease in expenses was mainly attributable to a reduction in personnel during the fourth quarter of fiscal year 2009 and a decrease in accounting fees.

Depreciation and Amortization

Depreciation and amortization increased 15% to $2.9 million for the year ended March 31, 2010, as compared to $2.5 million for the prior year, remaining constant as a percentage of net sales at 2%. The increase includes additional amortization of molds and tooling associated with our new brand products launched during fiscal year 2010.

Depreciation and amortization decreased 11% to $2.5 million for the year ended March 31, 2009, as compared to $2.8 million for the prior year, remaining constant at 2% of net sales. The decrease was attributable to lower amortization expense, as an impairment charge of $0.4 million was recorded in the comparative prior year in connection with the XOXO fragrance license (see Note 6 to the accompanying Consolidated Financial Statements for further discussion).

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Operating (Loss) Income

	For the Years Ended March 31,
	2010			% Change *			2009			% Change *			2008
							(in millions)
Operating (loss) income from continuing operations	$	(23.5	)		(246	)%	$	(6.8	)		(179	)%	$	8.6
As a % of net sales		(16	)%					(5	)%					6	%
Other income		—						—			N/A			0.5
As a % of net sales		0	%					0	%					0	%
Net interest income (expense)		(0.2	)		(202	)%		0.2			126	%		(1.0	)
As a % of net sales		0	%					0	%					(1	)%
Foreign exchange gain (loss)		—			N/A			—			N/A			—
As a % of net sales		0	%					0	%					0	%
(Loss) income from continuing operations before income taxes	$	(23.7	)		(261	)%	$	(6.6	)		(181	)%	$	8.1
As a % of net sales		(16	)%					(4	)%					5	%

———————

*

% change is based on unrounded numbers

As a result of the factors discussed above, we incurred an operating loss from continuing operations of $(23.5) million in fiscal year 2010, as compared to $(6.8) million in fiscal year 2009, and earning income from continuing operations of $8.6 million in fiscal year 2008.

Other Income

During the year ended March 31, 2008, we recorded other income of $0.5 million, primarily related to a gain on an insurance recovery resulting from an inventory theft, which was in excess of the recorded value of the stolen inventory.

Net Interest Income/Expense

Net interest expense was $0.2 million for the year ended March 31, 2010, as compared to net interest income of $0.2 million for the prior year, as we utilized a portion of our line of credit during fiscal year 2010.

Net interest income was $0.2 million for the year ended March 31, 2009, as compared to net interest expense of $1.0 million for the prior year, as we did not utilize our line of credit during fiscal year 2009.

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

	For the Years Ended March 31,
	2010			% Change *			2009			% Change *			2008
						(in millions)
(Loss) income from continuing operations before income taxes	$	(23.7	)		(261	)%	$	(6.6	)		(181	)%	$	8.1
As a of net sales		(16	)%					(4	)%					5	%
Income tax (benefit) provision		(8.9	)		N/A			(2.3	)		N/A			3.1
As a % of net sales		6	%					2	%					(2	)%
(Loss) income from continuing operations		(14.8	)		(245	)%		(4.3	)		(186	)%		5.0
As a % of net sales		(10	)%					(3	)%					3	%
Income from discontinued operations		—			N/A			—			N/A			—
As a % of net sales		0	%					0	%					0	%
Net (loss) income	$	(14.8	)		(245	)%	$	(4.3	)		(181	)%	$	5.0
As a % of net sales		(10	)%					(3	)%					3	%

———————

*

% change is based on unrounded numbers

37

Loss from continuing operations before taxes for the year ended March 31, 2010, was $(23.7) million, as compared $(6.6) million for the prior year. Our tax benefit for fiscal year 2010 reflects an estimated effective tax rate of 37.8% and includes a carryback of approximately $19.4 million in tax operating losses generated during the current year to offset U.S. federal income taxes paid during fiscal year 2006, in the amount of approximately $6.8 million. We are under an Internal Revenue Service (“IRS”) audit of our fiscal years 2007, 2008 and 2009, Federal income tax returns as a result of the carryback of our net operating losses incurred in fiscal year ended March 31, 2009.

Loss from continuing operations before taxes for the year ended March 31, 2009, was $(6.6) million, as compared to income from continuing operations before taxes of $8.1 million for the prior year. Our tax benefit for fiscal year 2009 reflects an estimated effective tax rate of 34.8% and includes a carryback of approximately $7.4 million in tax operating losses generated during the fiscal year 2009 to offset U.S. federal income taxes paid during fiscal year 2007, in the amount of approximately $2.6 million.

As a result, we incurred a loss from continuing operations of $(14.8) million in fiscal year 2010, as compared to $(4.3) million in fiscal year 2009, and earned income from continuing operations of $5.0 million in fiscal year 2008.

See Note 14 to the accompanying Consolidated Financial Statements for a discussion of our income from discontinued operations.

As a result, we incurred a net loss of $(14.8) million in fiscal year 2010, as compared to $(4.3) million in fiscal year 2009, and earned net income of $5.0 million in fiscal year 2008.

Liquidity and Capital Resources

Working capital was $88.8 million as of March 31, 2010, as compared to $102.5 million as of March 31, 2009, and $107.3 million at March 31, 2008. The decrease in fiscal year 2010, as compared to fiscal year 2009, was primarily the result of the net loss for the year ended March 31, 2010. The decrease in fiscal year 2009, as compared to fiscal year 2008, was primarily due to the use of current assets to support the net loss reported for the year ended March 31, 2009.

Cash Flows

Cash and cash equivalents increased by $11.5 million during fiscal year 2010, decreased by $15.3 million during fiscal year 2009, and increased by $21.4 million during fiscal year 2008.

Cash Flows from Operating Activities

During the year ended March 31, 2010, net cash provided by operating activities was $13.9 million, as compared to net cash used in operating activities of $13.1 million during the prior year. The activity for fiscal year 2010 reflects a decrease in accounts receivables and inventories (primarily resulting from net sales and the write-down of the GUESS? inventory), partially offset by a decrease in accounts payable. The prior year operating activity reflects an increase in inventories, prepaid expenses and other current assets, accounts payable and accrued expenses due to the launch of three brand products in fiscal year 2009 and the launch of five brand products during fiscal year 2010.

During the year ended March 31, 2009, net cash used in operating activities was $13.1 million, as compared to net cash provided by operating activities of $34.2 million during the prior year. The activity for fiscal year 2009 reflects an increase in inventories, prepaid expenses and other current assets, accounts payable due to the launch of three brand products in fiscal year 2009 and the anticipated launches planned for fiscal year 2010. Cash flows from operating activities were negatively affected by the downturn in global economic conditions.

Cash Flows from Investing Activities

Net cash used in investing activities was $2.0 million in fiscal year 2010, as compared $0.2 million in fiscal year 2009 and net cash provided by investing activities of $2.1 million in fiscal year 2008. The activity for fiscal year 2010 reflects the purchase of certain molds and tooling relating to the launches of our new brand products, as well as leasehold improvements, while the prior year investing activities reflects a lower purchase of equipment and trademarks. The activity for fiscal year 2009 reflects lower purchases of equipment and trademarks, as compared to the prior year.  Fiscal year 2008 reflects a decrease in restricted cash and the collection of the final balance due from the sale of the Perry Ellis brand and offset by an increase in the purchase of equipment and trademarks.

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Cash Flows from Financing Activities

Net cash used in financing activities was $0.4 million in fiscal year 2010, as compared to $2.0 million in fiscal year 2009 and $14.9 million in fiscal year 2008. The current year activity reflects the final payments on our capital leases, while fiscal year 2009 financing activity was mainly attributable to $1.2 million of cash payments for the repurchase of shares of our common stock and continued repayments of capital leases. Fiscal year 2008 includes $16.8 million in repayments of the GMAC Loan Agreement (as defined below), offset by an increase of $2.8 million in proceeds from the issuance of common stock and exercise of warrants.

As of the date of this filing, no amounts have been borrowed under the New Loan Agreement and availability under the New Loan Agreement was $3.6 million. The material terms of the New Loan Agreement are described below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Debt."

Our Ratios and Other Matters

As of March 31, 2010, and 2009, our ratios of the number of days sales in trade receivables and number of days cost of sales in inventory, on an annualized basis, were as follows:

	March 31,
	2010		2009
Trade receivables - Unrelated (1) (3)		26		62
Trade receivables - Related parties (2)		93		61
Inventories(3)		202		345

———————

(1)

Calculated on gross trade receivables based on the number of days sales in trade receivables excluding allowances for doubtful accounts, sales returns and advertising allowances of $4.1 million and $3.5 million in 2010 and 2009, respectively.

(2)

Based upon the seasonal nature of our sales to Perfumania and Quality King, the calculation of number of days sales in trade receivables is based on the actual agings as of March 31, 2010, and 2009, respectively.

(3)

The calculation excludes the transition of the remaining GUESS? brand inventory and the trade receivables of its new fragrance licensee as of March 31, 2010.

Our total net sales during the year ended March 31, 2010, were less than originally anticipated, essentially due to an increase in returns and allowances in our domestic market, as a result of lower consumer traffic during the holiday seasons, and lower than expected international and wholesale sales.

The decrease in the number of days sales in trade receivables in 2010 from 2009 for unrelated customers was mainly attributable to certain of our larger international distributors paying upon delivery. Management closely monitors the Company’s activities with all customers, however, if one or more 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.

We had net sales of $37.6 million and $9.1 million during the year ended March 31, 2010, respectively, to Perfumania and to Quality King. During the year ended March 31, 2009, we had net sales of $41.5 million to Perfumania. The majority shareholders of Perfumania Holdings, Inc. are also the owners of Quality King, a privately-held, wholesale distributor of pharmaceuticals and beauty care products. Transactions with Quality King are also presented as related party transactions. Any significant reduction in business with Perfumania as a customer of the Company would have a material adverse effect on our overall net sales. Perfumania’s inability to pay its account balance due to us at a time when it has a substantial unpaid balance could have an adverse effect on our financial condition and results of operations. Management closely monitors the Company’s activity with Perfumania and holds periodic discussi ons with Perfumania’s management in order to review their anticipated payments for each quarter. No allowance for credit loss has been recorded as of March 31, 2010. Between April 1, 2010, and June 25, 2010, we received $6.7 million from Perfumania in payment of its outstanding balance. Management continues to closely monitor all developments with respect to its extension of credit to Perfumania.

39

In addition to its sales to Perfumania and Quality King, we had net sales of $3.0 million for the year ended March 31, 2010, to Jacavi, a fragrance distributor. Jacavi’s managing member is Rene Garcia.  Rene Garcia owns approximately 9.1% of the outstanding stock of Perfumania Holdings, Inc. as of March 31, 2010, and is one of the principals of Artistic Brands. Also, on June 14, 2010, certain persons related to Mr. Garcia, the Garcia Group, acquired 2,718,728 shares of our common stock. The Garcia Group reports having beneficial ownership of a total of 2,995,527 shares, or approximately 14.7% of our outstanding shares as of June 14, 2010, excluding warrants owned by the Garcia Group. See Notes 6 and 10 to the accompanying Consolidated Financial Statements for further discussion. Sales to Jacavi are also included as related party sales in the accompanying Consolidated Statements of Operations.

See Note 2 to the accompanying Consolidated Financial Statements for further discussion of our relationship with Perfumania, Quality King, and Jacavi and the trade receivables and sales amounts during the respective periods for each related party.

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. Generally 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.

During the current year, the number of days sales in inventory decreased to 202 days from 345 days, mainly the result of the increase in net sales of our new brand products and the sales and write-down of slow moving inventories. Inventory balances are generally higher during our first and second quarters due to increased production in anticipation of the upcoming holiday gift-giving season. At the end of the current year, our inventory balances decreased due the launches of our new brand products in fiscal year 2010 and the sales of our GUESS? brand products prior to the expiration of our license agreement. We anticipate that, as new licenses are signed, and new products are launched, our inventory levels will increase in relation to anticipated sales for our existing products, as well as any new products. The new fragrance licensee is in the process of purchasing the remaining inventory balance at March 31, 2010. We believe that the ca rrying value of our inventory at March 31, 2010, based on current conditions, is stated at the lower of cost or market.

Share Repurchases

On January 4, 2007, our Board approved the repurchase of 10,000,000 shares, subject to certain limitations, including approval from our lender if we had amounts outstanding under our line of credit. Our lender’s approval was never requested. At that time, the August 6, 2004, repurchase plan for 1,000,000 shares was effectively terminated with approximately $0.2 million remaining. During the year ended March 31, 2008, we had repurchased, in the open market, 360,420 shares at a cost of $2.1 million, all of which was purchased during January 2007.

On October 16, 2008, our 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. There is no expiration date specified for this program. Our lender’s approval was received on October 24, 2008. During the fiscal year ended March 31, 2009, we repurchased, in the open market, 371,600 shares at a cost of $1.2 million. During the quarter ended March 31, 2009, our lender notified us to cease further buy-backs of our shares. As of March 31, 2010, we had repurchased, under all phases of our common stock buy-back program (including those phases before 2007), a total of 11,718,977 shares at a cost of $40.4 million. We did not repurchase any shares of our common stock during the year ended March 31, 2010.  Our New Loan Agreement restricts the ability of our subsidiaries to make distribu tions to us for the purpose of repurchasing our common stock, subject to certain exceptions.

Our Debt

On July 20, 2001, we entered into a Loan and Security Agreement (the “GMAC Loan Agreement”) with GMAC Commercial Credit LLC (“GMACCC”). On January 4, 2005, the GMAC Loan Agreement was extended through July 20, 2006. Under the GMAC Loan Agreement, we were able to borrow, depending upon the availability of a borrowing base, on a revolving basis, up to $20.0 million at an interest rate of LIBOR plus 2.75% or the Bank of New York’s prime rate, at our option.

40

On January 10, 2006, the GMAC Loan Agreement was amended, increasing the credit line to $30.0 million, with an additional $5.0 million available at our option. The maturity was extended to July 20, 2008, and the interest rate was reduced to 0.25% below the prime rate. During May 2006, we exercised our option and increased the line to $35.0 million. On September 13, 2006, the GMAC Loan Agreement was further amended, temporarily increasing the credit line to $40.0 million until December 13, 2006, at which time the maximum loan amount reverted back to $35.0 million. As of March 31, 2008, there were no amounts outstanding under the GMAC Loan Agreement nor were there amounts on deposit with our bank pending transfer. On July 20, 2008, the GMAC Loan Agreement expired.

On July 22, 2008, we signed a new Loan and Security Agreement (the “Loan Agreement”) with Regions Bank (“Regions”). The Loan Agreement provided a credit line of up to $20.0 million, depending upon the availability of a borrowing base, at an interest rate of LIBOR plus 2.00% or Regions’ prime rate, at our option.

During the period of July 22, 2008, through February 15, 2010, substantially all of our assets were collateralized under our Loan Agreement. The Loan Agreement contained customary events of default and covenants which prohibited, 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 Regions. The Loan Agreement also contained certain financial covenants relating to fixed charge coverage, and the ratio of funded debt to EBITDA.

On March 9, 2009, we entered into the First Amendment and Ratification of Loan and Security Agreement and Other Loan Documents (the “Amendment”) to the Loan Agreement, dated as of July 22, 2008, with Regions. The Amendment changed certain terms of the Loan Agreement. Under the Amendment, the interest rate for any borrowings was LIBOR rate plus the applicable margin. The applicable margin for any borrowings was calculated on a sliding scale basis and was tied to our fixed charge coverage ratio, with rates calculated between 3% and 4%, with an initial starting rate of 4.25%. Prior to December 31, 2009, the borrowing base amount was the lesser of the sum of an amount equal to 75% of the net amount (after deduction of such reserves and allowances as Regions deemed reasonably proper and necessary) of all eligible accounts plus an amount equal to the lesser of $10 million or 25% of the lower of cost or market value (af ter deduction of such reserves and allowances as Regions deemed reasonably proper and necessary) of all eligible inventory or the product of two times the sum of EBITDA measured from January 1, 2009, to the date of measurement, minus non-cash expenses related to the issuance of options and warrants, minus other non-cash expenses. After December 31, 2009, the borrowing base amount was the sum of an amount equal to 75% of the net amount (after deduction of such reserves and allowances as Regions deemed reasonably proper and necessary) of all eligible accounts plus an amount equal to the lesser of $10 million or 25% of the lower of cost or market value (after deduction of such reserves and allowances as Regions deemed reasonably proper and necessary) of all eligible inventory. In addition, receivables due from Perfumania, Inc., a related party, were not considered an eligible account. A tangible net worth covenant was added, which required us to maintain a tangible net worth of not less than $85& nbsp;million at all times. We were required to obtain written consent from Regions prior to repurchasing shares of our common stock, including repurchases which had been previously authorized under our existing stock buy-back program. We were no longer required to pay a non-utilization fee.

Our Loan Agreement required us to maintain compliance with various financial covenants. The calculation of our fixed charge coverage ratio was measured on a trailing twelve months basis, at the end of each fiscal quarter. We calculated the ratio as follows: (“A”) the sum of EBITDA, less any non-cash gains, less cash taxes paid, less any dividends and distributions (if any), to (“B”) the sum of the current portion of long-term debt (“CPLTD”) paid during the period plus lease and interest expense. If the ratio of our rolling twelve months EBITDA (A) to the sum of the debt (B) was less than the minimum coverage ratio we failed the ratio requirements. We were required to maintain a minimum ratio of 1.50 to 1. The calculation of our funded debt to EBITDA ratio was measured at the end of each fiscal quarter, based on our indebtedness to EBITDA. We were required to maintain a ratio of no greater than 2.50 to 1.00 for ea ch fiscal quarter. The Amendment deferred the fixed charge coverage ratio and the funded debt to EBITDA requirements until December 31, 2009, and added the tangible net worth covenant, which required us to maintain a tangible net worth of not less than $85 million at all times.

41

Our Loan Agreement defined EBITDA, a non-GAAP financial measure, as net income before interest, taxes, depreciation, amortization and non-cash expenses related to the issuance of options and warrants. Tangible net worth is the sum of our total assets, less intangible assets, minus our total liabilities. The following tables are the reconciliation of EBITDA to our net income and the calculation of our tangible net worth for the periods indicated. We do not show EBITDA nor tangible net worth for the quarter ended March 31, 2010, since all outstanding borrowings were repaid on February 16, 2010, and the Loan Agreement, as amended by the Second Amendment was terminated.

	For the Quarters Ended										Rolling Twelve Months Ended December 31, 2009
	March 31, 2009		June 30, 2009			September 30, 2009		December 31, 2009
(Unaudited)	(in thousands)
EBITDA:							&nbs p;
Net income (loss)	$	1,491	$	(2,467	)	$	2,969	$	(5,426	)	$	(3,433	)
Interest		16		56			97		131			300
Taxes		1,253		(1,512	)		1,820		(3,326	)		(1,765	)
Depreciation and amortization		622		687			812		755			2,876
Non-cash expenses (issuance of options and warrants)		70		82			82		192			426
EBITDA	$	3,452	$	(3,154	)	$	5,780	$	(7,674	)	$	(1,596	)
						&nbs p;
											Dece mber 31, 2009
(Unaudited)											(in thousands)
Tangible Net Worth:							&nbs p;
Total assets							&nbs p;				$	127,061
Less intangible assets							&nbs p;					4,847
						&nbs p;						122,214
Less total liabilities							&nbs p;					17,591
Tangible Net Worth							&nbs p;				$	104,623

On August 31, 2009, we entered into a Forbearance Agreement (“Forbearance Agreement”) regarding our Loan Agreement with Regions. The Forbearance Agreement was entered into to address that our outstanding borrowings as of June 30, 2009, were in excess of the limitation in our Loan Agreement, as amended. As of June 30, 2009, our outstanding principal balance under the Loan Agreement was $6.7 million. Pursuant to the Loan Agreement, our outstanding principal balance at no time should exceed the revolving loan availability, as defined in the Loan Agreement. The revolving loan availability as of June 30, 2009, was $0.2 million, resulting in an excess of the revolving loan availability in the amount of $6.5 million. Under the Forbearance Agreement, Regions agreed to forbear from any legal action to accelerate our obligations to the bank until October 28, 2009, subject to no further events of def ault under the terms of our Loan Agreement, as amended.

On October 29, 2009, we entered into a Second Amendment to Loan Agreement and Amendment to Forbearance Agreement (the “Second Amendment”) with Regions extending the forbearance period through February 15, 2010, and calling for us to repay the remaining loan balance over the course of the extension period, as noted in the table below. The Second Amendment called for us to continue to comply with certain covenants with Regions under the Loan Agreement, as amended by the Second Amendment. See Note 7 to the accompanying Consolidated Financial Statements for further discussion.

We were required and repaid the remaining outstanding principal balance over the course of the extension period as follows:

Payment Date	Payment Amount
November 30, 2009	$1.0 million
December 31, 2009	$1.6 million
February 1, 2010	$1.0 million
February 16, 2010	Fully paid

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On February 16, 2010, we repaid the remaining outstanding principal balance plus interest and fees in the amount of $1.1 million and the Loan Agreement, as amended by the Second Amendment, was terminated.

On June 25, 2010, we entered into the New Loan Agreement with GE Capital. The New Loan Agreement provides a credit line of up to $20.0 million, depending upon the availability of a borrowing base and certain reserves established by GE Capital from time to time, at an interest rate of the highest of (a) the prime rate, (b) the federal funds rate plus 3.0%, or (c) the Eurodollar Rate, in each case plus 3.50%; or the Eurodollar Rate plus 4.50%, at our option except in certain circumstances including defaults in the payment of any amounts under the loan facility or the unavailability of the LIBOR rate. The term of the loan facility under the New Loan Agreement is two years.

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 GE Capital. The New Loan Agreement requires us to maintain minimum net liquidity balance of $12.5 million through October 31, 2010, and $15.0 million thereafter through the end of the term. Under the New Loan Agreement, net liquidity is the sum of our unrestricted cash assets plus the excess availability under the revolving loan.  At any point if we fall below the net liquidity requirements, the New Loan Agreement contains certain additional financial covenants relating to minimum consolidated EBITDA, minimum consolidated interest coverage ratios and maximum capital expenditure limits. In addition, Parlux Ltd. and its affiliates must have minimum net liquidity b alance of $12.5 million to borrow under the New Loan Agreement. As of June 24, 2010, we met the minimum liquidity requirements under the New Loan Agreement.

The New Loan Agreement is secured by all of our assets and the assets of our subsidiary, Parlux Ltd., pursuant to a Guaranty and Security Agreement. In addition, GE Capital has a security interest in and to certain of our patents and trademarks, as well as those of our subsidiary, Parlux Ltd., pursuant to a Patent Security Agreement and Trademark Security Agreement, respectively. We have provided to GE Capital a full guaranty of payment of the obligations under the New Loan Agreement.

We believe that funds from operations will be sufficient to meet our current operating and seasonal needs through fiscal year 2011.  In addition, the new credit facility will provide us an opportunity to improve liquidity and profitability. However, if we were to expand operations through acquisitions, new licensing arrangements or both, we may need to obtain additional financing. There can be no assurances that we could obtain additional financing or what the terms of such financing, if available, would be. In addition, the current business environment may increase the difficulty of obtaining additional financing, if necessary.

Contractual Obligations

The following table sets forth information regarding our contractual obligations as of March 31, 2010:

	Payment Due by Period
Type of Obligation	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
					(In thousands)
Operating Lease(1) Obligations	$	6,349	$	2,545	$	1,968	$	1,281	$	555
Purchase Obligations (2)		22,769		22,769		—		—		—
Advertising Obligations (3)		156,102		26,942		75,940		42,887		10,333
Employment and Consulting Agreements (4)		1,485		1,010		475		—		—
Other Long-term Obligations (5)		42,450		8,090		18,005		12,805		3,550
	$	229,155	$	61,356	$	96,388	$	56,973	$	14,438

———————

(1)

Represents the future minimum annual rental commitments net of future minimum annual rental income of $555. See Notes 5 and 8A to the accompanying Consolidated Financial Statements for further discussion.

(2)

Represents purchase orders issued in the normal course of business for components, raw materials and promotional supplies.

43

(3)

Consists of advertising commitments under our licensing agreements. These amounts were calculated based on the guaranteed minimum sales goals, as set forth in the agreements. Unlike guaranteed minimum royalties, advertising and promotional spending are based on a percentage of actual net sales, and are not contractually required if there are no sales. See Note 8B to the accompanying Consolidated Financial Statements for further discussion of these amounts.

(4)

Consists of amounts remaining under employment and consulting agreements. See Note 8D to the accompanying Consolidated Financial Statements for further discussion.

(5)

Consists of guaranteed minimum royalty requirements under our licensing agreements.

Off-Balance Sheet Arrangements

As of March 31, 2010, we did not have any “off-balance sheet arrangements” as that term is defined in Regulation S-K Item 303(a)(4).

Forward-Looking Statements

Our business, financial condition, results of operations, cash flows and prospects, and the prevailing market price and performance of our common stock, may be adversely affected by a number of factors, including the matters discussed below. Certain statements and information set forth in this Annual Report on Form 10-K, as well as other written or oral statements made from time to time by us or by our authorized executive officers on our behalf, constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement and these risk factors in order to comply with such safe harbor provisions. You should note that our for ward-looking statements speak only as of the date of this Annual Report on Form 10-K or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations, plans, intentions and projections reflected in our forward-looking statements are reasonable, such statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks, uncertainties and other factors that our stockholders and prospective investors should consider include, but are not limited to, the following:

·

The Paris Hilton line is our primary source of revenue following the expiration of our GUESS? license.

·

If we are unable to acquire or license additional brands, secure additional distribution arrangements, or obtain the required financing for these agreements and arrangements, the growth of our business could be impaired.

·

The development of new products by us involves considerable costs and any new product may not generate sufficient consumer interest and sales to become a profitable brand or to cover the costs of its development.

·

We depend on a relatively small number of customers for most of our revenue, therefore if any of our significant customers reduced their demand for our products or became financially unstable it may have a material adverse effect on our business.

·

The loss of or interruption in our arrangements with our manufacturers, suppliers and customers could have a material adverse affect on our sales, profitability, and operating cash flow.

·

The fragrance and cosmetic industry is highly competitive, and if we are unable to compete effectively it could have a material adverse effect on our sales, profitability, operating cash flow, and many other aspects of our business, prospects, results of operations and financial condition.

·

Our net sales, operating income and inventory levels fluctuate on a seasonal basis and a decrease in sales or margins during our peak seasons could have a disproportionate effect on our overall financial condition and results of operations.

44

·

The continued consolidation of the U.S. department store segment could have a material adverse effect on our sales and profitability.

·

Our customers inability to pay their accounts payable balance due to us could have an adverse effect on our financial condition and results of operations.

·

Consumers have reduced discretionary purchases of our products as a result of the general economic downturn, and may further reduce discretionary purchases of our products in the event of further economic decline, terrorism threats or other external factors.

·

Our New Loan Agreement contains restrictive and financial covenants that could adversely affect our ability to borrow funds under the New Loan Agreement or adversely affect our business by limiting our flexibility.

·

Failure to manage inventory effectively could negatively impact our operations.

·

The value of our long-lived assets, including brand licenses and trademarks, may be adversely affected if we experience declines in operating results or experience significant negative industry or economic trends.

·

If we are unable to protect our intellectual property rights, specifically trademarks and trade names, our ability to compete could be negatively impacted.

·

The accessories market, specifically, watches, handbags, and sunglasses, is also highly competitive and if we are unable to compete effectively it could have a material adverse effect on our profitability, operating cash flow, and many other aspects of our business, prospects, results of operations and financial condition.

·

The loss of, or disruption in our distribution facility, could have a material adverse effect on our sales and our relationships with our customers.

·

Our success depends, in part, on the quality and safety of our fragrance and related products.

·

We are subject to risks related to our international operations.

·

Reductions in worldwide travel could hurt sales volumes in our duty-free related business.

·

If we lose the services of our executive officers and senior management, it could have a negative impact on our business.

·

If we lose our key personnel, or fail to attract and retain additional qualified experienced personnel, we will be unable to continue to develop our prestige fragrance products and attract and obtain new licensing partners.

·

We may unknowingly infringe on others’ intellectual property rights which could result in litigation.

·

We are involved in litigation from time to time in the ordinary course of business, which, if the outcome of such litigation is adverse to us, could materially adversely affect our business, results of operations, financial condition, and cash flows.

·

Our quarterly results of operations could fluctuate significantly due to retailing peaks related to gift giving seasons and delays in new product launches, which could adversely affect our stock price.

·

Our business is subject to regulation in the United States and internationally.

·

Our stock price has been volatile.

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Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We sell our products worldwide with all such sales being denominated in United States dollars. As a result, we were not at risk to foreign exchange translation exposure.

We could, however, be subject to changes in political and economic conditions in the countries in which we are represented internationally. We closely monitor such conditions and are able, for the most part, to adjust our sales strategies accordingly.

During the year ended March 31, 2010, our exposure to market risk for changes in interest rates related to our former bank line of credit. The bank line of credit bore interest at a variable rate, as discussed above under “Liquidity and Capital Resources.” On February 16, 2010, we repaid the remaining outstanding principal balance plus interest and fees of $1.1 million and the line of credit was terminated.

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements and supplemental data are included herein commencing on page F-1. The financial statement schedule is listed in the Index to Financial Statements on page F-1 and is incorporated herein by reference.

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

Item 9A.

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 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 Annual Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2010.

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 (as defined in Rules 13a-15(f)  and 15d-15(f) under the Exchange Act) 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.

46

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Parlux Fragrances, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel 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 and includes those policies and procedures that:

·

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

·

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

·

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2010. In making this assessment, management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Based on our assessment, management concluded that the Company’s internal control over financial reporting was effective as of March 31, 2010.

The Company’s independent registered public accounting firm, MarcumRachlin, a division of Marcum LLP, has issued an attestation report on the Company’s internal control over financial reporting.

47

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the

Board of Directors and Stockholders

Parlux Fragrances, Inc.

We have audited Parlux Fragrances, Inc. and subsidiaries (the “Company”) internal control over financial reporting as of March 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely det ection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2010, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of March 31, 2010, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended of the Company and our report dated June 29, 2010, expressed an unqualified opinion thereon.

/s/ MarcumRachlin, a division of Marcum LLP

Miami, Florida

June 29, 2010

48

Item 9B.

OTHER INFORMATION.

On June 25, 2010, we entered into the New Loan Agreement with GE Capital. The New Loan Agreement provides a credit line of up to $20.0 million, depending upon the availability of a borrowing base and certain reserves established by GE Capital from time to time, at an interest rate of the highest of (a) the prime rate, (b) the federal funds rate plus 3.0%, or (c) the Eurodollar Rate, in each case plus 3.50%; or the Eurodollar Rate plus 4.50%, at our option except in certain circumstances including defaults in the payment of any amounts under the loan facility or the unavailability of the LIBOR rate. The term of the loan facility under the New Loan Agreement is two years.

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 GE Capital. The New Loan Agreement requires us to maintain minimum net liquidity balance of $12.5 million through October 31, 2010, and $15.0 million thereafter through the end of the term. Under the New Loan Agreement, net liquidity is the sum of our unrestricted cash assets plus the excess availability under the revolving loan. At any point if we fall below the net liquidity requirements, the New Loan Agreement contains certain additional financial covenants relating to minimum consolidated EBITDA, minimum consolidated interest coverage ratios and maximum capital expenditure limits. In addition, Parlux Ltd. and its affiliates must have minimum net liquidity bal ance of $12.5 million to borrow under the New Loan Agreement. As of June 24, 2010, we met the minimum liquidity requirements under the New Loan Agreement.

The New Loan Agreement is secured by all of our assets and the assets of our subsidiary, Parlux Ltd., pursuant to a Guaranty and Security Agreement. In addition, GE Capital has a security interest in and to certain of our patents and trademarks, as well as those of our subsidiary, Parlux Ltd., pursuant to a Patent Security Agreement and Trademark Security Agreement, respectively. We have provided to GE Capital a full guaranty of payment of the obligations under the New Loan Agreement.

The foregoing summaries of the New Loan Agreement and the Guaranty and Security Agreement are qualified in their entirety by reference to such agreements. The New Loan Agreement is filed as Exhibit 10.93 to this Annual Report on Form 10-K. The Guaranty and Security Agreement is filed as Exhibit 10.94 to this Annual Report on Form 10-K. Each of the New Loan Agreement and the Guaranty and Security Agreement is incorporated by reference herein.

49

PART III

The information required by Items 10, 11, 12, 13 and 14 (other than information required by Item 201(d) of Regulation S-K with respect to equity compensation plans, which is set forth in Item 5 of this Report) will be set forth in our Proxy Statement relating to the 2010 Annual Meeting of Stockholders, which we intend to file no later than 120 days after March 31, 2010, and this information is incorporated herein by reference.

50

PART IV

Item 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a)(1)

Financial Statements

See Index to Financial Statements beginning on page F-1 of this Annual Report.

(2)

Financial Statement Schedules - See Index to Financial Statements beginning on Page F-1 of this Annual Report.

(3)

Exhibits – See Exhibit Index included elsewhere in this document.

51

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) 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.

Dated: June 29, 2010

PARLUX FRAGRANCES, INC.

/s/ FREDERICK E. PURCHES

Frederick E. Purches

Chairman and Chief Executive Officer

(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Signature	Title	Date
/s/ FREDERICK E. PURCHES	Chairman and Chief Executive Officer	June 29, 2010
Frederick E. Purches	(Principal Executive Officer)
/s/ RAYMOND J. BALSYS	Vice President and Chief Financial Officer	June 29, 2010
Raymond J. Balsys	(Principal Financial and Principal Accounting Officer)
/s/ GLENN GOPMAN	Director	June 29, 2010
Glenn Gopman
/s/ ESTHER EGOZI CHOUKROUN	Director	June 29, 2010
Esther Egozi Choukroun
/s/ ANTHONY D’AGOSTINO	Director	June 29, 2010
Anthony D’Agostino
/s/ ROBERT MITZMAN	Director	June 29, 2010
Robert Mitzman

52

EXHIBIT INDEX

Exhibits

Description of Exhibits

2.1

Asset Purchase Agreement, dated June 15, 1994, by and between Fred Hayman Beverly Hills Inc. and the Company (incorporated by reference to Exhibit 1 to the Company’s Report on Form 8-K, filed with the SEC on June 15, 1994 and as amended on June 29, 1994 and August 26, 1994).

3.1

Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibits 3.1 through 3.5 to the Registration Statement on Form S-3 (File No. 33-89806), declared effective on March 13, 1995, Exhibit 4.6 of Registration Statement on Form S-3, declared effective on October 2, 1996 (File No. 333-11953) and Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2009, filed on February 4, 2010.

3.2

Amended and Restated Bylaws of the Company, as amended, (incorporated by reference to Exhibit 3 (b) to the Company’s Report on Form 8-K, filed on February 6, 2007) and Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2009, filed on February 4, 2010.

4.1

Form of Warrant (included as Exhibit D to the Agreement, dated April 3, 2009, by and between Parlux Fragrances, Inc. and Artistic Brands Development, LLC (formerly known as Iconic Fragrances, LLC), filed as Exhibit 4.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 2009).

10.1+

Stock Option Plan (incorporated by reference to Annex A to the Company’s Preliminary Proxy Statement, filed on August 16, 1996).

10.2+

Employee Stock Option Plan 2000 (incorporated by reference to Annex “A” to the Company’s Definitive Proxy Statement, filed on August 25, 2000).

10.3+

Settlement Agreement, dated as of February 6, 2007 by and between the Company, Glenn H. Nussdorf and Ilia Lekach (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K, filed on February 6, 2007).

10.4+

Executive Employment Agreement, dated July 26, 2007, between Parlux Fragrances Inc. and Neil J. Katz (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K, filed on July 30, 2007).

10.5+

Executive Employment Agreement, dated July 26, 2007, between Parlux Fragrances Inc. and Raymond J. Balsys (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, filed on July 30, 2007).

10.6+

The Parlux Fragrances, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-8 (File No. 333-148383) filed on December 28, 2007).

10.64

Agreement, dated March 28, 2003, between the Company and Victory International (USA) LLC (incorporated by reference to Exhibit 10.64 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2003, filed on June 30, 2003).

10.65

License Agreement, dated as of November 1, 2003, between the Company and GUESS?, Inc. and GUESS? IP Holder L.P. (“Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission”) (incorporated by reference to Exhibit 10.66 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, filed on November 14, 2003).

10.66

License Agreement, dated as of June 1, 2004, between the Company and Paris Hilton Entertainment, Inc. (“Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.67 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2004, filed on June 28, 2004).

10.67

License Agreement, dated as of December 8, 2004, between the Company and Andy Roddick. (“Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission”) (incorporated by reference to Exhibit 10.69 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004, filed on February 14, 2005).

10.68

Asset Purchase Agreement, dated January 6, 2005, between the Company and Victory International (USA) LLC (incorporated by reference to Exhibit 10.70 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004, filed on February 14, 2005).

10.69

License Agreement, dated January 26, 2005, between the Company and Paris Hilton Entertainment, Inc. (“Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission”) (incorporated by reference to Exhibit 10.71 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004, filed on February 14, 2005).

10.70

License Agreement, dated April 6, 2005, between the Company and Gund, Inc. (incorporated by reference to Exhibit 10.72 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2005, filed on July 8, 2005).

10.71

License Agreement, dated May 11, 2005, between the Company and Paris Hilton Entertainment, Inc. (“Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission”) (incorporated by reference to Exhibit 10.73 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2005, filed on July 8, 2005).

10.72

License Agreement, dated May 13, 2005, between the Company and Paris Hilton Entertainment, Inc. (“Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission”) (incorporated by reference to Exhibit 10.74 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2005, filed on July 8, 2005).

10.73+

Employment Agreement, with Frank A. Buttacavoli, dated as of June 1, 2005 (incorporated by reference to Exhibit 10.76 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2005, filed on July 8, 2005).

10.74

License Agreement, dated April 5, 2006, between the Company and Paris Hilton Entertainment, Inc. (“Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission”) (incorporated by reference to Exhibit 10.81 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006, filed on July 24, 2006).

10.75

Facility Lease Agreement, dated April 7, 2006, between the Company and GreDel Properties, L.L.C. (incorporated by reference to Exhibit 10.82 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006, filed on July 24, 2006).

10.76

Facility Lease Agreement, dated May 2, 2006, between the Company and Port 95-2, Ltd. (incorporated by reference to Exhibit 10.83 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006, filed on July 24, 2006).

10.77

License Agreement, dated June 21, 2007, between the Company and VCJS, LLC (“Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission”) (incorporated by reference to Exhibit 10.85 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 14, 2007).

10.78

Office Sublease Agreement, dated as of November 30, 2007, between the Company and Tarragon South Development Corp. (incorporated by reference to Exhibit 10.86 to the Company’s Report on Form 10-Q, filed on February 7, 2008).

10.79

Loan and Security Agreement, dated as of July 22, 2008, between Parlux Fragrances, Inc. and Parlux Ltd., and Regions Bank (incorporated by reference to Exhibit 4.1 to the Company’s Report on Form 8-K filed with the SEC on July 25, 2008).

10.80

First Amendment and Ratification of Loan and Security Agreement and Other Loan Documents dated March 9, 2009, to the Loan and Security Agreement, as of July 22, 2008, between Parlux Fragrances, Inc. and Parlux Ltd., and Regions Bank (incorporated by reference to Exhibit 4.1 to the Company’s Report on Form 8-K filed with the SEC on March 13, 2009).

10.81

Acknowledgment of Assignment Agreement, dated as of January 31, 2009, between Parlux Fragrances, Inc. and Tarragon South Development Corp., Tarragon Corporation and Tricony CFC, L.L.C.*

10.82

Forbearance Agreement, effective as of August 31, 2009, by and between Parlux Fragrances, Inc. and Parlux Ltd. and Regions Bank (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed on September 2, 2009).

10.83

Second Amendment to Loan Agreement and Amendment to Forbearance Agreement, dated as of October 29, 2009, by and between Parlux Fragrances, Inc. and Parlux Ltd. and Regions Bank (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed on October 30, 2009).

10.84

Agreement, dated April 3, 2009, by and between Parlux Fragrances, Inc. and Artistic Brands Development, LLC (formerly known as Iconic Fragrances, LLC) (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009). ***

10.85

Sublicense Agreement, dated April 7, 2009, by and between Parlux Fragrances, Inc. and Artistic Brands Development, LLC (formerly known as Iconic Fragrances, LLC) regarding a license for Rihanna. License Agreement, dated April 3, 2009, by and between Combermere Entertainment Properties, LLC and Artistic Brands Development, LLC (formerly known as Iconic Fragrances, LLC) (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009). ***

10.86

Sublicense Agreement, dated April 7, 2009, dated April 4, 2009, by and between Parlux Fragrances, Inc. and Artistic Brands Development, LLC (formerly known as Iconic Fragrances, LLC) regarding a license for Kanye West. License Agreement, dated April 3, 2009, by and between Mascotte Holdings, Inc. and Artistic Brands Development, LLC (formerly known as Iconic Fragrances, LLC) (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009). ***

10.87

Letter Agreement, dated April 3, 2009, by and among Parlux Fragrances, Inc., Artistic Brands Development, LLC (formerly known as Iconic Fragrances, LLC) and Rene Garcia (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009).

10.88+

Executive Employment Agreement, dated June 5, 2009, by and between Parlux Fragrances, Inc. and Frank A. Buttacavoli (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009).

10.89+

Amendment to Executive Employment Agreement, dated as of March 31, 2010, between Parlux Fragrances, Inc. and Frank A. Buttacavoli (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed on April 5, 2010).

10.90+

Executive Employment Agreement, dated as of April 1, 2010, between Parlux Fragrances, Inc. and Frederick E. Purches (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, filed on April 5, 2010).

10.91+

Executive Employment Agreement, dated as of April 1, 2010, between Parlux Fragrances, Inc. and Raymond J. Balsys (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, filed on April 5, 2010).

10.92

Consulting Agreement, with Cambridge Development Corp., dated as of April 1, 2010.*

10.93

Credit Agreement, dated as of June 25, 2010, among Parlux Ltd., as borrower, Parlux Fragrances, Inc., as guarantor, the lenders party thereto, and General Electric Capital Corporation, as administrative agent and collateral agent. (Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.)*

10.94

Guaranty and Security Agreement, dated as of June 25, 2010, among Parlux Ltd., and each grantor from time to time party thereto and General Electric Capital Corporation, as administrative agent and collateral agent.*

21.1

Subsidiaries of the Company.*

23.1

Consent of MarcumRachlin, a division of Marcum LLP, an independent registered public accounting firm.*

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, as amended.**

32.2

Certification of Chief Financial Officer Pursuant to § 906 of the Sarbanes-Oxley Act of 2002, as amended.**

———————

*

Filed herewith

**

Furnished herewith

***

Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been submitted separately with the SEC.

+

Management contracts or compensatory plans, contracts or arrangements.

PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-4
Consolidated Statements of Changes in Stockholders’ Equity	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-7
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts	F-47

All other Schedules are omitted as the required information is not applicable or the information is presented in the financial statements or the related notes thereto.

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the

Board of Directors and Stockholders of

Parlux Fragrances, Inc.

We have audited the accompanying consolidated balance sheets of Parlux Fragrances, Inc. and Subsidiaries (the “Company”) as of March 31, 2010, and 2009, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended March 31, 2010. Our audits also included the financial statement schedule listed in the accompanying index with respect to each of the three years in the period ended March 31, 2010. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2010, and 2009, and the consolidated results of operations and cash flows for each of the three years in the period ended March 31, 2010, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of March 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated, June 29, 2010, expressed an unqualified opinion on the effectiveness of the Company’s internal controls over financial reporting.

As discussed in Note 1C to the Consolidated Financial Statements, the Company is subject to certain liquidity and profitability considerations.

/s/ MarcumRachlin, a division of Marcum LLP

Miami, Florida

June 29, 2010

F-2

PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	March 31, 2010			March 31, 2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	17,579		$	6,088
Trade receivables, net of allowance for doubtful accounts, sales returns and advertising allowances of $4,144 and $3,476, respectively		3,372			15,111
Trade receivables from related parties		10,873			12,423
Income taxes receivable		7,161			3,156
Inventories		41,846			66,737
Prepaid promotional expenses, net		7,867			10,013
Prepaid expenses and other current assets, net		9,437			11,098
Deferred tax assets		5,238			4,048
TOTAL CURRENT ASSETS		103,373			128,674
Equipment and leasehold improvements, net		2,679			2,735
Trademarks and licenses, net		4,654			1,885
Deferred tax assets, net		1,667			1,448
Other		1,959			1,962
TOTAL ASSETS	$	114,332		$	136,704
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings, current portion	$	—		$	539
Accounts payable		10,019			23,747
Accrued expenses		4,513			1,934
TOTAL CURRENT LIABILITIES		14,532			26,220
TOTAL LIABILITIES		14,532			26,220
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding at March 31, 2010, and 2009		—			—
Common stock, $0.01 par value, 40,000,000 and 30,000,000 shares authorized at March 31, 2010, and 2009, respectively, 30,143,789 and 29,993,789 shares issued at March 31, 2010, and 2009, respectively		301			300
Additional paid-in capital		105,943			101,869
Retained earnings		28,829			43,588
		135,073			145,757
Less 9,668,977 shares of common stock in treasury, at cost, at March 31, 2010, and 2009		(35,273	)		(35,273	)
TOTAL STOCKHOLDERS' EQUITY		99,800			110,484
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	114,332		$	136,704

See notes to consolidated financial statements.

F-3

PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	For the Years Ended March 31,
	2010			2009			2008
Net sales:									&nb sp;
Unrelated customers, including licensing fees of $75 in 2010, 2009, and 2008	$	93,861		$	109,685		$	94,543
Related parties		49,615			41,470			59,153
Sales – expired license		4,626			—			—
		148,102			151,155			153,696
Cost of goods sold:									&nb sp;
Unrelated customers		44,942			51,294			48,119
Related parties		29,147			19,261			29,111
Cost of sales – expired license		11,871			—			—
		85,960			70,555			77,230
Operating expenses:									&nb sp;
Advertising and promotional		44,927			45,442			29,559
Selling and distribution		14,157			15,891			11,994
Royalties		13,357			13,009			12,310
General and administrative, including share-based compensation expense of $587 in 2010, $348 in 2009, and $244 in 2008		10,337			10,555			11,175
Depreciation and amortization, including impairment charge of $385 in 2008		2,873			2,506			2,828
Total operating expenses		85,651			87,403			67,866
Operating (loss) income		(23,509	)		(6,803	)		8,600
Other income		—			—			498
Interest income		77			314			106
Interest expense and bank charges		(313	)		(81	)		(1,107	)
Foreign exchange loss		(1	)		(1	)		(4	)
(Loss) income from continuing operations before income taxes		(23,746	)		(6,571	)		8,093
Income tax (benefit) provision		(8,987	)		(2,287	)		3,082
(Loss) income from continuing operations		(14,759	)		(4,284	)		5,011
Discontinued operations:									&nb sp;
Income from operations of Perry Ellis fragrance brand		—			—			41
Income tax provision related to Perry Ellis brand		—			—			16
Income from discontinued operations		—			—			25
Net (loss) income	$	(14,759	)	$	(4,284	)	$	5,036
(Loss) income per common share:									&nb sp;
Basic:
Continuing operations	$	(0.73	)	$	(0.21	)	$	0.26
Discontinued operations		—			—			—
Total	$	(0.73	)	$	(0.21	)	$	0.26
Diluted:									&nb sp;
Continuing operations	$	(0.73	)	$	(0.21	)	$	0.24
Discontinued operations		—			—			—
Total	$	(0.73	)	$	(0.21	)	$	0.24
Weighted average number of shares outstanding:									&nb sp;
Basic	20,330,395			20,537,624			19,344,953
Diluted	20,330,395			20,537,624			20,603,256

See notes to consolidated financial statements.

F-4

PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED MARCH 31, 2010, 2009, AND 2008

(In thousands, except per share data)

	Common Stock				Additional Paid-In Capital			Retained Earnings			Treasury Stock						Total
	Number of Shares		Par Value								Number of Shares			Cost
BALANCE at March 31, 2007		29,417,289	$	294	$	102,018		$	45,619			11,347,377		$	(39,177	)	$	108,754
Net income		—		—		—			5,036			—			—			5,036
Excess tax deficiency		—		—		(1,277	)		—			—			—			(1,277	)
Issuance of common stock upon exercise of warrants		560,000		6		590			—			—			—			596
Issuance of common stock from treasury shares upon exercise of warrants		—		—		—			(2,728	)		(1,950,000	)		4,940			2,212
Share-based compensation from option grants		—		—		244			—			—			—			244
BALANCE at March 31, 2008		29,977,289		300		101,575			47,927			9,397,377			(34,237	)		115,565
Net (loss)		—		—		—			(4,284	)		—			—			(4,284	)
Excess tax deficiency		—		—		(114	)		—			—			—			(114	)
Issuance of common stock upon exercise of stock options and warrants		16,500		—		60			—			—			—			60
Issuance of common stock from treasury shares upon exercise of warrants		—		—		—			(55	)		(100,000	)		177			122
Share-based compensation from option grants		—		—		348			—			—			—			348
Purchase of treasury stock, at cost		—		—		—			—			371,600			(1,213	)		(1,213	)
BALANCE at March 31, 2009		29,993,789		300		101,869			43,588			9,668,977			(35,273	)		110,484
Net (loss)		—		—		—			(14,759	)		—			—			(14,759	)
Excess tax deficiency						(246	)											(246	)
Issuance of common stock upon exercise of warrants		150,000		1		179			—			—			—			180
Issuance of warrants in connection with sublicense agreements		—		—		3,554			—			—			—			3,554
Share-based compensation from option grants		—		—		587			—			—			—			587
BALANCE at March 31, 2010		30,143,789	$	301	$	105,943		$	28,829			9,668,977		$	(35,273	)	$	99,800

See notes to consolidated financial statements.

F-5

PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	For the Years Ended March 31,
	2010			2009			2008
Cash flows from operating activities:
Net (loss) income	$	(14,759	)	$	(4,284	)	$	5,036
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Share-based compensation expense		587			348			244
Depreciation and amortization		2,873			2,480			2,828
Provision for doubtful accounts		636			836			1,475
Write-downs of inventories		11,202			183			900
Write-downs of prepaid promotional supplies		2,368			511			240
Deferred income tax (benefit) provision		(1,655	)		86			2,781
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables – customers		11,103			3,354			(9,268	)
Decrease (increase) in trade receivables - related parties		1,550			2,969			(1,359	)
(Increase) decrease in income taxes receivable		(4,005	)		(413	)		6,077
Decrease (increase) in inventories		13,689			(18,852	)		7,215
(Increase) decrease in prepaid promotional expenses		(222	)		(4,078	)		2,109
Decrease (increase) in prepaid expenses and other current assets		1,661			(6,200	)		1,314
Decrease in inventories, non-current		—			—			17,392
Decrease (increase) in other non-current assets		3			(1,629	)		85
(Decrease) increase in accounts payable		(13,728	)		12,299			(3,048	)
Increase (decrease) in accrued expenses		2,579			(667	)		189
Total adjustments		28,641			(8,773	)		29,174
Net cash provided by (used in) operating activities		13,882			(13,057	)		34,210
Cash flows from investing activities:
Proceeds from sale of Perry Ellis fragrance brand		—			—			2,296
Net decrease in restricted cash		—			—			1,274
Purchases of equipment and leasehold improvements		(1,977	)		(143	)		(1,217	)
Purchases of trademarks		(55	)		(94	)		(276	)
Net cash (used in) provided by investing activities		(2,032	)		(237	)		2,077
Cash flows from financing activities:
Repayments - line of credit, net		—			—			(16,775	)
Repayments of capital leases		(539	)		(995	)		(926	)
Purchases of treasury shares		—			(1,213	)		—
Proceeds from issuance of common stock from treasury shares		—			122			2,212
Proceeds from issuance of common stock		180			60			596
Net cash used in financing activities		(359	)		(2,026	)		(14,893	)
Net increase (decrease) in cash and cash equivalents		11,491			(15,320	)		21,394
Cash and cash equivalents, beginning of year		6,088			21,408			14
Cash and cash equivalents, end of year	$	17,579		$	6,088		$	21,408

See notes to consolidated financial statements.

F-6

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

1.

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.

Nature of business

Parlux Fragrances, Inc. was incorporated in Delaware on July 23, 1984, and is engaged in the creation, design, manufacture, and distribution and sale of prestige fragrances and beauty related products, on a worldwide basis. See Note 8(B) to the Consolidated Financial Statements for further discussion of signed license agreements to manufacture and distribute watches, cosmetics and handbags, purses and other small leather goods, and sunglasses.

B.

Principles of consolidation

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

The accompanying Consolidated Financial Statements and the Notes to the Consolidated Financial Statements are presented in thousands, except for per share data.

C.

Liquidity and profitability considerations

As a result of the economic downturn over the past two years and the impact of the expiration of the GUESS? license on December 31, 2009, the Company has incurred significant net losses of $14,759 and $4,284 for the years ended March 31, 2010 and 2009, respectively. Net cash used in operations during the year ended March 31, 2009, was $13,057, while net cash provided by operations during the year ended March 31, 2010, was $13,882. As reflected in the accompanying Consolidated Balance Sheet as of March 31, 2010, the Company had unrestricted cash and cash equivalents of approximately $17,579 and positive working capital of $88,841.

Cost Reductions

During fiscal years 2009 and 2010, the Company implemented a number of cost reduction initiatives including a targeted reduction in staff, along with a reduction in committed advertising and promotional spending, and reduced our production levels. The reductions during fiscal year 2010 were partially offset by approximately $1,700  in advertising and promotional expense relating to the write-off of the Company’s remaining GUESS? collateral material.  Management will continue to implement various operational efficiencies and monitor all facets of the Company’s operations.

Credit Facility

On June 25, 2010, the Company entered into a new Loan Agreement (the “New Loan Agreement”) with General Electric Capital Corporation (“GE Capital”), as lender, administrative agent and collateral agent.  The New Loan Agreement provides a credit line of up to $20.0 million, depending upon the availability of a borrowing base and certain reserves established by GE Capital from time to time, at an interest rate of the highest of (a) the prime rate, (b) the federal funds rate plus 3.0%, or (c) the LIBOR rate over one minus any Eurodollar reserve requirement (the "Eurodollar Rate"), in each case plus 3.50%; or the Eurodollar Rate plus 4.50%, at the Company’s option except in certain circumstances including defaults in the payment of any amounts under the loan facility or the unavailability of the LIBOR rate. The term of the loan facility under the New Loan Agreement is two years.

F-7

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

1.

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 GE Capital. The New Loan Agreement requires the Company to maintain minimum net liquidity balance of $12.5 million through October 31, 2010, and $15.0 million thereafter through the end of the term.  Under the New Loan Agreement, net liquidity is the sum of the Company’s unrestricted cash assets plus the excess availability under the revolving loan.  At any point if the Company falls below the net liquidity requirements, the New Loan Agreement contains certain additional financial covenants relating to minimum consolidated EBITDA, minimum consolidated interest coverage ratios and maximum capital expenditure limits.  In addition, t he Company’s subsidiary, Parlux Ltd., and its affiliates must have minimum net liquidity balance of $12.5 million to borrow under the New Loan Agreement.  As of June 24, 2010, the Company and its subsidiary, Parlux Ltd., met the minimum liquidity requirements under the New Loan Agreement.

The New Loan Agreement is secured by all of the Company’s assets and the assets of the Company’s subsidiary, Parlux Ltd., pursuant to a Guaranty and Security Agreement.  In addition, GE Capital has a security interest in and to certain of the Company’s patents and trademarks, as well as those of Parlux Ltd., pursuant to a Patent Security Agreement and Trademark Security Agreement, respectively.  The Company has provided to GE Capital a full guaranty of payment of the obligations under the New Loan Agreement.

Summary

Management believes that the actions taken, along with the new credit facility will provide the Company an opportunity to improve liquidity and profitability, and the Company’s new 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 additional financing.  There can be no assurances that the Company could obtain additional financing or what the terms of such financing, if available, would be. In addition, the current business environment may increase the difficulty of obtaining additional financing, if necessary.

D.

Accounting estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates relate to the carrying value of accounts receivable from related parties, allowance for doubtful accounts, sales returns and advertising allowances, inventory obsolescence, periods of depreciation and amortization for trademarks, licenses, and equipment, the carrying value of intangibles, and valuation allowance of deferred tax assets. Actual results could differ from those estimates.

E.

Revenue recognition

Revenue is recognized when the product is shipped to a customer, or in the limited circumstances, at destination, when terms provide that title passes at destination. Estimated amounts for sales returns and allowances are recorded at the time of sale and reviewed and adjusted on a quarterly basis, if needed. Accounts receivable are recorded concurrently with revenue. The Company continuously monitors the collectability of the receivables by analyzing the aging, assessing its customer’s credit worthiness, and evaluating the impact of changes in economic conditions.

F-8

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

1.

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

On occasion, the Company will consign certain limited edition watches to customers. Revenue for such activity is recognized and billed when the customer sells such products.

Licensing income, which is included in sales to unrelated customers, is recognized ratably over the terms of the contractual license agreements.

F.

Prepaid promotional expenses, net

Prepaid promotional expenses, net consists of collateral inventory items such as testers, samples, gifts with purchases, and other advertising materials to support the sales of our products. The collateral inventory is stated at the lower of cost (using the first-in, first-out method) or market. During the years ended March 31, 2010, 2009, and 2008, the carrying value of collateral items inventory was reduced by $2,368, $511, and $240, respectively, as excess collateral items for older brands were marked down to the lower of cost or market. These adjustments are included in advertising and promotional expense in the accompanying Consolidated Statements of Operations.

G.

Inventories and cost of goods sold

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 $3,246 and $3,295 at March 31, 2010, and 2009, 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.

Cost of goods sold includes the cost of inventories discussed above, as well as gift-with-purchase products.

H.

Equipment and leasehold improvements

Equipment and leasehold improvements are carried at cost. Equipment is depreciated using the straight-line method over the estimated useful life of the asset. Leasehold improvements are amortized over the lesser of the estimated useful life or the lease period. Repairs and maintenance charges are expensed as incurred, while betterments and major renewals are capitalized. The cost of assets and related accumulated depreciation are removed from the accounts when such assets are disposed of, and any related gains or losses are reflected in current earnings.

I.

Property held for sale

The Company considers property to be held for sale when management and the Board of Directors approves and commits to a formal plan to actively market the property for sale. Upon designation as held for sale, the carrying value of the property is adjusted to the lower of its current carrying value or its estimated fair value, less costs to sell. The Company ceases to record depreciation expense at that time.

J.

Trademarks and licenses

Trademarks and licenses are recorded at cost and those with a finite life are amortized over the estimated periods of benefit. Amortization expense was $840, $980, and $1,418 (including an impairment charge of $385), for the years ended March 31, 2010, 2009, and 2008, respectively.

Indefinite-lived intangible assets are reviewed annually for impairment, 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

F-9

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

1.

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 effected by changes in industry or market conditions.

K.

Long-lived assets

Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. On an annual basis, long-lived assets are reviewed for impairment, or sooner, if events or circumstances have occurred that indicate a potential impairment. Impairment losses are recognized if expected undiscounted future cash flows of the related assets are less than their carrying values. Management recorded an impairment charge of $385 during the year ended March 31, 2008, in connection with the XOXO license and does not believe that there are any unrecorded impairment losses as of March 31, 2010. See Note 6 to the accompanying Consolidated Financial Statements for further discussion.

L.

Advertising and promotion costs

Advertising and promotional expenditures are expensed to operations as incurred. These expenditures include print and media advertising, as well as in-store cooperative advertising and promotions.

Cooperative advertising, which is under the direct control of our customer and includes a percentage rebate or deduction based on net sales to the customer, is accrued and recorded as a reduction of net sales at the time of sale. Cooperative advertising with our customers, which is under the direct control of, and at the option of the Company, including catalogue and other forms of print advertising, are included in advertising and promotional expense. The costs associated with the specific advertisements are recorded as incurred, and when applicable, are applied against trade accounts receivable. Such cooperative advertising costs under our direct control which amounted to approximately $9,245, $10,744, and $10,621, have been included in advertising and promotional expenses for the years ended March 31, 2010, 2009, and 2008, respectively.

M.

Selling and distribution expenses

Selling and distribution expenses include labor costs (wages and other benefits) for employees directly involved in the selling and marketing of the Company’s products, sales commissions to independent sales representatives, and the other overhead costs relating to these areas.

Additionally, this caption includes approximately $4,447, $4,881, and $4,686 for the years ended March 31, 2010, 2009, and 2008, respectively, relating to the cost of warehouse operations not allocated to inventories and other related distribution expenses (excluding inbound shipping expenses which are recorded as cost of goods sold). A portion of warehouse operation expenses is allocated to inventory in accordance with US GAAP.

N.

General and administrative expenses

General and administrative expenses include labor costs (wages and other benefits) for employees not directly involved in the selling and distribution of the Company’s products, professional service fees, corporate activities and other overhead costs relating to these areas. Additionally, this caption includes $587, $348, and $244 for the years ended March 31, 2010, 2009, and 2008, respectively, of share-based compensation expense.

F-10

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

1.

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

O.

Shipping and handling fees and costs

Amounts billed to customers for shipping and handling, which amount is not significant, are included in net sales. The Company classifies the cost related to outbound shipping and handling in cost of goods sold.

P.

Product development costs

Product development costs, which amounted to $1,819, $754, and $508 for the years ended March 31, 2010, 2009, and 2008, respectively, are expensed as incurred.

Q.

Income taxes

The Company follows the liability method in accounting for income taxes. The liability method provides that deferred tax assets and liabilities are recorded, using currently enacted tax rates, based upon the difference between the tax bases of assets and liabilities and their carrying amounts for financial statement purposes. The Company classifies interest and penalties associated with income tax obligations in general and administrative expenses, which was not significant for the years ended March 31, 2010, 2009, and 2008.

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable or recoverable for the period and the change during the period in deferred tax assets and liabilities less amounts recorded directly to stockholders’ equity.

The accounting for uncertainty in income taxes recognized in the financial statements prescribes a recognition threshold of more-likely-than-not and a measurement attribute on all tax positions taken or expected to be taken in a tax return in order to be recognized in the financial statements. In making this assessment, a company must determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based solely on the technical merits of the position and must assume that the tax position will be examined by appropriate taxing authority that would have full knowledge of all relevant information. Once the recognition threshold is met, the tax position is then measured to determine the actual amount of benefit to recognize in the financial statements. In addition, the recognition threshold of more-likely-than-not must continue to be met in e ach reporting period to support continued recognition of the tax benefit. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the financial reporting period in which that threshold is no longer met. The Company did not recognize a liability for unrecognized tax benefits or adjust any recorded liabilities for uncertain tax positions. As of the years ended March 31, 2010, and 2009, there was no material liability for income tax associated with unrecognized tax benefits. The Company does not anticipate any material adjustments relating to unrecognized tax benefits within the next twelve months, however; the outcome of tax matters is uncertain and unforeseen results can occur.

The Company is under an Internal Revenue Service (“IRS”) audit of its fiscal years 2007, 2008 and 2009 Federal income tax returns, as a result of the carryback of its net operating losses incurred in fiscal year ended March 31, 2009.

F-11

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

1.

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

R.

Foreign currency translation and transactions

The Company’s functional currency for its French foreign subsidiary is the local currency (Euro). Other income and expense includes foreign currency gains and losses on transactions denominated in foreign currencies, which are recognized as incurred.

S.

Fair value of financial instruments

The carrying value of the Company’s financial instruments, consisting principally of cash and cash equivalents, receivables, accounts payable and borrowings approximate fair value due to either the short-term maturity of the instruments or borrowings with similar interest rates and maturities.

T.

Basic and diluted earnings (loss) per share

Basic earnings (loss) per common share calculations are determined by dividing earnings (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per common share calculations are determined by dividing earnings (loss) attributable to common stockholders by the weighted average number of shares of common stock and, when applicable, dilutive potential common stock equivalents outstanding during the year.  Antidilutive shares are not included in diluted earnings per share computations for the years ended March 31, 2010, and 2009, as we incurred a loss from continuing operations for those periods.

U.

Share-based compensation

The Company recognizes the cost of share-based compensation expense in the accompanying Consolidated Financial Statements for stock options and warrants granted, based on the fair value of the awards at the date of grant over the vesting period. The Company uses the Black-Scholes valuation model to determine the compensation expense. When estimating forfeitures, the Company considers an analysis of actual option forfeitures, as well as management judgment. The forfeiture rate used when calculating the value of stock options granted in 2010 and 2009 was approximately 5%.

V.

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:

	For the Years Ended March 31,
	2010		2009		2008
Cash received for:
Income taxes	$	3,628	$	2,002	$	6,000
Cash paid for:
Interest	$	313	$	81	$	1,107
Income taxes	$	421	$	43	$	243

Supplemental disclosures of non-cash investing and financing activities are as follows:

Year ended March 31, 2010:

·

The Company granted warrants to acquire the fragrance licensing rights of entertainers Rihanna and Kanye West. The fair value of the warrants was $3,554 which is included in additional paid-in capital and trademarks and licenses, net in the accompanying Consolidated Balance Sheets (see Notes 6 and 10 to the Consolidated Financial Statements for further discussion).

F-12

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

1.

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

There were no non-cash investing and financing activities during fiscal years ended March 31, 2009 and 2008.

W.

Segment Information

The Company determined its operating segments on the same basis that it uses to evaluate performance internally.

Prior to the quarter ended December 31, 2005, the Company operated in one operating segment as a manufacturer and distributor of one product line consisting of prestige fragrances and beauty related products. During December 2005, the Company commenced sales of watches, and in March 2006, sales of handbags, both of which are under license agreements with Paris Hilton Entertainment, Inc. Gross revenues from the sale of watches and handbags during the year ended March 31, 2010, totaled $981 and $4 ($1,705 and $59 in 2009), respectively. Included in inventories at March 31, 2010, is approximately $346 and $62 relating to watches and handbags ($637 and $100 in 2009), respectively. The Company anticipates preparing full segment disclosure for these activities if these operations become more significant. See Note 13 to the Consolidated Financial Statements for discussion of international sales

2.

RELATED PARTY TRANSACTIONS

Related party transactions include the following balances:

		March 31,
		2010				2009
Accounts receivable from related parties:
Perfumania		$		10,496		$		12,423
Quality King				—				—
Other related parties				377				—
		$		10,873		$		12,423
	For the Years Ended March 31,
	2010				2009				2008
Sales to related parties:											< /P>
Perfumania	$		37,562		$		41,470		$	51,148
Quality King			9,096				—			—
Other related parties			2,957				—			8,005
	$		49,615		$		41,470		$	59,153

The Company had net sales of $46,658, $41,470 and $51,148 during the years ended March 31, 2010, 2009, and 2008, respectively, to Perfumania, Inc., a wholly-owned subsidiary of Perfumania Holdings, Inc. (“Perfumania”) and to Quality King Distributors, Inc. (“Quality King”). 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.

F-13

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

2.

RELATED PARTY TRANSACTIONS (Continued)

Perfumania offers the Company the opportunity to sell its products in approximately 370 retail outlets and its terms with Perfumania take into consideration the relationship existing between the companies for almost 20 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. Perfumania Holdings, Inc.’s majority shareholders acquired an approximate 12.2% ownership interest in the Company during fiscal year 2007 (10.1% at March 31, 2010), and accordingly, transactions with Perfumania continue to be presented as related party transactions (see Note 15 to the Consolidated Financial Statements for further discussion). The majority shareholders of Perfumania Holdings, Inc. are also the owners of Quality King, a privately-held, wholesale distributor of pharmaceuticals and beauty care products. Transactions with Quality King are presented as related party transactions.

While the Company’s invoice terms to Perfumania are stated as net ninety days, for over eleven 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 $10,496 and $12,423 at March 31, 2010, and 2009, respectively. Between April 1, 2010 and June 25, 2010, the Company received $6,663 from Perfumania in payment of its outstanding balance. Amounts due from Perfumania are non-interest bearing and were paid in accordance with the terms established by the Board. The Company’s invoice terms to Quality King are stated as sixty days. No amounts were owed to the Company by Quality King at March 31, 2010. Given the relationship between Perfumania and Quality King, management performs similar reviews and analyses as it does for Perfumania, monitoring the activity of Quality King for compliance with their terms and limits. (See Note 13 to the Consolidated Financial Statements for further discussion of this concentration of credit risk.)

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.

In addition to its sales to Perfumania and Quality King, the Company had net sales of $2,957 for year ended March 31, 2010, to Jacavi Beauty Supply, LLC (“Jacavi”), a fragrance distributor. Jacavi’s managing member is Rene Garcia. Rene Garcia owns approximately 9.1% of the outstanding stock of Perfumania Holdings, Inc. as of March 31, 2010, and is one of the principals of Artistic Brands Development, LLC, see Note 6 for further discussion. Sales to Jacavi are also included as related party sales in the accompanying Consolidated Statement of Operations for the year ended March 31, 2010. As of March 31, 2010, net trade account receivables from Jacavi totaled $377, which were subsequently received on April 19, 2010.

On June 14, 2010, certain persons related to Mr. Garcia (the “Garcia Group”) acquired 2,718,728 shares of the Company’s common stock. The Garcia Groups means that certain group comprised of JM-CO Capital Fund, LLC, Irrevocable Trust for Victor Garcia, Jacqueline Marie Garcia, Jacavi Investments, LLC, Carolina Marie Garcia 2006 Family Trust, Jacqueline Marie Garcia 2006 Family Trust, Carolina Marie Garcia and Aqua Capital Funds, LLC, which filed a Schedule 13G on June 23, 2010. The Garcia Group reports having beneficial ownership of a total of 2,995,527 shares, or approximately 14.7% of the Company’s outstanding shares as of June 14, 2010, excluding warrants owned by the Garcia Group.

During the year ended March 31, 2008, the Company had net sales of $8,005 to fragrance distributors owned/operated by individuals related to the Company’s former Chairman/CEO, Ilia Lekach. Prior to July 1, 2007, sales to parties related to Mr. Lekach were treated as related party sales. During the year ended March 31, 2008, Mr. Lekach’s beneficial ownership interest in the Company declined to less than 5% (0% at March 31, 2010).Accordingly, effective July 1, 2007, transactions with such parties are no longer considered to be related part transactions.

F-14

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

3.

INVENTORIES

The components of inventories are as follows:

	March 31,
	2010		2009
Finished products:
Fragrances	$	22,857	$	41,464
Watches		342		633
Handbags		62		100
Components and packaging material:
Fragrances		16,240		20,519
Watches		4		4
Raw material		2,341		4,017
	$	41,846	$	66,737

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 our applicable overhead in an amount of $3,246 and $3,295 at March 31, 2010, and 2009, respectively.

The lead time for certain of the Company’s 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. These lead times are most affected for glass and plastic components orders, as many of our unique designs require the production of molds in addition to the normal production process. This may take 180 to 240 days, or longer, to receive in stock. In addition, when the Company launches a new brand or Stock Keeping Unit (“SKU”), it frequently produces a six to nine-month supply to ensure adequate inventories if the new products exceed forecasted expectations. Generally gross margins on its products outweigh the potential loss due to out-of-stock situations, and the additional carrying costs to maintain higher inventory levels. Also, the composition of its inventory at any given point can vary considerably depending on whether there is a launch of a new product, or a planned sale of a significant amount of product to one or more of our major distributors. 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 classifies its inventory into three major categories: finished goods, raw materials, and components and packaging materials. Finished goods include items that are ready for sale to our customers, or essentially complete and ready for use in value sets or other special offers. Raw materials consists of fragrance oils or bulk. Components and packaging materials (such as bottles, caps, boxes, etc.) are the individual elements used to manufacture our finished goods. The levels of inventory maintained by the Company vary depending on the age of a brand, its commercial success and market distribution. The Company normally carries higher levels of new products and older products for which demand remains high. Older, slower moving products are periodically reviewed, and inventory levels adjusted, based upon expected future sales. If inventory levels exceed projected demand, management determines whether a product requires a write-down in order to sell the inventory at discounted prices. Management also reviews whether there are any excess components which should be written down or scrapped due to decreased product demand.

F-15

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

3.

INVENTORIES (Continued)

Inventories and write-downs, by major categories, as of March 31, 2010, and 2009, are as follows:

	March 31, 2010
	Finished Goods		Components and Packaging Material		Raw Material		Total
Inventories	$	28,195	$	22,268	$	2,585	$	53,048
Less write-downs		4,934		6,024		244		11,202
Net inventories	$	23,261	$	16,244	$	2,341	$	41,846
						&n bsp;
	March 31, 2009
	Finished Goods		Components and Packaging Material		Raw Material		Total
Inventories	$	44,099	$	21,464	$	4,182	$	69,745
Less write-downs		1,902		941		165		3,008
Net inventories	$	42,197	$	20,523	$	4,017	$	66,737

The Company performs a review of its inventory on a quarterly basis, unless events or circumstances indicate a need for review more frequently. The write-down of inventory results from the application of an analytical approach that incorporates a comparison of sales expectations to the amount of inventory on hand. Other qualitative reasons for writing down selected inventory may include, but are not limited to, product expiration, licensor restrictions, damages, and general economic conditions.

As of March 31, 2010, and 2009, of our total inventories of $53,048 and $69,745, respectively, management determined that approximately $9,453 and $3,938, respectively, of the finished goods inventory was either selling slower than anticipated or showed signs of deterioration. This inventory was written down by $4,934 and $1,902 in fiscal year 2010 and 2009, respectively. Components and packaging materials are reviewed in light of estimated future sales for finished goods or damages sustained during the production of finished goods. As of March 31, 2010, and 2009, approximately $7,692 and $12,857, respectively, were identified as problematic and the inventory was written down by $6,024 and $941, respectively. Raw materials are usually scrapped due to spoilage or stability issues. As of March 31, 2010, and 2009, approximately $244 and $324 were identified as problematic and the inventory was written down by $244 and $165, r espectively.

As of March 31, 2010, the Company’s inventories of GUESS? products totaled $1,014 ($27,700 at March 31, 2009). As the Company’s license with GUESS? expired on December 31, 2009, and was not renewed, the Company recorded charges of $7,567, which is included in the $11,202 write-down noted above, as of March 31, 2010, to cost of sales to reduce the recorded value of such inventories to the amounts, which the Company estimates could be realized upon their sale or liquidation.

During the year ended March 31, 2010, the Company transferred $4,626 of GUESS? brand inventory to its new fragrance licensee at its original cost. This transfer of inventory, along with the cost of sales and inventory write-downs, have been classified as “Sales-expired license” and “Cost of sales-expired license” in the accompanying Consolidated Statements of Operations for the year ended March 31, 2010.

At December 31, 2009, the end of the license period, GUESS? and/or its new fragrance licensee had the option of purchasing the remaining inventory, or the inventory must be destroyed. The new fragrance licensee is in the process of purchasing the remaining inventory balance at March 31, 2010. The Company anticipates that the remaining inventory will be sold over the next twelve months.

F-16

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

4.

PREPAID PROMOTIONAL, PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid promotional, prepaid expenses and other current assets are as follows:

	March 31,
	2010		2009
Prepaid promotional expenses, net	$	7,867	$	10,013
Prepaid advertising	$	935	$	1,641
Prepaid royalties		5,637		5,357
Prepaid development		1,843		2,195
Other		1,022		1,905
Prepaid expenses and other current assets	$	9,437	$	11,098

During the year ended March 31, 2009, the Company entered into agreements with two media companies to exchange inventory for future advertising credits on print, broadcasting, internet, and other media formats. The advertising credits are redeemable over three and four year periods, and were recorded based on the net cost of the inventory exchanged. During the year ended March 31, 2010, the Company utilized $72 of the advertising credits.

The prepaid advertising credits are as follows:

	March 31,
	2010		2009
Prepaid advertising credits - current	$	531	$	603
Prepaid advertising credits – noncurrent (included in Other Assets in the accompanying Consolidated Balance Sheets)		1,690		1,690
	$	2,221	$	2,293

F-17

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

5.

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements are comprised of the following:

	March 31,						Estimated useful Lives (in Years)
	2010			2009
Molds and equipment	$	6,358		$	5,912		3-7
Furniture and fixtures		1,693			1,414		3-5
Leasehold improvements		1,601			1,352		2-7
Construction in process		—			20		—
		9,652			8,698
Less - accumulated depreciation and amortization		(6,973	)		(5,963	)
	$	2,679		$	2,735

Depreciation and amortization expense on equipment and leasehold improvements for the years ended March 31, 2010, 2009, and 2008, was $2,033, $1,526, and $1,410, respectively. Amounts subject to capital leases at March 31, 2010, and 2009, included in equipment and leasehold improvements above, totaled $782 and $1,369, respectively, net of accumulated depreciation and amortization of $2,103 and $1,516, respectively.

As a result of various factors, including the Company’s anticipated growth, the increase in trucking costs resulting primarily from the increase in fuel prices and South Florida’s susceptibility to major storms, management and the Company’s Board of Directors determined that it would be more cost effective and prudent to relocate a major part of the Company’s warehousing and distribution activities to the New Jersey area, close to where the Company’s products are filled and packaged. Accordingly, on April 17, 2006, the Company entered into a five-year lease for 198,500 square feet of warehouse space in New Jersey, to also serve as a backup information technology site if the current Fort Lauderdale, Florida location encounters unplanned disruptions. The Company commenced activities in the New Jersey facility during the latter part of August 2006.

The Company currently maintains a lease for its former corporate headquarters and distribution center in Ft. Lauderdale, Florida and during May 2006, entered into a new five-year lease on the property, commencing October 1, 2006, at an initial annual cost of approximately $900, increasing approximately 3% per annum. On January 29, 2009, the Company entered into a sublease agreement to sublease 40,000 square feet of the 99,000 square feet of space in the facility at the approximate per square foot cost under the Company’s lease. The sublease commenced on April 1, 2009, and terminates on September 30, 2011, the expiration date of the lease (see Note 8A to the Consolidated Financial Statements for further discussion).

F-18

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

6.

TRADEMARKS AND LICENSES

Trademarks and licenses are attributable to the following brands:

	March 31,						Estimated Life (in years)
	2010			2009
XOXO	$	4,285		$	4,285		5
Fred Hayman Beverly Hills (“FHBH”)		2,820			2,820		10
Paris Hilton		892			839		5
Rihanna		1,777			—		5
Kanye West		1,777			—		5
Other		217			217		5-25
		11,768			8,161
Less – accumulated amortization		(7,114	)		(6,276	)
	$	4,654		$	1,885

Amortization expense for the years ended March 31, 2010, 2009, and 2008 was $840, $954, and $1418 (which includes an impairment charges of $385 in fiscal year 2008), respectively.

Estimated future amortization of licenses and trademarks for the next five years is as follows:

For the Years Ending March 31,	Amount
2011	$	512
2012		995
2013		995
2014		797
2015		732
	$	4,031

During the years ended March 31, 2010, and 2009, given the current economic environment, the Company performed a review of its trademark and license intangible assets on a quarterly basis. As a result, the Company determined that there were no impairment charges during the years ended March 31, 2010, and 2009.

An analysis of the XOXO intangible assets as of March 31, 2010, is as follows:

Initial fair value	$	5,800
Impairment charge recorded during the year ended March 31, 2007		(1,130	)
Impairment charge recorded during the year ended March 31, 2008		(385	)
		4,285
Less - accumulated amortization		(4,145	)
Net carrying value	$	140

See Note 8B and 8C to the Consolidated Financial Statements, respectively, for further discussion of the XOXO and FHBH brands.

F-19

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

6.

TRADEMARKS AND LICENSES (Continued)

On April 3, 2009, the Company entered into an agreement (the “Agreement”) with Artistic Brands Development, LLC (“Artistic Brands”), formerly known as Iconic Fragrances, LLC, a licensing company in which entertainment mogul and icon Shawn “JAY-Z” Carter and Rene Garcia are principals (Rene Garcia owns approximately 9.1% of the outstanding stock of Perfumania Holdings, Inc. as of March 31, 2010). The Agreement allows for the sublicensing of certain worldwide fragrance licenses to the Company. Pursuant to the Agreement, on April 7, 2009, the Company entered into sublicense agreements with Artistic Brands for the exclusive rights to worldwide fragrance licenses for multiple Grammy® award winning and multi-platinum selling international entertainers Rihanna and Kanye West. At that time, Artistic Brands was also in the final stage of negotiations for a worldwide fragrance license with Shawn Carter, and in discussions with a well-established female artist, referred to herein as the fourth artist both of which, if executed, would be sublicensed to the Company. The Company will enter into a sublicense agreement with the fourth artist to the extent the terms and conditions of the license entered into with such celebrity are generally consistent with and no less favorable to the Company than the terms and conditions of drafts and term sheets of licenses previously presented to the Company with respect to the fourth artist.

Pursuant to the Agreement, the Company will pay Artistic Brands and the licensors and their designated affiliates, on an annual basis so long as each sublicense agreement remains in effect, a percentage of the cumulative net profits, as defined in the Agreement, earned by the Company on sales of products developed and sold under each license. Also, the Company will assume Artistic Brands’ obligation to make royalty payments to the licensors, including any initial guaranteed minimum royalty advance payable to any licensor.

Furthermore, in connection with the sublicense agreements, the Company issued, and may issue in the future, warrants to purchase shares of Parlux common stock, $0.01 par value, at a purchase price of $5.00 per share (“Warrants”) to Artistic Brands, the licensors, the celebrities, and their respective designated affiliates. The Warrants vest in four equal annual installments beginning on the first anniversary of the date of issuance and will expire on the eighth anniversary of the date of issuance, or the fifth anniversary of the date of issuance, if the applicable licenses are not renewed by the Company as the sub-licensee. The Company issued Warrants to purchase a total of 4,000,000 shares, consisting of Warrants for 2,000,000 shares in connection with the sublicense agreement for Rihanna, and Warrants for 2,000,000 shares in connection with the sublicense agreement for Kanye West. On December 18, 2009, the Company issued add itional Warrants to purchase 1,000,000 shares each in connection with the sublicense agreements for Rihanna and Kanye West, for a total of 3,000,000 shares per sublicense. In addition, the Company will issue Warrants for 3,000,000 shares each in connection with the sublicense agreements for Shawn Carter and the fourth artist, if and when such sublicenses are entered into. If all of the sublicenses are entered into, Warrants to purchase a total of 12,000,000 shares will be outstanding in connection with the four sublicenses (3,000,000 shares per sublicense). The licenses are recorded at the fair value of the warrants and will be amortized over a five-year period, commencing as of the date of the first shipment of each fragrance under the licenses (see Note 10 to the Consolidated Financial Statements for further discussion).

In addition, on April 3, 2009, the Company entered into a letter agreement with Artistic Brands and Rene Garcia, the manager of Artistic Brands, individually, allowing for the acceleration of vesting and immediate exercise of the Warrants for 4,000,000 shares allocable to Rihanna and Kanye West in the event that the Company is acquired by another person or entity (other than Artistic Brands or its affiliates, Rene Garcia or Shawn “JAY-Z” Carter) or concludes a similar change of control transaction prior to April 3, 2012, or if definitive agreements for such a transaction is entered into by April 3, 2012, and consummated within ninety (90) days. In certain circumstances, the letter agreement provides for Artistic Brands to receive cash and/or securities valued up to $10 per share in the event that the Company is acquired by another person or entity (other than Artistic Brands or its affiliates, Rene Garcia or Shawn &# 147;JAY-Z” Carter) or concludes a similar change of control transaction prior to April 3, 2012, with respect to the Warrants for 4,000,000 shares allocable to Rihanna and Kanye West to the extent such shares have not been previously sold by the holder into the market or otherwise disposed of by the holder in a bona fide third party transaction.

F-20

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

6.

TRADEMARKS AND LICENSES (Continued)

On December 18, 2009, stockholder’s approved the issuance of the Warrants (noted above) to Artistic Brands and its designated affiliates to purchase a total of 2,000,000 shares of the Company’s common stock, $0.01 par value, at a purchase price of $5.00 per share, pursuant to an agreement, dated April 3, 2009. The Warrants consist of Warrants for 1,000,000 shares each in connection with the sublicense agreements with Rihanna and Kanye West, dated April 7, 2009) see Note 10 to the Consolidated Financial Statements for further discussion).

The Warrants vest in four equal annual installments beginning on the first anniversary of the date of issuance and expire on the eighth anniversary of the date of issuance, or the fifth anniversary of the date of issuance, if the applicable licenses are not renewed by the Company as the sub-licensee.

7.

BORROWINGS

The composition of borrowings is as follows:

	March 31,
	2010		2009
Capital leases payable to Provident Equipment Leasing, collateralized by certain equipment and leasehold improvements, payable in equal quarterly installments of $257, including imputed interest at 7.33%, through July 2009.	$	—	$	503
Capital lease payable to IBM, collateralized by certain computer equipment, payable in equal monthly installments of $4, including imputed interest at 3.94%, through December 2009.		—		36
Total borrowings	$	—	$	539

Bank Financing

On July 20, 2001, the Company entered into a Loan and Security Agreement (the “GMAC Loan Agreement”) with GMAC Commercial Credit LLC (“GMACCC”). On January 4, 2005, the GMAC Loan Agreement was extended through July 20, 2006. Under the GMAC Loan Agreement, the Company was able to borrow, depending on the availability of a borrowing base, on a revolving basis, up to $20,000 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 GMAC Loan Agreement was amended, increasing the loan amount to $30,000 with an additional $5,000 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. On September 13, 2006, the GMAC Loan Agreement was further amended, temporarily increasing the loan amount to $40,000 until December 13, 2006, at which time the maximum loan amount reverted back to $35,000. At March 31, 2008, based on the borrowing base at that date, available borrowing under the credit line amounted to $35,000. There were no amounts outstanding under the GMAC Loan Agreement nor were there amounts on deposit with our bank pending transfer. On July 20, 2008, the Company’s GMAC Loan Agreement expired.

On July 22, 2008, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Regions Bank (the “Regions”). The Loan Agreement provides up to $20,000, depending upon the availability of a borrowing base, at an interest rate of LIBOR plus 2.00% or Regions’ prime rate, at the Company’s option.

F-21

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

7.

BORROWINGS (Continued)

During the period of July 22, 2008, through February 15, 2010, substantially all of the Company’s assets collateralized the Loan Agreement. The Loan Agreement contained customary events of default and covenants which prohibited, 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 Regions. The Loan Agreement also contained certain financial covenants as noted below.

On March 9, 2009, the Company entered into the First Amendment and Ratification of Loan and Security Agreement and Other Loan Documents (the “Amendment”) to the Loan Agreement with Regions. The Amendment changed certain terms of the Loan Agreement. Under the Amendment, the interest rate for any borrowings is LIBOR rate plus the applicable margin. The applicable margin for any borrowings is calculated on a sliding scale basis and is tied to our fixed charge coverage ratio, with rates calculated between 3% and 4%, with an initial starting rate at 4.25%.

Prior to December 31, 2009, the borrowing base amount was the lesser of the sum of an amount equal to 75% of the net amount (after deduction of such reserves and allowances as Regions deemed reasonably proper and necessary) of all eligible accounts plus an amount equal to the lesser of $10,000 or 25% of the lower of cost or market value (after deduction of such reserves and allowances as Regions deemed reasonably proper and necessary) of all eligible inventory or the product of two times the sum of EBITDA measured from January 1, 2009, to the date of measurement, minus non-cash expenses related to the issuance of options and warrants, minus other non-cash expenses. After December 31, 2009, the borrowing base amount was the sum of an amount equal to 75% of the net amount (after deduction of such reserves and allowances as Regions deemed reasonably proper and necessary) of all eligible accounts plus an amount equal to the lesser of $10,000 or 25% of the lower of cost or market value (after deduction of such reserves and allowances as Regions deemed reasonably proper and necessary) of all eligible inventory. In addition, receivables due from Perfumania, Inc., a related party, were not considered an eligible account. A tangible net worth covenant was added, which required the Company to maintain a tangible net worth of not less than $85,000 at all times. The Company was required to obtain written consent from Regions prior to repurchasing shares of our common stock, including repurchases which have been previously authorized under our existing stock buy-back program. The Company was no longer required to pay a non-utilization fee.

On August 31, 2009, the Company entered into a Forbearance Agreement (“Forbearance Agreement”) regarding the Loan Agreement with Regions. The Forbearance Agreement was entered into to address the Company’s outstanding borrowings as of June 30, 2009, in excess of the limitation in the Loan Agreement, as amended. As of June 30, 2009, the Company’s outstanding principle balance under the Loan Agreement was $6,681. Pursuant to the Loan Agreement, the outstanding principal balance at no time should exceed the revolving loan availability, as defined in the Loan Agreement. The revolving loan availability as of June 30, 2009, was $208, resulting in an excess of the revolving loan availability in the amount of $6,473. Under the Forbearance Agreement, Regions agreed to forbear from any legal action to accelerate the Company’s obligation to the bank until October 28, 2009, subject to no further events o f default under the terms of the Loan Agreement, as amended.

On October 29, 2009, the Company entered into a Second Amendment to Loan Agreement and Amendment to Forbearance Agreement (the “Second Amendment”) with Regions extending the forbearance period through February 15, 2010, which called for the Company to repay the remaining loan balance over the course of the extension period, as noted in the table below. The Second Amendment called for the Company to continue to comply with certain covenants with Regions under the Loan Agreement, as amended by the Second Amendment.

F-22

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

7.

BORROWINGS (Continued)

The Company was required and repaid the remaining outstanding principal balance over the course of the extension period as follows:

Payment Date	Payment Amount
November 30, 2009	$	1,000
December 31, 2009	$	1,600
February 1, 2010	$	1,000
February 16, 2010	Fully paid

On February 16, 2010, the Company repaid the remaining outstanding principal balance plus interest and fees in the amount of $1,089 and the Loan Agreement, as amended by the Second Amendment, was terminated.

On June 25, 2010, the Company entered into the New Loan Agreement with GE Capital. The New Loan Agreement provides a credit line of up to $20.0 million, depending upon the availability of a borrowing base and certain reserves established by GE Capital from time to time, at an interest rate of the highest of (a) the prime rate, (b) the federal funds rate plus 3.0%, or (c) the Eurodollar Rate, in each case plus 3.50%; or the Eurodollar Rate plus 4.50%, at the Company’s option except in certain circumstances including defaults in the payment of any amounts under the loan facility or the unavailability of the LIBOR rate. The term of the loan facility under the New Loan Agreement is two years.

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 GE Capital. The New Loan Agreement requires the Company to maintain minimum net liquidity balance of $12.5 million through October 31, 2010, and $15.0 million thereafter through the end of the term. Under the New Loan Agreement, net liquidity is the sum of the Company’s unrestricted cash assets plus the excess availability under the revolving loan. At any point if the Company falls below the net liquidity requirements, the New Loan Agreement contains certain additional financial covenants relating to minimum consolidated EBITDA, minimum consolidated interest coverage ratios and maximum capital expenditure limits. In addition, the Company’s subsidiary, Parl ux Ltd., and its affiliates must have minimum net liquidity balance of $12.5 million to borrow under the New Loan Agreement. As of June 24, 2010, the Company and its subsidiary, Parlux Ltd., met the minimum liquidity requirements under the New Loan Agreement.

The New Loan Agreement is secured by all of the Company’s assets and the assets of the Company’s subsidiary, Parlux Ltd., pursuant to a Guaranty and Security Agreement. In addition, GE Capital has a security interest in and to certain of the Company’s patents and trademarks, as well as those of Parlux Ltd., pursuant to a Patent Security Agreement and Trademark Security Agreement, respectively. The Company has provided to GE Capital a full guaranty of payment of the obligations under the New Loan Agreement.

The Company believes that funds from operations will be sufficient to meet its current operating and seasonal needs through fiscal year 2011. In addition, the new credit facility will provide the Company an opportunity to improve liquidity and profitability. However, if the Company were to expand operations through acquisitions, new licensing arrangements or both, the Company may need to obtain additional financing. There can be no assurances that the Company could obtain additional financing or what the terms of such financing, if available, would be. In addition, the current business environment may increase the difficulty of obtaining additional financing, if necessary.

F-23

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

7.

BORROWINGS (Continued)

Capital Lease Financing

During May 2006, the Company entered into an agreement with Provident Equipment Leasing (“Provident”) covering approximately $2,761 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. In July 2009, the Company exercised its option to purchase the equipment and leasehold improvements at the end of the lease term for one dollar.

On December 15, 2006, the Company entered into a lease agreement with International Business Machines (“IBM”) covering approximately $124 of computer equipment which has been classified as a capital lease. In December 2009, the Company exercised its option to purchase the computer equipment at the end of the lease term for one dollar.

8.

COMMITMENTS AND CONTINGENCIES

A.

Leases:

The Company leases office and warehouse space, as well as certain equipment under non-cancellable operating leases expiring on various dates through 2016. Total rent expense charged to operations for the years ended March 31, 2010, 2009, and 2008, was approximately $2,535, $2,786, and $2,226, respectively.

At March 31, 2010, the future minimum annual rental commitments under non-cancellable operating leases are as follows:

For the Year Ending March 31,	Amount
2011	$	2,545
2012		1,354
2013		614
2014		631
2015		650
Thereafter		555
Total	$	6,349

The future minimum annual rental commitments are net of future minimum annual rental income of $369 in fiscal year 2011, and $186 in fiscal year 2012.

B.

License and Distribution Agreements:

During the year ended March 31, 2010, the Company held exclusive worldwide licenses to manufacture and sell fragrance and other related products for Ocean Pacific, XOXO, Paris Hilton, Andy Roddick, babyGund, Jessica Simpson, Nicole Miller, Josie Natori, Queen Latifah, Marc Ecko, Rihanna, Kanye West, and GUESS?. On December 31, 2009, the Company’s license with GUESS? expired and was not renewed.

During December 2006, the Company sold its Perry Ellis licensing rights and other related assets to Perry Ellis International, its Licensor (see Note 14 to the consolidated financial statements for further discussion). As of the year ended March 31, 2007, the Perry Ellis brand activity has been presented as discontinued operations.

F-24

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

8.

COMMITMENTS AND CONTINGENCIES (Continued)

Ocean Pacific

In August 1999, we entered into an exclusive worldwide licensing agreement with Ocean Pacific Apparel Corp. (“OP”), to manufacture and distribute men’s and women’s fragrances and other related products under the OP label. The initial term of the agreement extended through December 31, 2003, and was automatically renewed for two additional three-year periods, with the latest term ending December 31, 2009. We initially had six additional three-year renewal options, of which the first two contained automatic renewals at our option, and the last four required the achievement of certain minimum net sales. The license required the payment of minimum royalties, whether or not any product sales were made, which declined as a percentage of net sales as net sales volume increased, and the spending of certain minimum amounts for advertising based upon annual net sales of the products. This license expired on Dece mber 31, 2009, and was not renewed.

XOXO

On December 1, 2003, Victory International (USA), LLC (“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.

On January 7, 2005, the Company entered into a purchase and sale agreement, effective January 6, 2005, (the “Purchase Agreement”) with Victory, whereby it acquired the exclusive worldwide licensing rights, along with inventories, molds, designs and other assets, relating to the XOXO fragrance brand. Under the Purchase Agreement, Victory assigned its rights, and the Company assumed the obligations, under the Fragrance License. As consideration, Victory was paid approximately $7,460, of which $2,550 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.

During June 2006, the Company negotiated renewal terms which, among other items, reduced minimum royalty requirements and extended the Fragrance License for an additional three years through June 30, 2010. The Company does not anticipate any further renewals of this license.

Paris Hilton

Effective June 1, 2004, the Company entered into a definitive license agreement with Paris Hilton Entertainment, Inc. (“PHEI”), to develop, manufacture and distribute prestige fragrances and related products, on an exclusive basis, under the Paris Hilton name, which was scheduled to expire on June 30, 2009. During June 2009, we renewed, at the Company’s option, the license agreement for an additional five-year period through June 30, 2014. The first Paris Hilton women’s fragrance was launched during November 2004, and was followed by a launch of a men’s fragrance in April 2005.

On January 26, 2005, the Company entered into an exclusive worldwide license agreement with 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. The Company has not exercised its option to renew this license

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. The cosmetic license is due to expire in fiscal year 2011, and all remaining royalty obligations have been accrued and expensed in fiscal year 2010. The Company does not anticipate any further renewals of this license.

F-25

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

8.

COMMITMENTS AND CONTINGENCIES (Continued)

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. The Company remains contingently liable for the minimum guaranteed royalties due through the remainder of this agreement. The Company does not anticipate any further renewals of 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 rights with PHEI, for the production and distribution of Paris Hilton sunglasses. The Company remains contingently liable for the minimum guaranteed royalties due through the remainder of this agreement. The Company does not anticipate any further renewals of this license.

Andy Roddick

Effective December 8, 2004, the Company entered into an exclusive worldwide license agreement with Andy Roddick, to develop, manufacture and distribute prestige fragrances and related products under his name. The initial term of the agreement, as amended, expired on March 31, 2010, and was renewable for an additional three-year period, at the mutual agreement of both parties. The first fragrance under this agreement was produced during March 2008. The Company has notified the licensor that it has elected not to renew this license.

babyGUND

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 September 30, 2010, and is renewable for an additional two years if certain sales levels are met. The Company does not anticipate renewing this license.

Jessica Simpson

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 license during August 2008.

Nicole Miller

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 recently launched a new fragrance under this license in the April 2010.

F-26

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

8.

COMMITMENTS AND CONTINGENCIES (Continued)

Josie Natori

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, and is renewable for an additional three-year term if certain sales levels are met. The Company launched the first fragrance under this license in July 2009.

Queen Latifah

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 launched the first fragrance under this license in late June 2009.

Marc Ecko

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 trademarks. 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 launched the first fragrance under this license in late September 2009.

Rihanna

On April 7, 2009, the Company entered into a sublicense agreement with Artistic Brands for the exclusive worldwide rights to develop, manufacture and distribute prestige fragrances and related products under the Rihanna name. The initial term of the agreement expires on the fifth anniversary of the first date products are shipped 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 spring of 2011.

Kanye West

On April 7, 2009, the Company entered into a sublicense agreement with Artistic Brands for the exclusive worldwide rights to develop, manufacture and distribute prestige fragrances and related products under the Kanye West name. The initial term of the agreement expires on the fifth anniversary of the first date products are shipped, but in no event later than April 30, 2015, 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 fiscal year 2012.

Minimum Royalty Payments

Under all of these license agreements, the Company 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 in compliance with all material obligations under the above agreements.

GUESS?

In December 2006, the Company received a complaint from GUESS?, Inc. alleging that GUESS? fragrance products were being sold in unauthorized retail channels. Although the Company did not sell

F-27

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

8.

COMMITMENTS AND CONTINGENCIES (Continued)

such products directly to these channels, it represented 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, required GUESS?’s reapproval of all international distributors selling GUESS? fragrance products, liquidating damages in the amount of $500, payable in nine equal monthly installments of $56, as well as requiring the Company to strictly monitor distribution channels. This license expired on December 31, 2009, and was not renewed.

Continuing Obligations for Advertising and Royalty

The Company expects to incur continuing obligations for advertising and royalty expense under these license agreements. As of March 31, 2010, the minimum amounts of these obligations derived from the aggregate minimum sales goals, set forth in the agreements, over the remaining contract periods are as follows:

	For the Year Ending March 31,
	2011		2012		2013		2014		2015		Thereafter
Advertising	$	26,942	$	39,085	$	36,855	$	27,662	$	15,225	$	10,333
Royalties	$	8,090	$	9,010	$	8,995	$	7,793	$	5,012	$	3,550

C.

Trademarks:

Through various acquisitions since 1991, the Company acquired worldwide trademarks and distribution rights including those for LIMOUSINE. In addition during 1994, Fred Hayman Beverly Hills, Inc. (“FHBH”) granted the Company an exclusive 55-year royalty free license. Accordingly, there are no licensing agreements requiring the payment of royalties by the Company on these trademarks and the Company has the rights to license all of these trademarks, other than FHBH, for all classes of merchandise.

On March 28, 2003, the Company entered into an exclusive agreement to sublicense the FHBH rights to Victory for a royalty of 2% of net sales, with a guaranteed minimum annual royalty of $50 (the “Sublicense”). The initial term of the Sublicense expired on December 31, 2008, and is automatically renewable every five years at the sublicensee’s option. The Sublicense excluded the rights to “273 Indigo” for men and women, the latest fragrance introduction for the FHBH brand, as well as all new FHBH product development rights.

On October 17, 2003, the parties amended the Sublicense, granting new FHBH product development rights to the sublicensee. In addition, the guaranteed minimum annual royalty increased to $75 and royalty percentage on sales of new FHBH products increased to 3% of net sales.

D.

Employment and Consulting Agreements:

As of March 31, 2010, the Company had contracts with certain officers, employees and consultants which expire from March 2011 through March 2012. Minimum commitments under these contracts total approximately $1,485 ($1,010, and $475 for the fiscal years ended March 31, 2011, and 2012, respectively).

On June 5, 2009, the Company granted, to an executive officer, 100,000 options to acquire shares of common stock at $1.84 per share, the closing price of the stock on June 5, 2009. These options have a life of five years from the date of grant, and vest 33% each year over a three-year period. The fair value of the options was determined to be $111, which is being expensed as share-based compensation over a three-year period in accordance with the vesting period of the options. In addition, on April 1, 2010, the

F-28

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

8.

COMMITMENTS AND CONTINGENCIES (Continued)

Company granted, to two executive officers, options to acquire 50,000 and 20,000 shares, respectively, of common stock at $2.25 per share, the closing price of the stock on April 1, 2010. These options have a life of five years from the date of grant. The options vest 50% immediately and 50% on April 1, 2011, for one executive officer, and July 31, 2011, for the other executive officer, respectively. The fair value of the options was determined to be $60 and $24, respectively.

During the year ended March 31, 2008, warrants to purchase 240,000 shares of common stock at a price of $4.60 were granted to certain officers in connection with their June 2007 employment agreements. In addition, warrants to purchase 1,520,000 shares of common stock at a price of $0.93 (the “2002 Warrants”) (adjusted for the Stock Split) were granted to certain officers and consultants during 2002 in connection with their previous contracts. The 2002 Warrants were exercisable for a ten-year period from the date of grant, vested over the three-year term of the applicable contract starting on March 31, 2004, and doubled in the event of a change in control. As of March 31, 2006, all of the 2002 Warrants were fully vested. During the years ended March 31, 2008, and 2007, all of the 2002 Warrants were exercised (760,000 in each year). All of the previously described warrants were granted at or in excess of the market value of the underlying shares at the date of grant.

See Note 10 to the Consolidated Financial Statements for further discussion of all options and warrants.

E.

Purchase Commitments:

As of March 31, 2010, the Company is contingently liable in the amount of approximately $22,769 for purchase orders issued in the normal course of business for components, raw materials and promotional supplies. The purchase orders, for the most part, stipulate delivery dates ranging from thirty days to periods exceeding one year, based on forecasted production needs.

F.

Litigation:

The Company is a party to legal and administrative proceedings arising in the ordinary course of business. The outcome of these actions is not expected to have a material effect on the Company’s financial position or results of operations. See Note 12 to the Consolidated Financial Statements for further discussion.

9.

INCOME TAXES

The components of the (benefit) provision for income taxes for each of the years ended March 31 are as follows:

	Year Ended March 31,
	2010			2009			2008
Current taxes:
U.S. federal	$	(7,412	)	$	(2,407	)	$	237
U.S. state and local		76			34			80
		(7,336	)		(2,373	)		317
Deferred taxes:
U.S. federal		(996	)		308			—
U.S. state		(655	)		(222	)		2,781
		(1,651	)		86			2,781
Income tax (benefit) provision	$	(8,987	)	$	(2,287	)	$	3,098

F-29

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

9.

INCOME TAXES (Continued)

Income tax (benefit) provision has been allocated as follows:

	Year Ended March 31,
	2010			2009			2008
Continuing operations	$	(8,987	)	$	(2,287	)	$	3,082
Discontinued operations		—			—			16
	$	(8,987	)	$	(2,287	)	$	3,098

The following table reconciles the statutory federal income tax rate to the Company’s effective tax rate for the years ended March 31 as follows:

	2010			2009			2008
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
Increase (decrease) resulting from:
Other, including state taxes		2.8	%		(0.2	)%		3.1	%
		37.8	%		34.8	%		38.1	%

The tax provision for the year ended March 31, 2010, reflects the carryback of approximately $19,422 in U.S. federal tax operating losses generated during the current year to offset taxes paid during the year ended March 31, 2006, in the amounts of approximately $6,798, which is included in income taxes receivable in the accompanying Consolidated Balance Sheet for the year ended March 31, 2010.

The tax provision for the year ended March 31, 2009, reflects the carryback of approximately $7,409 in U.S. federal tax operating losses generated during fiscal year 2009 to offset taxes paid during the year ended March 31, 2007, in the amount of approximately $2,593, which is included in income taxes receivable in the accompanying Consolidated Balance Sheet for the year ended March 31, 2009.

Deferred income taxes as of March 31, 2010, and 2009, are provided for temporary differences between financial reporting carrying value and the tax basis of the Company’s assets and liabilities. The tax effects of temporary differences are as follows:

	March 31,
	2010			2009
Deferred Tax Assets:
Current:
Allowance for doubtful accounts, sales returns and allowances	$	1,390		$	1,101
Inventory write-downs		2,151			1,714
Shared-based compensation		151			240
Net operating loss carry forwards		1,227			645
Other, net		319			348
	$	5,238		$	4,048
Long-term, net:
Depreciation on intangibles	$	1,300		$	1,166
Share-based compensation		439			461
Other		63			91
Depreciation and amortization on equipment and leasehold improvements		(135	)		(270	)
	$	1,667		$	1,448

F-30

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

9.

INCOME TAXES (Continued)

As of March 31, 2010, the Company had net operating loss carryforwards for federal income tax purposes of approximately $1,113, which will begin to expire in March 2028.

The Company is under an IRS audit of its fiscal years 2007, 2008 and 2009 Federal income tax returns, as a result of the carryback of its net operating losses incurred in fiscal year ended March 31, 2009.

10.

STOCK OPTION AND OTHER PLANS

2007 Plan

The Parlux Fragrances, Inc. 2007 Stock Incentive Plan (the “2007 Plan”) provides for the grant of equity-based awards to employees, officers, directors, consultants and/or independent contractors of the Company. A maximum of 1,500,000 shares of common stock may be issued under the 2007 Plan, of which 588,000 options were granted as of March 31, 2010 (an additional 85,000 options were granted under the 2007 Plan on April 1, 2010, as noted below). The 2007 Plan was adopted by the Board of Directors on June 20, 2007, subsequently approved by the stockholders on October 11, 2007. 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, at that date, to acquire common stock during a five-year period at $4.60 per share, the closing price of the Company’s common 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 $729. 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, at that date, 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, which was expensed as shared-based compensation during the quarter ended December 31, 2008.

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	%

F-31

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

10.

STOCK OPTION AND OTHER PLANS (Continued)

On April 1, 2009, the Company granted 30,000 options (which vested on the grant date) under the 2007 Plan to consultants, to acquire shares of common stock during a five-year period at $0.82 per share, the closing price of the stock on April 1, 2009. The fair value of the options was determined to be $13, which was expensed as share-based compensation during the quarter ended June 30, 2009.

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	77	%
Risk-free interest rate	2	%
Dividend yield	0	%

On June 5, 2009, the Company granted, to an executive officer, 100,000 options under the 2007 Plan to acquire shares of common stock at $1.84 per share, the closing price of the stock on June 5, 2009. These options have a life of five years from the date of grant, and vest 33% each year over a three-year period. The fair value of the options was determined to be $111, which is 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)	4
Expected volatility	82	%
Risk-free interest rate	2	%
Dividend yield	0	%

On October 13, 2009, the Company granted 60,000 options (15,000 each, which vested on the grant date) under the 2007 Plan to its four non-employee directors, to acquire common stock during a five-year period at $2.18 per share, the closing price of the stock on October 13, 2009. The fair value of the options was determined to be $79, which was expensed as shared-based compensation during the quarter ended December 31, 2009.

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	82	%
Risk-free interest rate	2	%
Dividend yield	0	%

On March 1, 2010, the Company granted, to various employees, options under the 2007 Plan to acquire 4,000 shares of common stock at $1.75 per share, the closing price of the stock on March 1, 2010. On March 2, 2010, the Company granted, to various employees, options under the 2007 Plan to acquire 4,000 shares of common stock at $1.76 per share, the closing price of the stock on March 2, 2010. 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 $8, which is being expensed as share-based compensation over a three-year period in accordance with the vesting period of the options.

F-32

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

10.

STOCK OPTION AND OTHER PLANS (Continued)

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	81	%
Risk-free interest rate	2	%
Dividend yield	0	%

On April 1, 2010, the Company granted, to two executive officers and a consultant, options under the 2007 Plan to acquire 50,000, 20,000 and 15,000 shares, respectively, of common stock at $2.25 per share, the closing price of the stock on April 1, 2010. These options have a life of five years from the date of grant. The executive officers options vest 50% immediately and 50% on April 1, 2011, for one executive officer, and July 31, 2011, for the other executive officer, respectively. The consultant’s options vest immediately. The fair value of the options was determined to be $60, $24, and $17, respectively.

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	81	%
Risk-free interest rate	2	%
Dividend yield	0	%

Employee Plans and Warrants

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 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 (234,000 of which are outstanding at March 31, 2010), 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 period.

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 $171, which is 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	%

F-33

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

10.

STOCK OPTION AND OTHER PLANS (Continued)

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 $8, which is being 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 $195, which is 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)	4
Expected volatility	70	%
Risk-free interest rate	3	%
Dividend yield	0	%

On April 7, 2009, the Company granted warrants, in connection with the sublicenses for Rihanna and Kanye West, to Artistic Brands (a licensing company in which entertainment mogul and icon Shawn “JAY-Z” Carter and Rene Garcia are principals) and the celebrities and their respective affiliates, for the purchase of 4,000,000 shares of the Company’s common stock at an exercise price of $5.00 per share.  On December 18, 2009, the Company’s stockholders approved an amendment to Parlux's certificate of incorporation to increase the total number of shares of common stock that Parlux is authorized to issue from 30,000,000 to 40,000,000 shares and the issuance of warrants to purchase an aggregate of up to an additional 8,000,000 shares of its common stock at an exercise price of $5.00 per share in connection with the Artistic Brands licenses. On December 18, 2009, the Company granted additional warrants in conn ection with the sublicenses (as noted above), upon stockholder’s approval, for the purchase of 2,000,000 shares of the Company’s common stock at a purchase price of $5.00 per share, pursuant to the agreement, dated April 3, 2009. The warrants, which were granted at an exercise price in excess of the market value of the underlying shares at the grant date, vest over four years, and are exercisable for an eight-year period (see Note 6 to the Consolidated Financial Statements for further discussion). The fair value of the warrants was determined to be $3,554 ($1,282 for the warrants issued on April 7, 2009, and $2,272 for the warrants issued December 18, 2009), which is included in additional paid-in capital in the accompanying Consolidated Balance Sheet as of March 31, 2010. The licenses are recorded at the fair value of the warrants and are included in trademarks and licenses, net in the accompanying Consolidated Balance Sheet as of March 31, 2010.

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

Expected life (years)	6
Expected volatility	77 % - 82	%
Risk-free interest rate	2	%
Dividend yield	0	%

F-34

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

10.

STOCK OPTION AND OTHER PLANS (Continued)

Option and Warranty Activity

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. When estimating forfeitures, the Company considers an analysis of actual option forfeitures, as well as management judgment. The forfeiture rate used when calculating the value of stock options granted in 2010 and 2009 was approximately 5%.

Share-based compensation included in general and administrative expenses for the years ended March 31, 2010, 2009, and 2008, is $587, $348, and $244, respectively. A summary of stock option and warrant activity during the three years ended March 31, 2010, follows:

	Number of Shares			Weighted Average Exercise Price			Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value (in thousands)
Outstanding as of March 31, 2007		2,994,000			$	1.14		4.10		$	13,302
Granted		417,850				4.28		5.00			—
Exercised		(2,510,000	)			1.12		3.74			(7,171	)
Forfeited		—				—		—			—
Outstanding as of March 31, 2008		901,850				2.64		3.57			826
Granted		209,225				3.10		4.75			—
Exercised		(116,500	)			1.57		3.27			(212	)
Forfeited		(12,400	)			2.95		4.47			—
Outstanding as of March 31, 2009		982,175				2.87		3.04			—
Granted		6,198,000				4.90		7.32			—
Exercised		(150,000	)			1.20		0.25			(113,400	)
Forfeited		(13,025	)			2.85		3.95			—
Outstanding as of March 31, 2010		7,017,150			$	4.70		6.75		$	226,800
Exercisable as of March 31, 2010		774,835			$	3.04		2.48		$	226,800

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 of options and warrants, 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 $177 and the proceeds received from the warrant holder $122 was recorded as a reduction in retained earnings. Of the 2,510,000 warrants exercised during the year ended March 31, 2008, 1,950,000 shares were issued from treasury shares. The difference between the original cost of the treasury shares $4,940 and the proceeds received from the warrant holders, $2,212 was recorded as a reduction in retained earnings. As of March 31, 2008, a deferred tax benefit of $192 was provided on the 100,000 warrants in connection with the share-based compensation charge from fiscal 2007. During the year ended March 31, 2009, the Company adjusted the deferred tax asset and reduced additional paid-in capital by $114 as a result of the exercise. As of March 31, 2010, a deferred tax benefit of $289 was provided on 150,000 warrants exercised in connection with the share-based compensation charge from fiscal 2007. During the year ended March 31, 2010, the Company adjusted the deferred tax asset and reduced additional paid-in capital by $246 as a result of the exercise.

F-35

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

10.

STOCK OPTION AND OTHER PLANS (Continued)

The following table summarizes information about the stock options and warrants outstanding at March 31, 2010, of which 774,835 are exercisable:

					Options and Warrants Outstanding
Range of Exercise Prices			Amount		Weighted Average Exercise Price	Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
		$0.82		30,000	$0.82	4.25	$	35,400
$1.04	-	$1.22		214,000	1.21	1.00		169,440
$1.75	-	$2.71		302,462	2.23	4.10		21,960
$3.30	-	$4.60		468,188	4.23	2.66		—
$5.00	-	$5.55		6,002,500	5.00	7.42		—
				7,017,150	$4.70	6.75	$	226,800

The intrinsic value of the stock options and warrants exercised during the years ended March 31, 2010, 2009, and 2008, was approximately $113, $212, and $7,171, respectively, and the tax benefit from the exercise of the warrants amounted to $43, $78, and $1,986, respectively.

Proceeds relating to the exercise of all options and warrants during the years ended March 31, 2010, 2009, and 2008, were $180, $182, and $2,808, respectively.

401k Plan

The Company established a 401-K plan covering substantially all of its U.S. employees. Commencing on April 1, 1996, the Company matched 25% of the first 6% of employee contributions, within annual limitations established by the Internal Revenue Code. Beginning on September 2, 2007, the Company increased its matching contribution to 50% of the first 6% of employee contributions. During the year ended March 31, 2010, the Company suspended the 401-K matching program, due to the economic climate. The cost of the matching program totaled approximately $0, $218, and $139 for the years ended March 31, 2010, 2009, and 2008, respectively. Effective April 1, 2010, the Company reinstated the matching contribution of 25% of the first 6% of the employee contributions.

F-36

PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

11.

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:

	For the Year Ended March 31,
	2010			2009			2008
							< /P>
(Loss) income from continuing operations	$	(14,759	)	$	(4,284	)	$	5,011
Income from discontinued operations	$	—		$	—		$	25
Net (loss) income	$	(14,759	)	$	(4,284	)	$	5,036
Weighted average number of shares issued		29,999,372			29,984,704			29,845,349
Weighted average number of treasury shares		(9,668,977	)		(9,447,080	)		(10,500,396	)
Weighted average number of shares outstanding used in basic earnings per share calculation		20,330,395			20,537,624			19,344,953
Basic net (loss) income per common share – continuing operations	$	(0.73	)	$	(0.21	)	$	0.26
Basic net income per common share – discontinued operations	$	0.00		$	0.00		$	0.00
Weighted average number of shares outstanding used in basic earnings per share calculation		20,330,395			20,537,624			19,344,953
Effect of dilutive securities:
Stock options and warrants(1)		—			—			1,258,303
Weighted average number of shares outstanding used in diluted earnings per share calculation		20,330,395			20,537,624			20,603,256
Diluted net (loss) income per common share – continuing operations(1)	$	(0.73	)	$	(0.21	)	$	0.24
Diluted net income per common share – discontinued operations	$	0.00		$	0.00		$	0.00
Antidilutive securities not included in diluted earnings per share computation(1):
Options and warrants to purchase common stock		7,017,150			982,175			417,850
Exercise price	$	0.82 to $5.55		$	1.04 to $5.55		$	3.30 to $4.60

———————

(1)

The number of shares utilized in the calculation of diluted (loss) earnings per share from continuing operations, discontinued operations and net income were the same as those used in the basic calculation of earnings per share for the years ended March 31, 2010, and 2009, as we incurred a loss from continuing operations for those periods.

12.

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 June 2006 proposal

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PARLUX FRAGRANCES INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

12.

LEGAL PROCEEDINGS (Continued)

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 original Derivative Action sought to remedy the alleged breaches of fiduciary duties, waste of corporate assets, and other violations of law and sought 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 alleged that the unlawful plan to attempt to buy out the public shareholders of Parlux without having proper financing in place, and for inadequate consideration, violated applicable law by di rectly 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 continued to name the then Board of Directors as defendants along with Parlux, as a nominal defendant. The Amended Complaint was 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 added to those claims, assertions regarding a 2003 buy-out effort and an abandoned buy-out effort of PFA. It also contained 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. During fiscal year 2008, there followed extremely limited discovery. A number of the factual allegations upon which the various complaints were based have fallen away, simply by operation of time. The Company was then 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. The Company believes the documents provide no support for any of the claims.

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 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 was given leave to amend the complaint and intervene on behalf of a new plaintiff. Counsel also moved to amend the complaint yet again. After a lengthy hearing, the Court permitted the new plaintiff to intervene and to file a Third Amended Complaint on July 29, 2009.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

12.

LEGAL PROCEEDINGS (Continued)

The Third Amended Complaint claims damages to the Company based on allegations of (1) insider trading; (2) failing to have proper internal controls resulting in delays in the filing of an Annual Report on Form 10-K for 2006 and a Quarterly Report on Form 10-Q for June 2006 and (3) intentionally stifling Parlux’s independent outside auditors in the commencement of the Company’s Sarbanes-Oxley review.

Based on that preliminary review and discussions with the directors and detailed discussions with the Company’s counsel, the Company believes that there are meaningful defenses to the claims although discovery will be required to reach a final conclusion as to these matters. An answer was filed to the Third Amended Complaint on September 14, 2009, essentially denying the substantive allegations.

Discovery has commenced. A number of depositions were taken of the brokerage firms through which the stock trades were conducted by the then Board of Directors. Two representatives of the Company’s former independent outside auditors, as well as one of the Company’s consultants have been deposed. A deposition of the new plaintiff was completed in February 2010. The new plaintiff had no personal knowledge of any of the basic factual allegations and was simply unhappy that the Company’s stock declined in value

On January 19, 2010, the plaintiff filed a motion for leave to file under seal a motion for partial summary judgment. That motion was granted. The motion for partial summary judgment was filed and was initially scheduled for a hearing on June 25, 2010. That hearing was postponed until September 17, 2010. The motion seeks a ruling that one of the Company’s directors engaged in insider trading. A comprehensive opposing memorandum has been filed on behalf of the director. It directly rebuts the facts upon which the motion is based.

Based on the manner in which this case has been conducted to date, and based on the investigations into the earlier complaint the Company feels the Third Amended Complaint is without merit and subject to challenge and to an effective defense.

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.

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.

13.

CONCENTRATIONS AND CREDIT RISKS

Brands

During the last three fiscal years, the following brands (including accessories) have accounted for 10% or more of the Company’s sales:

	Year Ended March 31,
	2010		2009		2008
PARIS HILTON		42%		55%		68%
GUESS? (license expired in December 2009)		28%		30%		23%
JESSICA SIMPSON		15%		13%		N/A

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PARLUX FRAGRANCES INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

13.

CONCENTRATIONS AND CREDIT RISKS (Continued)

Major Customers

During the last three fiscal years, the following sales by major customers have accounted for 10% or more of the Company’s sales:

	Year Ended March 31,
	2010		2009		2008
Perfumania and Quality King	$	46,658	$	41,470	$	51,148
Macy’s		33,801		34,640		20,577
	$	80,459	$	76,110	$	71,725

As of the last two fiscal years, net trade accounts receivable owed by major customers are as follows:

	March 31,
	2010		2009
Perfumania	$	10,496	$	12,423
M Macy’s		304		5,055
	$	10,800	$	17,478

Related parties

Related parties are those parties that are known to the Company as having a related party relationship (see Note 2 to the Consolidated Financial Statements for additional information regarding related parties).

Revenues from Perfumania (which is a wholly-owned subsidiary of Perfumania Holdings, Inc., formerly known as E-Com Ventures, Inc.) represented 25%, 27%, and 33%, of the Company’s net sales from continuing operations during the years ended March 31, 2010, 2009, and 2008, respectively. During the years ended March 31, 2010, 2009, and 2008, revenues from other related parties represented approximately 8%, 0%, and 5%, respectively, of the Company’s net sales from continuing operations. In addition, net trade accounts receivable owed by Perfumania to the Company totaled $10,496 and $12,423 at March 31, 2010, and 2009, respectively.

Management continues to evaluate its credit risk and assess the collectability of the Perfumania receivables. Perfumania’s reported financial information, as well as the Company’s payment history with Perfumania, indicates that, historically, their first quarter ended approximately April 30, is Perfumania’s most difficult quarter as is the case with most U.S. based retailers. The Company has, in the past, received significant payments from Perfumania during the last three months of the calendar year, and has no reason to believe that this will not continue. Based on management’s evaluation, no allowances have been recorded as of March 31, 2010. Management will continue to evaluate Perfumania’s financial condition on an ongoing basis and consider the possible alternatives and effects, if any, on the Company.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

13.

CONCENTRATIONS AND CREDIT RISKS (Continued)

Credit risks – international sales

Total gross sales to unrelated international customers totaled approximately $46,983, $56,173, and $66,290, for the years ended March 31, 2010, 2009, and 2008, respectively. These gross sales by region were as follows:

	Year Ended March 31,
	2010		2009		2008
Latin America	$	11,386	$	19,142	$	27,250
Europe		16,362		15,582		15,880
Caribbean		1,652		2,121		6,267
Asia/Pacific		3,928		5,751		5,516
Canada		3,755		4,455		4,098
Middle East		5,027		4,720		1,697
Other		4,873		4,402		5,582
	$	46,983	$	56,173	$	66,290

No single foreign country accounted for more than 10% of the Company’s gross sales during the years ended March 31, 2010, 2009, and 2008.

At March 31, 2010 and 2009, trade receivables from unrelated foreign customers amounted to approximately $1,804 and $5,823, respectively (substantially all of which are payable in U.S. dollars).

Other

Financial instruments which potentially subject the Company to credit risk consist primarily of trade receivables from department and specialty stores in the United States, distributors throughout the world, and related parties. To reduce credit risk for trade receivables from unaffiliated parties, the Company performs ongoing evaluations of its customers’ financial condition but does not generally require collateral. Management has established an allowance for doubtful accounts for estimated losses. The allowances for doubtful accounts are considered adequate to cover estimated credit losses.

The Company maintains its cash with financial institutions. From time to time, these balances exceed the federally insured limits. These balances are maintained with high quality financial institutions, which management believes limits the risk. As of March 31, 2010, and 2009, approximately $7,785 and $5,838, respectively, was in excess of the federal depository insurance coverage limit.

Because of the substantial margins generated by fragrance sales, some products intended for sale in certain international territories are re-exported to the United States, a common practice in the fragrance industry. In addition, prior season gift sets, refurbished returns and other slow moving products, are sold at substantially discounted prices, and as such, can find their way into mass market channels. Additionally, where the licensor does not restrict distribution, sales are made in all markets deemed appropriate for the brand.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

14.

DISCONTINUED OPERATIONS

On November 28, 2006, the Company’s Board of Directors approved the sale of the Perry Ellis fragrance brand license and related assets back to Perry Ellis International (PEI) at a price of approximately $63,000, including approximately $21,000 for inventory and promotional products relating to the brand. A definitive agreement was signed on December 6, 2006, and the closing of the sale took place shortly thereafter. The sale included all inventory, promotional products, molds and other intangibles.

As of the year ended March 31, 2007, the Perry Ellis brand activity was presented as discontinued operations. The transaction generated proceeds of approximately $63,000, and resulted in a pre-tax gain of approximately $34,300 during the year ended March 31, 2007.

The remaining activity for this discontinued operation is summarized as follows:

	Year Ended March 31,
	2010		2009		2008
Net revenues	$	—	$	—	$	41
Gain on sale of brand	$	—	$	—	$	—
Operating income	$	—	$	—	$	25
Income from discontinued operations	$	—	$	—	$	25

15.

CONSENT SOLICITATION

On August 31, 2006, Mr. Glenn H. Nussdorf (“Nussdorf”) sent a letter to the Company’s Board of Directors requesting that it approve purchases of the Company’s Common Stock by Nussdorf and his brother in excess of fifteen percent (15%) in the aggregate of the Company’s outstanding shares of Common Stock for purposes of Section 203 of the Delaware General Corporation Law. On September 5, 2006, the Board granted such approval. The Board believed that open market purchases of Company shares by any shareholder benefited all Company stockholders and had also anticipated that an acquisition proposal at a premium might be forthcoming from Nussdorf.

On September 7, 2006, Nussdorf and a family member filed a Schedule 13D with the Commission reporting that Nussdorf may seek to influence or serve on the Board or designate nominees for election to the Board. On September 26, 2006, Nussdorf sent a letter to the Board notifying them of his objections to the proposed sale by the Company of its Perry Ellis fragrance rights to Victory International (USA) LLC. On October 17, 2006, Nussdorf and a family member filed an amendment to their Schedule 13D disclosing that Nussdorf was exploring the possibility of making an acquisition proposal to acquire the Company. On November 21, 2006,

Nussdorf sent a letter to the Board announcing his intention to commence a consent solicitation to replace all the members of the Board. In the same letter, Nussdorf also wrote that he was considering making an acquisition proposal for the Company. On December 22, 2006, Nussdorf filed a preliminary consent solicitation statement on Schedule 14A with the SEC seeking to replace the entire Board with his slate of directors.

On January 4, 2007, the Board determined to go forward with its own solicitation in opposition to Nussdorf, and on January 8, 2007, the Board held a meeting to set the record date of January 17, 2007 in connection with Nussdorf’s proposed consent solicitation.

On January 19, 2007, Nussdorf filed the definitive consent solicitation statement on Schedule 14A with the SEC, and on January 23, 2007, the Company filed suit in the United States District Court for the Southern

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

15.

CONSENT SOLICITATION (Continued)

District of New York against Quality King Distributors, Inc., Model Reorg, Inc. (other entities affiliated with the Nussdorfs), Nussdorf and his proposed slate of new directors.

On February 6, 2007, pursuant to a settlement agreement between Nussdorf, Ilia Lekach and the Company, Nussdorf terminated his solicitation of consents from Parlux stockholders to replace Parlux's directors, and Parlux dismissed its lawsuit against Mr. Nussdorf, his nominees and certain Nussdorf-controlled companies. The parties' settlement provided for the immediate resignation from the Parlux Board of Ilia Lekach. In addition, because the parties' settlement called for equal representation on the Parlux Board by the current independent directors and Mr. Nussdorf's nominees, Jaya Kader Zebede, one of the then current independent directors, offered her resignation in order to facilitate the transition. Frank A. Buttacavoli then agreed to resign as a director to allow for such equal representation, but continues to serve as Parlux's Executive Vice President, and Chief Operating Officer. The parties' settlement provided for the immediate appointment to the Parlux Board of three of Mr. Nussdorf's nominees, Neil Katz, Anthony D'Agostino and Robert Mitzman. The new Parlux Board consisted of six directors, Glenn Gopman, Esther Egozi Choukroun, David Stone, and Messrs. Katz, D'Agostino and Mitzman.

The parties' settlement also provided for the immediate appointment of Neil Katz as the interim Chief Executive Officer of Parlux. Neil Katz previously served as President and Chief Executive Officer of Gemini Cosmetics, Inc. and President of Liz Claiborne Cosmetics, the prestige fragrance division of the Liz Claiborne Corporation. The reconstituted Parlux Board was to conduct a search for a permanent CEO, and would consider Neil Katz for such position along with other candidates. Mr. Lekach, who was instrumental in negotiating the terms of the settlement, ceased to serve as Parlux's Chief Executive Officer. Mr. Lekach will continue to serve Parlux as a consultant and to assist, if requested, with fragrance brand licenses and international distribution of Parlux products for a period of four years, and agreed not to compete with Parlux in the fragrance business for a period of four years.

Mr. Neil J. Katz was subsequently appointed Chairman and Chief Executive Officer of the Company by the Board of Directors on May 14, 2007.

Mr. Lekach received $1,200 as severance pay and an additional $1,200 for his consulting services and non-competition covenants, both of which were charged to operations in 2007. In addition, at Mr. Nussdorf's request, Mr. Lekach agreed to a substantial reduction in the amount of the severance payments and warrants contemplated by his employment agreement in the event that a change in control was deemed to have occurred as a result of Mr. Nussdorf's consent solicitation. Under the terms of the agreement, Mr. Lekach received 500,000 warrants to purchase the Company's common stock at an exercise price of $1.1654, and Mr. Lekach received no other compensation under his employment agreement. The Company recorded a share-based compensation charge of $2,745, along with the other settlement costs, during the quarter ended March 31, 2007.

At the request of Mr. Lekach and the Parlux Board, Mr. Nussdorf and his affiliates agreed, subject to certain exceptions, that for a period of two years he will not make any proposal to acquire Parlux, unless such proposal is to acquire all shares, at a value of not less than $11 per share. Mr. Nussdorf also agreed not to engage in any proxy or consent solicitations prior to the earlier of 60 days before the 2008 annual meeting of stockholders or eighteen months from the date of the settlement agreement. Mr. Lekach agreed, for a period of four years, not to engage or in any way participate in any proxy or consent solicitation, or acquisition proposal, without the approval of a majority of the Company’s Board of Directors. Parlux agreed to reimburse Mr. Nussdorf for $1,000 of his expenses incurred in connection with the consent solicitation and the litigation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

16.

RECENT ACCOUNTING UPDATES

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Codification Accounting Standards Update No. 2009-01 (“ASU No. 2009-01”), an amendment based on Statement of Financial Accounting Standard No. 168, The FASB Accounting Standards Codification (“Codification”) and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, under Topic 105, Generally Accepted Accounting Principles. Under this update, the Codification has become the source of US GAAP recognized by the FASB to be applied by nongovernmental entities. The rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of ASU No. 2009-01, the Codification supersede d all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification has become non-authoritative. The provisions of ASU No. 2009-01 are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of ASU No. 2009-01 did not have a material impact on our consolidated financial statements.

In August 2009, the FASB issued Codification Accounting Standards Update No. 2009-05 (“ASU No. 2009-05”), Measuring Liabilities at Fair Value, under Topic 820, Fair Value Measurements and Disclosures, to provide guidance on the fair value measurement of liabilities. This update provides clarification in circumstances in which a quoted price in an active market for the identical liability is not available. It also clarifies the inputs relating to the existence of a restriction that prevents the transfer of the liability and clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. ASU No. 2009-05 is effective for financial statements issued for interim and an nual periods beginning after its issuance. The adoption of ASU No. 2009-05 did not have a material impact on our consolidated financial statements.

In January 2010, the FASB issued Codification Accounting Standards Update No. 2010-01 (“ASU No. 2010-01”), Accounting for Distributions to Shareholders with Components of Stock and Cash, under Topic 505, Equity. This update amends the accounting for a distribution to shareholders that allows the ability to elect to receive the distribution in cash or shares of equivalent value with a potential limitation on the total amount of cash that shareholders can elect to receive in the aggregate. This update clarifies that the stock portion of the distribution is to be reflected in earnings per share prospectively and is not a stock dividend for purposes of applying Topics 505 and 206, Equity and Earnings Per Share. ASU No. 2010-01 is effective for financial statements issued for interim and annual periods ending on or after December 15, 2009, and is applied retrospectively. The adoption of ASU No. 2010-01 did not have a material impact on our consolidated financial statements.

In January 2010, the FASB issued Codification Accounting Standards Update No. 2010-02 (“ASU No. 2010-02”), Accounting and Reporting for Decreases in Ownership of a Subsidiary-a Scope Clarification, under Topic 810, Consolidation, to amend the accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity or that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity. This update also expands the disclosure about the deconsolidation of a subsidiary or group of assets within the scope of Subtopic 810-10 (originally issued as FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements). ASU No. 2010-02 is effective for financial statements issued for interim or annual periods ending on or after December 15, 2009. The adoptio n of ASU No. 2010-02 did not have a material impact on our consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

16.

RECENT ACCOUNTING UPDATES (Continued)

In January 2010, the FASB issued Codification Accounting Standards Update No. 2010-06 (“ASU No. 2010-06”), Improving Disclosure about Fair Value Measurements, under Topic 820, Fair Value Measurements and Disclosures, to improve and provide new disclosures for recurring and nonrecurring fair value measurements under the three-level hierarchy of inputs for transfers in and out of Levels 1 and 2, and activity in Level 3. This update also clarifies existing disclosures of the level of disaggregation for the classes of assets and liabilities and the disclosure about inputs and valuation techniques. ASU No. 2010-06 new disclosures and clarification of existing disclosure is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for financial statements issued for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently assessing the impact, if any, of ASU No. 2010-06 disclosures on our consolidated financial statements.

In February 2010, the FASB issued Codification Accounting Standards Update No. 2010-09 (“ASU No. 2010-09”), Amendments to Certain Recognition and Disclosure Requirements, under Topic 855, Subsequent Events, to amend the requirement to disclose the date that the financial statements are issued for subsequent events to align with SEC’s reporting requirements.  This update is amendment includes the definition of an SEC filer and requires an SEC filer to evaluate subsequent events through the date that the financial statements are issued.  Further, the amendment no longer requires that an SEC filer disclose the date financial statements were issued. ASU No. 2010-09 is effective upon issuance. The adoption of ASU No. 2010-09 did not have a material impact on our consolidated financial statements.

17.

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the Company’s unaudited quarterly results of operations for the years ended March 31, 2010, and 2009:

	For the Quarters Ended
	June 30, 2009				September 30, 2009		December 31, 2009			March 31, 2010
Continuing Operations:
Net sales	$		23,644		$	56,461	$	50,280		$	17,717
Net (loss) income			(2,467	)		2,969		(5,426	)		(9,835		)
(Loss) income per common share:
Basic	$		(0.12	)	$	0.15	$	(0.27	)	$	(0.48		)
Diluted	$		(0.12	)	$	0.14	$	(0.27	)	$	(0.48		)
For the Quarters Ended
	June 30, 2008				September 30, 2008		December 31, 2008			March 31, 2009
Continuing Operations:
Net sales	$	23,304			$	52,392	$	47,293		$		28,166
Net (loss) income		(4,883		)		3,644		(4,536	)			1,491
(Loss) income per common share:
Basic	$	(0.24		)	$	0.18	$	(0.22	)	$		0.07
Diluted	$	(0.24		)	$	0.17	$	(0.22	)	$		0.07

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PARLUX FRAGRANCES INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED MARCH 31, 2010, 2009, AND 2008

18.

SUBSEQUENT EVENTS

On June 25, 2010, the Company entered into the New Loan Agreement with GE Capital.  The New Loan Agreement provides a credit line of up to $20.0 million, depending upon the availability of a borrowing base and certain reserves established by GE Capital from time to time, at an interest rate of the highest of (a) the prime rate, (b) the federal funds rate plus 3.0%, or (c) the Eurodollar Rate, in each case plus 3.50%; or the Eurodollar Rate plus 4.50%, at the Company’s option except in certain circumstances including defaults in the payment of any amounts under the loan facility or the unavailability of the LIBOR rate. The term of the loan facility under the New Loan Agreement is two years.

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 GE Capital. The New Loan Agreement requires the Company to maintain minimum net liquidity balance of $12.5 million through October 31, 2010, and $15.0 million thereafter through the end of the term. Under the New Loan Agreement, net liquidity is the sum of the Company’s unrestricted cash assets plus the excess availability under the revolving loan.  At any point if the Company falls below the net liquidity requirements, the New Loan Agreement contains certain additional financial covenants relating to minimum consolidated EBITDA, minimum consolidated interest coverage ratios and maximum capital expenditure limits. In addition, the Company’s subsid iary, Parlux Ltd., and its affiliates must have minimum net liquidity balance of $12.5 million to borrow under the New Loan Agreement.  As of June 24, 2010, the Company and its subsidiary, Parlux Ltd., met the minimum liquidity requirements under the New Loan Agreement.

The New Loan Agreement is secured by all of the Company’s assets and the assets of the Company’s subsidiary, Parlux Ltd., pursuant to a Guaranty and Security Agreement. In addition, GE Capital has a security interest in and to certain of the Company’s patents and trademarks, as well as those of Parlux Ltd., pursuant to a Patent Security Agreement and Trademark Security Agreement, respectively. The Company has provided to GE Capital a full guaranty of payment of the obligations under the New Loan Agreement.

On June 14, 2010, certain persons related to Mr. Rene Garcia, the Garcia Group, acquired 2,718,728 shares of the Company’s common stock. The Garcia Group refers to that certain group comprised of JM-CO Capital Fund, LLC, Irrevocable Trust for Victor Garcia, Jacqueline Marie Garcia, Jacavi Investments, LLC, Carolina Marie Garcia 2006 Family Trust, Jacqueline Marie Garcia 2006 Family Trust, Carolina Marie Garcia and Aqua Capital Fund, LLC, which filed a Schedule 13G on June 23, 2010. The Garcia Group reports having beneficial ownership of a total of 2,995,527 shares, or approximately 14.7% of the Company’s outstanding shares as of June 14, 2010, excluding warrants owned by the Garcia Group.

On June 4, 2010, the Company entered into an exclusive fragrance licensing agreement with Vince Camuto, Chief Designer and Chief Executive Officer of Camuto Group, to develop, manufacture and distribute prestige fragrances and related products under the Vince Camuto trademark. The initial term of the agreement expires on March 31, 2016, and is renewable for an additional five-year term if certain sales levels are met. The Company must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based upon sales volume. The Company anticipates launching a new fragrance under this license in the fall of 2011.

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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

(In thousands)

Description	Balance at Beginning of Period		Additions Charged to Costs and Expenses		Net Deductions		Balance at End of Period
Year ended March 31, 2010
Reserves for:
Doubtful accounts	$	428	$	636	$	348	$	716
Sales returns		1,300		13,524		12,514		2,310
Demonstration and co-op advertising allowances		1,748		13,770		14,400		1,118
	$	3,476	$	27,930	$	27,262	$	4,144
Year ended March 31, 2009
Reserves for:
Doubtful accounts	$	1,045	$	836	$	1,453	$	428
Sales returns		1,000		6,512		6,212		1,300
Demonstration and co-op advertising allowances		2,442		16,849		17,543		1,748
	$	4,487	$	24,197	$	25,208	$	3,476
Year ended March 31, 2008
Reserves for:
Doubtful accounts	$	1,563	$	1,475	$	1,993	$	1,045
Sales returns		1,276		4,193		4,469		1,000
Demonstration and co-op advertising allowances		3,316		10,556		11,430		2,442
	$	6,155	$	16,224	$	17,892	$	4,487

F-47

EX-10.81

EXHIBIT 10.81

ACKNOWLEDGMENT OF ASSIGNMENT

This Acknowledgment of Assignment (the “Agreement”) is made as of the 31st day of January, 2009 (the “Effective Date”), by and among TARRAGON SOUTH DEVELOPMENT CORP., a Nevada corporation (the “Debtor”), TARRAGON CORPORATION, a Nevada corporation (“Tarragon”), TRICONY CFC, L.L.C., a Delaware limited liability company (the “Landlord”), and PARLUX FRAGRANCES, INC., a Delaware corporation (the “Tenant”).

RECITALS

WHEREAS, FBEC-Cypress Financial Center, L.P., predecessor-in-interest to the Landlord, and the Debtor entered into that certain Office Lease Agreement dated August 24, 2005 (the “Lease”) concerning Suite 500, consisting of 19,072 rentable square feet located at 5900 North Andrews Avenue, Fort Lauderdale, Florida 33309 (the “Premises”); and

WHEREAS, Tarragon guaranteed all of the Debtor’s obligations under the Lease with the Landlord pursuant to a Guaranty dated August 25, 2005 (the “Guaranty”); and

WHEREAS, Debtor and Tenant entered into a Sublease Agreement dated November 30, 2007 (“Sublease”), whereby the Debtor subleased the Premises to the Tenant; and

WHEREAS, Landlord, Debtor and Tenant entered into a Consent to Sublease dated December 6, 2007 (“Consent”), whereby Landlord consented to Debtor subletting the Premises to Tenant in accordance with the terms and conditions of the Sublease; and

WHEREAS, on January 12, 2009 (the “Filing Date”), the Debtor and certain of its affiliated entities each filed voluntary petitions for relief pursuant to Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of New Jersey (the “Bankruptcy Court”), which cases are jointly administered under Tarragon Corporation, et al. Case No. 09-10555 (DHS); and

WHEREAS, on or about January 5, 2009, the Tenant paid the Debtor the rent amount due in accordance with the terms of the Sublease, but that Debtor failed to pay the Landlord the rent due in accordance with the terms of the Lease; and

WHEREAS, on or about January 30, 2009, the Debtor filed a motion with the Bankruptcy Court seeking to assume and assign the Lease to the Tenant and to reject the Sublease with the Tenant pursuant to Bankruptcy Code Section 365(the “Motion”), which the Bankruptcy Court approved by Order dated February ___, 2009 (the “Assignment Order”).  A true copy of the Motion and Assignment Order is attached hereto as Exhibit “A”; and

WHEREAS, Tenant seeks to acknowledge to the Landlord that Tenant is the assignee of all of the right, title, and interest, of the Debtor under Lease, and assumes the obligations of the Debtor under the Lease accruing from and after the Effective Date.

NOW THEREFORE, in consideration of the foregoing, the mutual covenants and conditions contained in this Agreement, and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement, intending to be legally bound, agree as follows:

1.           Incorporation of Recitals.  The parties represent and warrant that the recitals to this Agreement are accurate and correct and incorporate them in this Agreement. Capitalized terms used but not defined in this Agreement shall have the same definitions given to them in the Lease unless the context clearly indicates a contrary intent.

2.           Consent to Assignment.  Landlord consents to the assignment of the Lease by the Debtor to the Tenant pursuant to Bankruptcy Code Section 365 as provided in the Assignment Order.  Nothing contained in this Agreement shall be construed as amending the Lease in any respect.

3.           Acknowledgment of Assignment.  Pursuant to the Assignment Order, Debtor hereby assigns to Tenant all of the right, title and interest of Debtor in, to and under the Lease, as of February 1, 2009.  Tenant acknowledges to Landlord that Tenant is the assignee of all of the right, title, interest of the Debtor under Lease pursuant to the Assignment Order.  Tenant confirms that it has read and is fully familiar with the terms of the Lease.  Tenant assumes all of the obligations of the Debtor under the Lease accruing from and after the Effective Date and shall fully comply with all terms and condi tions of the Lease to be performed by the Tenant under the Lease from and after the Effective Date.

4.           Landlord’s Bankruptcy Claim.  Landlord will not seek payment from Tenant for the unpaid amounts due under the term of the Lease for the month of January 2009, or on account of any reconciliation of the amounts due under the Lease for the period prior to the Effective Date through such date.  Landlord will file a proof of claim in Debtor’s bankruptcy case claiming a pre-petition unsecured claim for the base rent, additional rent and any other amount due under the Lease for January 2009, plus on account of any reconciliation of the amounts due under the Lease for the period prior to the Effective Date through such date.  Other than the pre-petiti on unsecured claim for January 2009 rent, Landlord waives and releases the Debtor and Tarragon from any other known or unknown claims, including, but not limited to: (a) any claim for cure of arrearages under Bankruptcy Code Section 365(b), and (b) any administrative expense claims, for use and occupancy or otherwise, relating to the periods after the Filing Date.

5.           Tenant’s Waiver of Any and All Bankruptcy Claims.  Tenant waives any and all claims it may have against the Debtor and/or Tarragon for lease rejection damages in connection with the rejection of the Sublease.  In addition, Tenant waives any and all rights it may have pursuant to Bankruptcy Code Section 365(h) with respect to the Debtor’s rejection of the Sublease, and Tenant will not seek to enforce such rights against the Debtor and/or Tarragon.

6.           Tenant’s Notice Address.  After the Effective Date, all notices to the Tenant under the Lease shall be sent to Tenant at the Premises.

7.           Warranties and Representations.  Tenant warrants and represents to Landlord the following:

(a) A true and correct copy of the Lease is attached to this Agreement as Exhibit “B.”

(b) To the best of the knowledge of Tenant, Landlord is in full and complete compliance with all of its obligations under the Lease.

(c) The Lease has not been amended or modified, either orally or in writing and represents the entire agreement between Landlord and Tenant as to the Premises.

2

(d) Tenant acknowledges that, to the best of its knowledge, Landlord is not in default under the Lease and knows of no facts which, given the passage of time, would constitute a default by Landlord under the Lease. Tenant is not entitled to any credit, offset or reduction in rent or other charges due or to become due under the Lease for any reason whatsoever. Tenant has no defenses to the enforcement of the Lease by Landlord, and there exist no claims or potential claims by Tenant against Landlord.  Tenant hereby waives, releases and discharges Landlord from any and all claims which Tenant ever had, now has or hereinafter can, shall or may have against Landlord arising out of or in connection with the Lease or Landlord’s obligations thereto occurring prior to the Effective Date.

(e) The Premises have not been sublet by Tenant. No person or entity other than Tenant is entitled to possess, use or occupy the Premises under any license, concession or other agreement, whether oral or written, to which Tenant is a party.

8.           General Releases.  The parties hereby provide mutual general releases as follows:

(a) Tenant hereby waives, releases and discharges each of the Debtor and Tarragon from any and all claims which Tenant ever had, now has or hereinafter can, shall or may have against either the Debtor or Tarragon arising out of or in connection with the Sublease and the Lease, Debtor’s and/or Tarragon’s obligations thereto occurring prior to the Effective Date, and in connection with Debtor’s rejection of the Sublease.

(b) Other than the pre-petition unsecured claim for January 2009 rent as set forth in Paragraph 4 above, Landlord hereby waives, releases and discharges each of the Debtor and Tarragon from any and all claims which Landlord ever had, now has or hereinafter can, shall or may have against either the Debtor or Tarragon arising out of or in connection with the Lease or the Guaranty, Debtor’s and/or Tarragon’s obligations thereto occurring prior to the Effective Date, including, but not limited to: (a) any claim for cure of arrearages under Bankruptcy Code Section 365(b), and (b) any administrative expense claims, for use and occupancy or otherwise, relating to the periods after the filing date.

(c) The Debtor hereby waives, releases and discharges each of the Tenant and the Landlord from any and all claims which the Debtor ever had, now has or hereinafter can, shall or may have against either the Tenant or the Landlord arising out of or in connection with the Lease, the Guaranty or the Sublease, and Tenant’s and/or Landlord’s obligations thereunder occurring prior to the Effective Date.

(d) Tarragon hereby waives, releases and discharges each of the Tenant and the Landlord from any and all claims which Tarragon ever had, now has or hereinafter can, shall or may have against either the Tenant or the Landlord arising out of or in connection with the Lease, the Guaranty or the Sublease, and Tenant’s and/or Landlord’s obligations thereunder occurring prior to the Effective Date.

9.           Further Assignment or Subletting.  This Agreement shall not be construed as permitting any further assignment of the Lease or subletting of the Premises except in strict accordance with the terms of the Lease.

3

9.           Integration.  This Agreement constitutes the entire agreement of the parties concerning the transactions contemplated by this Agreement. All prior understandings and agreements between the parties concerning these matters are merged into this Agreement, which alone fully and completely expresses their understanding.

10.           Enforcement Costs.  If any party commences, engages in or threatens to commence or engage in any suit, action or other proceeding, including arbitration or bankruptcy, against any other party, arising out of or in any manner relating to this Agreement, including, without limitation, (i) the enforcement or interpretation of any party's rights or obligations under this Agreement (whether in contract, tort or both) or (ii) the declaration of any rights or obligations under this Agreement, the successful or prevailing party, as determined by the court or arbitrator, shall be entitled to recover from the losing party, as det ermined by the court or arbitrator, reasonable attorneys' fees and disbursements (including disbursements which would not otherwise be taxable as costs in the proceeding) and expert witness fees. All references in this Agreement to attorneys' fees shall be deemed to include all legal assistants', paralegals' and law clerks’ fees and shall include all fees incurred through all post judgment and appellate levels and in connection with collection, arbitration and bankruptcy proceedings.

11.           Severability.  If any provision of this Agreement or the application of a provision to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement and the application of the invalid or unenforceable provision to persons or circumstances other than those as to which it is invalid or unenforceable shall not be affected, and the remainder of this Agreement shall otherwise remain in full force and effect. Moreover, the invalid or unenforceable provision shall be reformed, if possible, so as to accomplish most closely the intent of the parties consistent with applicable law.< /font>

12.           Governing Law, Venue and Waiver.

(a) Governing Law.  This Agreement shall in all respects be governed by, and construed and enforced in accordance with, the laws of the State of Florida, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Florida or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Florida.

(b) Waivers.  To the extent permitted by law, each party hereby waives trial by jury, any objections based on forum non conveniens and any objections to venue of any action arising out of, connected with, related to or incidental to this Agreement.

(c) Jurisdiction.  All disputes between the parties arising out of, connected with, related to or incidental to this Agreement and whether arising in contract, tort, equity or otherwise, shall be resolved by the Bankruptcy Court and each Party hereby consents and submits to the jurisdiction of the Bankruptcy Court.  It is understood that this Section 12(c) shall not apply to any dispute that may arise between the Landlord and Tenant under or in relation to the Lease.

13.           Benefit and Binding Effect.  All of the terms and provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties to this Agreement and their respective heirs, successors, legal representatives and permitted assigns.

4

14.           Amendment.  This Agreement may not be amended except by a further agreement in writing duly executed by each of the parties to this Agreement.

15.           Counterparts. This Agreement may be executed by the parties signing different counterparts of this Agreement, which counterparts together shall constitute the agreement of the parties.  Facsimile signatures will be treated and will have the same effect as originals.

SIGNATURES ON THE FOLLOWING PAGE

5

IN WITNESS WHEREOF, the parties to this Agreement have duly executed this Agreement as of the date executed by the last of the parties to do so.

DEBTORS:
TARRAGON SOUTH DEVELOPMENTCORP., a Nevada corporation
By:	/s/ Marcy H. Kammerman
Name:	Marcy H. Kammerman
Title:	Executive Vice President

TARRAGON CORPORATION, a Nevada corporation
By:	/s/ Marcy H. Kammerman
Name:	Marcy H. Kammerman
Title:	Executive Vice President

LANDLORD:
TRICONY CFC, L.L.C., a Delaware limited liability company
By:	/s/ Rick Torres
Name:	Rick Torres
Title:	President

TENANT:
PARLUX FRAGRANCES, INC., a Delaware corporation
By:	/s/ Neil J. Katz
Name:	Neil J. Katz
Title:	Chairman and CEO

6

EX-10.92

EXHIBIT 10.92

CONSULTING AGREEMENT

This Consulting Agreement (hereinafter “Agreement”) dated as of April 1st, 2010 between PARLUX FRAGRANCES, INC., a corporation organized and existing under the laws of the State of Delaware (hereinafter “Corporation”) and CAMBRIDGE  DEVELOPMENT CORP. 74 Summit Road, Port Washington, New York 11050 (hereinafter “Consultant”), and Albert F. Vercillo (hereinafter “Vercillo”), the President of Consultant residing at [home address]. Collectively hereinafter referred to as “Parties”.

WHEREAS, Corporation, Consultant and Vercillo are parties to a Consulting Agreementwith a term beginning June 1, 2005extending through March 31, 2010 which is hereby terminated by the parties without liability to either party effective immediately upon the execution of this Agreement.

WHEREAS, the parties wish to enter into a new Consulting Agreement under revised terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the mutual understanding set forth herein, the Parties agree as follows:

1.  Consultant’s Duties: The Corporation hereby engages the Consultant as its business and financial consultant. Subject at all times to the control and direction of the Corporation’s Chief Executive Officer, Chief perating Officer and Chief Financial Officer (hereinafter Management) and the Board of Directors (hereinafter Board), the Consultant shall have the duties as the general advisor and consultant to Management and the Board on all matters pertaining to the business and to render all other services relevant thereto. The Consultant, by Vercillo, shall perform all other duties that may be reasonably assigned to it by Management or Board provided said duties be consistent with the prestige and responsibility of Vercillo’s position. The Consultant shall, through its agents, servants and employees, devote its best efforts at all times necessary to perform its duties and to advance the Corporation’s best interests, subject to reasonable vacations. The Consultant and the Corporation acknowledge that the Consultant and its agents, servants and employees have other business interests and shall not be required to devote its exclusive time and attention to the performance of its duties hereunder.

EX-10.93

EXHIBIT 10.93

Execution Copy

CREDIT AGREEMENT

Dated as of June 25, 2010

among

PARLUX LTD., AS BORROWER

PARLUX FRAGRANCES, INC., AS GUARANTOR

THE LENDERS PARTY HERETO

and

GENERAL ELECTRIC CAPITAL CORPORATION,

AS ADMINISTRATIVE AGENT AND COLLATERAL AGENT

.

TABLE OF CONTENTS

		Page
ARTICLE 1	DEFINITIONS, INTERPRETATION AND ACCOUNTING TERMS	1
Section 1.1	Defined Terms		1
Section 1.2	UCC Terms		25
Section 1.3	Accounting Terms and Principles		26
Section 1.4	Payments		26
Section 1.5	Interpretation		26
ARTICLE 2	THE REVOLVING CREDIT FACILITY		26
Section 2.1	Revolving Credit Commitments		27
Section 2.2	Borrowing Procedures		27
Section 2.3	[Reserved].		29
Section 2.4	[Reserved].		29
Section 2.5	Reduction and Termination of the Commitments.		29
Section 2.6	Repayment of Loans		29
Section 2.7	Optional Prepayments		29
Section 2.8	Mandatory Prepayments		29
Section 2.9	Interest		30
Section 2.10	Conversion and Continuation Options		31
Section 2.11	Fees		31
Section 2.12	Application of Payments		31
Section 2.13	Payments and Computations		32
Section 2.14	Evidence of Debt		33
Section 2.15	Suspension of Eurodollar Rate Option		34
Section 2.16	Breakage Costs; Increased Costs; Capital Requirements		35
Section 2.17	Taxes		36
Section 2.18	Substitution of Lenders		38
Section 2.19	Eligie Accounts		39
Section 2.20	Eligible Inventory		39
ARTICLE 3	CONDITIONS TO REVOLVING LOANS		38
Section 3.1	Conditions Precedent to Initial Revolving Loans		40
Section 3.2	Conditions Precedent to Each Revolving Loan		42
Section 3.3	Determinations of Initial Borrowing Conditions		42

CREDIT AGREEMENT

PARLUX LTD.

ii

ARTICLE 4	REPRESENTATIONS AND WARRANTIES	41
Section 4.1	Corporate Existence; Compliance with Law	43
Section 4.2	Loan and Other Documents	43
Section 4.3	Ownership of Group Members	44
Sectin 4.4	Financial Statements	44
Section 4.5	Material Adverse Effect	45
Secton 4.6	Solvency	45
Section 4.7	Litigation	45
Section 4.8	Taxes	45
Section 4.9	Margin Regulations	45
Section 4.10	No Burdensome Obligations; No Defaults	45
Section 4.11	Investment Company Act	46
Section 4.12	Labor Matters	46
Section 4.13	ERISA	46
Section 4.14	Environmtal Matters	46
Section 4.15	Intellectual Property	47
Section 4.16	Title; Real Property	47
Section 4.17	Full Disclosure	47
Section 4.18	Patriot Act	47
ARTICLE 5	FINANCIAL COVENANTS	48
Section 5.1	Minimum Conslidated EBITDA	48
Section 5.2	Minimum Consolidated Interest Coverage Ratio	50
Section 5.3	Maximum Capital Expenditures	50
ARTICLE 6	REPORTING COVENANTS	51
Section 6.1	Financial Statements	51
Section 6.2	Other Events	55
Section 6.3	Copies of Notices and Reports	55
Section 6.4	Taxes	55
Section 6.5	Labor Matters	55
Section 6.6	ERISA Matters	56
Section 6.7	Environmental Matters	56
Section 6.8	Other Information	56

CREDIT AGREEMENT

PARLUX LTD.

iii

ARTICLE 7	AFFIRMATIVE COVENANTS	57
Section 7.1	Maintnance of Corporate Existence		57
Section 7.2	Compliance with Laws, Etc		57
Section 7.3	Payment of Obligations		57
Section 7.4	Maintenance of Property		57
Section 7.5	Maintenance of Insurance		58
Section 7.6	Keeping of Books		58
Section 7.7	Access to Books and Property		58
Section 7.8	Environmental		58
Section 7.9	Use of Proceeds		59
Section 7.10	Additional Collateral and Guaranties		59
Section 7.11	Deposit Accounts; Securities Accounts; Cash Collateral Accounts; Maximum Cash and Cash Equivalents		60
ARTICLE 8	NEGATIVE COVENANTS		62
Section 8.1	Indebtedness		62
Section 8.2	Liens		63
Section 8.3	Investments		64
Section 8.4	Asset Sales		65
Section 8.5	Restricted Payments		66
Section 8.6	Prepayment of Indebtedness		67
Section 8.7	Fundamental Changes		67
Section 8.8	Change in Nature of Business		67
Section 8.9	Transactions with Affiliates		68
Section 8.10	Third-Party Restrictions on Indebtedness, Liens, Investments or Restricted Payments		68
Section 8.11	Modification of Certain Documents		68
Section 8.12	Accounting Changes; Fiscal Year		68
Section 8.13	Margin Regulations		68
Section 8.14	Compliance with ERISA		68
Section 8.15	Hazardous Materials		68
ARTICLE 9	EVENTS OF DEFAULT		69
Section 9.1	Definition		69
Section 9.2	Remedies		70

CREDIT AGREEMENT

PARLUX LTD.

iv

ARTICLE 10	THE ADMINISTRATIVE AGENT	71
Section 10.1	Appointment and Duties		71
Section 10.2	Binding Effect		72
Section 10.3	Use of Discretion		72
Section 10.4	Delegation of Rights and Duties		72
Section 10.5	Reliance and Liability		72
Section 10.6	Administrative Agent Individually		73
Section 10.7	Lender Credit Decision		74
Section 10.8	Expenses; Indemnities		74
Section 10.9	Resignation of Administrative Agent		74
Section 10.10	Release of Collateral or Guarantors68		75
Section 10.11	Additional Secured Parties68		75
ARTICLE 11	MISCELLANEOUS		76
Section 11.1	Amendments, Waivers, Etc		76
Section 11.2	Assignments and Participations; Binding Effect		77
Section 11.3	Costs and Expenses		79
Section 11.4	Indemnities		79
Section 11.5	Survival		80
Section 11.6	Limitation of Liability for Certain Damages		80
Section 11.7	Lender-Creditor Relationship		80
Section 11.8	Right of Setoff		80
Section 11.9	Sharing of Payments, Etc		81
Section 11.10	Marshaling; Payments Set Aside		81
Section 11.11	Notices		81
Section 11.12	Electronic Transmissions		82
Section 11.13	Governing Law		83
Section 11.14	Jurisdiction		83
Section 11.15	Waiver of Jury Trial		84
Section 11.16	Severability		84
Section 11.17	Execution in Counterparts		84
Section 11.18	Entire Agreement		84
Section 11.19	Use of Name		84
Section 11.20	Non-Public Information; Confidentiality		85
Section 11.21	Patriot Act Notice		85

CREDIT AGREEMENT

PARLUX LTD.

v

SCHEDULES

Schedule 1.1	Certain Percentage
Schedule 4.3	Ownership of Group Members
Schedule 4.8	Taxes
Schedule 4.12	Labor Matters
Schedule 4.13	ERISA
Schedule 4.14	Environmental Matters
Schedule 4.16	Title; Real Property
Schedule 8.1	Indebtedness
Schedule 8.2	Liens
Schedule 8.3	Investments

EXHIBITS

Exhibit A	Form of Assignment
Exhibit B	Form of Revolving Loan Note
Exhibit C	Form of Notice of Borrowing
Exhibit D	Form of Borrowing Base Certificate
Exhibit E	Form of Notice of Conversion or Continuation
Exhibit F	Form of Compliance Certificate

CREDIT AGREEMENT

PARLUX LTD.

vi

CREDIT AGREEMENT

This Credit Agreement, dated as of June 25, 2010, is entered into among PARLUX LTD., a New York corporation (the “Borrower”), PARLUX FRAGRANCES, INC., a Delaware corporation (“Holdings”),the Lenders (as defined below), and GENERAL ELECTRIC CAPITAL CORPORATION (“GE Capital”), as administrative agent and collateral agent for th e Lenders (in such capacity, and together with its successors and permitted assigns,the “Administrative Agent”).

For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE 1

DEFINITIONS, INTERPRETATION AND ACCOUNTING TERMS

Section 1.1    Defined Terms.  As used in this Agreement, the following terms have the following meanings:

“Account” means, as at any date of determination, all “accounts” (as such term is defined in the UCC) of the Borrower and its Subsidiaries, including, without limitation, the unpaid portion of the obligation of a customer of the Borrower or any of its Subsidiaries in respect of Inventory purchased by and shipped to such customer and/or the rendition of services by the Borrower or such Subsidiary, as stated on the respective invoice of the Borrower or such Subsidiary, net of any credits, rebates or offsets owed to such customer.

“Account Debtor” means the customer of the Borrower or any of its Subsidiaries who is obligated on or under an Account.

“Affected Lender” has the meaning specified in Section 2.18.

“Affiliate” means, with respect to any Person, each officer, director, general partner or joint venturer of such Person and any other Person that directly or indirectly controls, is controlled by, or is under common control with, such Person; provided, however, that no Secured Party shall be an Affiliate of the Borrower.  For purpose of this definition, “control” means the possession of either (a) the power to vote, or the beneficial ownership of, 10% or more of the Voting Stock of such Person or (b) the power to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.

“Agreement” means this Credit Agreement.

“Applicable Margin”means (i) with respect to any Base Rate Loan, three and one-half percentage points (3.50%) per annum, (ii) with respect to any Eurodollar Rate Loan, four and one-half percentage points (4.50%) per annum, and (iii) with respect to the Unused Commitment Fee, one and one-half percentage points (1.50%) per annum; provided, however, that if the Average Daily Revolving Credit Outstandings is greater than or equal to $10,000,000 for any calendar month, then the Applicable Margin used to calculate the Unused Commitment Fee for such month shall be one percentage point (1.0%) per annum.

“Approved Fund” means, with respect to any Lender, any Person (other than a natural Person) that (a) is or will be engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business and (b) is advised or managed by (i) such Lender, (ii) any Affiliate of such Lender or (iii) any Person (other than an individual) or any Affiliate of any Person (other than an individual) that administers or manages such Lender.

CREDIT AGREEMENT

PARLUX LTD.

1

“Assignment” means an assignment agreement entered into by a Lender, as assignor, and any Person, as assignee, pursuant to the terms and provisions of Section 11.2 (with the consent of any party whose consent is required by Section 11.2), accepted by the Administrative Agent, in substantially the form of Exhibit A, or any other form approved by the Administrative Agent.

“Average Daily Revolving Credit Outstandings” means, for any calendar month, the average daily Revolving Credit Outstandings during such month.

“Base Rate” means, for any day, a rate per annum equal to the highest of (a) the rate last quoted by The Wall Street Journal as the “Prime Rate” in the United States or, if The Wall Street Journal ceases to quote such rate, the highest per annum interest rate published by the Federal Reserve Board in Federal Reserve Statistical Release H.15 (519) (Selected Interest Rates) as the “bank prime loan” rate or, if such rate is no longer quoted therein, any similar rate quoted therein (as determined by the Administrative Agent) or any similar release by the Federal Reserve Board (as determined by the Administrative Agent), (b) the sum of 3.0% per annum and the Federal Funds Rate, and (c) the sum of (x) the Eurodollar Rate, as defined herein, calculated for each such day based on an Interest Period of three months determined two (2) Business Days prior to such day, plus (y) the excess of the Applicable Margin for Eurodollar Rate Loans over the Applicable Margin for Base Rate Loans, in each instance, as of such day.  Any change in the Base Rate due to a change in any of the foregoing shall be effective on the effective date of such change in the “bank prime loan” rate, the Federal Funds Rate, or the Eurodollar Rate for an Interest Period of three months.

“Base Rate Loan” means any Revolving Loan that bears interest based on the Base Rate.

“Benefit Plan” means any employee benefit plan as defined in Section 3(3) of ERISA (whether governed by the laws of the United States or otherwise) to which any Group Member incurs or otherwise has any obligation or liability, contingent or otherwise.

“Borrowing” means a borrowing consisting of Revolving Loans made on the same day by the Lenders according to their respective Revolving Credit Commitments.

“Borrowing Base” means, as of any date of determination by the Administrative Agent, from time to time, an amount equal to the sum at such time of:

(a)           an amount for each Eligible Account at such time equal to the product of the Eligible Inventory Advance Rate times the book value of such Eligible Account at such time;

(b)           the lesser of (i) 40% of the net amount of Eligible Inventory at such time (valued at the lower of cost or market, on a first-in, first-out basis) and (ii) 50% of the Net Orderly Liquidation Value of Eligible Inventory at such time; and

(c)           the lesser of (i) 20% of the net amount of Eligible Slow-Moving Inventory at such time (valued at the lower of cost or market, on a first-in, first-out basis) and (ii) 50% of the Net Orderly Liquidation Value of Eligible Slow-Moving Inventory at such time.

“Borrowing Base Certificate” means a certificate of the Borrower, in substantially the form of Exhibit D hereto, duly completed as of a date acceptable to the Administrative Agent in its sole discretion.

“Business Day” means any day of the year that is not a Saturday, Sunday or a day on which banks are required or authorized to close in New York City and, when determined in connection with notices and determinations in respect of any Eurodollar Rate or Eurodollar Rate Loan or any funding, conversion, continuation, Interest Period or payment of any Eurodollar Rate Loan, that is also a day on which dealings in Dollar deposits are carried on in the London interbank market.

CREDIT AGREEMENT

PARLUX LTD.

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“Capital Expenditures” means, for any Person for any period, the aggregate of all expenditures, whether or not made through the incurrence of Indebtedness, by such Person and its Subsidiaries during such period for the acquisition, leasing (pursuant to a Capital Lease), construction, replacement, repair, substitution or improvement of fixed or capital assets or additions to equipment, in each case required to be capitalized under GAAP on a Consolidated balance sheet of such Person.

“Capital Lease” means, with respect to any Person, any lease of, or other arrangement conveying the right to use, any property (whether real, personal or mixed) by such Person as lessee that has been or should be accounted for as a capital lease on a balance sheet of such Person prepared in accordance with GAAP.

“Capitalized Lease Obligations” means, at any time, with respect to any Capital Lease, any lease entered into as part of any Sale and Leaseback Transaction of any Person or any synthetic lease, the amount of all obligations of such Person that is (or that would be, if such synthetic lease or other lease were accounted for as a Capital Lease) capitalized on a balance sheet of such Person prepared in accordance with GAAP.

“Cash Collateral Account” means any deposit account or securities account in the name of the Borrower and under the sole control (as defined in the applicable UCC) of the Administrative Agent that may be established after the date of this Agreement pursuant to any Loan Document and (a) in the case of a deposit account, from which the Borrower may not make withdrawals except as permitted by the Administrative Agent and (b) in the case of a securities account, with respect to which the Administrative Agent shall be the entitlement holder and the only Person authorized to give entitlement orders with respect thereto.

“Cash Equivalents” means (a) any readily-marketable securities (i) issued by, or directly, unconditionally and fully guaranteed or insured by the United States federal government or (ii) issued by any agency of the United States federal government the obligations of which are fully backed by the full faith and credit of the United States federal government, (b) any readily-marketable direct obligations issued by any other agency of the United States federal government, any state of the United States or any political subdivision of any such state or any public instrumentality thereof, in each case having a rating of at least “A-1” from S&P or at least “P-1” from Moody’s, (c) any commercial paper rated at least “ ;A-1” by S&P or “P-1” by Moody’s and issued by any Person organized under the laws of any state of the United States, (d) any Dollar-denominated time deposit, insured certificate of deposit, overnight bank deposit or bankers’ acceptance issued or accepted by (i) any Lender or (ii) any commercial bank that is (A) organized under the laws of the United States, any state thereof or the District of Columbia, (B) “adequately capitalized” (as defined in the regulations of its primary federal banking regulators) and (C) has Tier 1 capital (as defined in such regulations) in excess of $250,000,000 and (e) shares of any United States money market fund that (i) has substantially all of its assets invested continuously in the types of investments referred to in clause (a), (b), (c) or (d) above with maturities as set forth in the proviso below, (ii) has net assets in excess of $500,000,000 and (iii) has obtained from either S&P or Moody’s the highest rating obtainable for money market funds in the United States; provided, however, that the maturities of all obligations specified in any of clauses (a), (b), (c) and (d) above shall not exceed 365 days.

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“CERCLA” means the United States Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. §§ 9601 et seq.).

“Change of Control” means the occurrence of any of the following:

(a)          any person shall become the legal or beneficial owner of, or shall have acquired, pursuant to any Contractual Obligation or otherwise, control over the voting rights of, 20% (or such different percentage for a particular person that may be shown for such person on Schedule 1.1 attached hereto) or more of the issued and outstanding Voting Stock of Holdings;

(b)          at any time, continuing directors shall cease for any reason other than death or disability to constitute a majority of the members of the board of directors of Holdings then in office; or

(c)          Holdings shall cease to own and control legally and beneficially all of the economic and voting rights associated with all classes of the outstanding Stock and Stock Equivalents of the Borrower.

For purpose of this definition, the following terms shall have the following meanings: (x) “person” means any “person” as such term is used in the United States Securities Exchange Act of 1934, as amended, including any partnership, limited partnership, syndicate or group of persons that is deemed to be a “person” for purposes of Sections 13(d) and 14(d)(2) of such Securities Exchange Act, (y) “beneficial owner” means any “beneficial owner” under and as defined in Rules 13d-3 and 13d-5 of the United States Securities and Exchange Commission under such Securities Exchange Act; provided, however, that any person shall be deemed to be the beneficial ow ner of all Securities that such person has the right to acquire, whether such right is exercisable immediately or with the passage of time and (z) “continuing director” means, at any date of determination, each individual member of the board of directors of Holdings who (i) has been a member of such board in the period of twelve successive calendar months last ended prior to such date or (ii) whose nomination for election or appointment by the stockholders of Holdings was approved by a vote of at least two thirds of the directors who were continuing directors at the time of such nomination.

“Closing Date” means the first date on which any Revolving Loan is made.

“Code” means the U.S. Internal Revenue Code of 1986.

“Collateral” means all property and interests in property and proceeds thereof now owned or hereafter acquired by any Loan Party in or upon which a Lien is granted or purported to be granted pursuant to any Loan Document.

“Commitment Letter” means the commitment letter dated June 11, 2010 issued by GE Capital to Borrower with respect to the Revolving Credit Facility.

“Commitments” means the Lenders’ Revolving Credit Commitments.

“Compliance Certificate” means a certificate substantially in the form of Exhibit F.

“Consolidated” means, with respect to any Person, the accounts of such Person and its Subsidiaries consolidated in accordance with GAAP.

“Consolidated Cash Interest Expense” means, with respect to any Person for any period, the Consolidated Interest Expense of such Person for such period less the sum of, in each case to the extent included in the definition of Consolidated Interest Expense (a) the amortized amount of debt discount, debt issuance costs, and amortization and expenses related to the consummation of the initial Borrowings on the Closing Date and the payment of all fees, costs and expenses associated with the execution of the Loan Documents, (b) charges relating to write-ups or write-downs in the book or carrying value of existing Consolidated Total Debt, (c) interest payable in evidences of Indebtedness or by additio n to the principal of the related Indebtedness and (d) other non-cash interest.

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“Consolidated EBITDA” means, with respect to any Person for any period, (a) the Consolidated Net Income of such Person for such period plus (b) the sum of, in each case to the extent included in the calculation of such Consolidated Net Income but without duplication, (i) any provision for United States federal income taxes or other taxes measured by net income, (ii) Consolidated Interest Expense, amortizationofdebt discount and commissions and other fees and charges associated with Indebtedness, (iii) any loss from extraordinary items, (iv) any depreciation, depletion and amortization expense, (v) any aggregate net loss on the Sale of property (other than accounts (as defined under the applicable UCC) and inventory) outside the ordinary course of business and (vi) any other non-cash expenditure, charge or loss for such period (other than any non-cash expenditure, charge or loss relating to write-offs, write-downs or reserves with respect to accounts receivable, inventory and sales returns), including the amount of any compensation deduction as the result of any grant of Stock or Stock Equivalents to employees, officers, directors or consultants and minus (c) the sum of, in each case to the extent included in the calculation of such Consolidated Net Income and without duplication, (i) any credit for United States federal income taxes or other taxes measured by net income, (ii) any interest income, (iii) any gain from extraordinary items and any other non-recurring gain, but without giving effect to any g ain resulting from any reapprasal or write-up of any assets, (iv) any aggregate net gain from the Sale of property (other than accounts (as defined in the applicable UCC) and inventory) out of the ordinary course of business by such Person, (v) any other non-cash gain, including any reversal of a charge referred to in clause (b)(vi) above by reason of a decrease in the value of any Stock or Stock Equivalent, and (vi) any other cash payment in respect of expenditures, charges and losses that have been added to Consolidated EBITDA of such Person pursuant to clause (b)(vi) above in any prior period.

“Consolidated Interest Coverage Ratio” means, with respect to any Person for any period, the ratio of (a) Consolidated EBITDA of such Person for such period to (b) Consolidated Cash Interest Expense of such Person for such period.

“Consolidated Interest Expense” means, for any Person for any period, the Consolidated total interest expense of such Person and its Subsidiaries for such period as determined in accordance with GAAP and including, in any event, (a) all interest, charges and related expenses payable with respect to that period to a lender in connection with borrowed money or the deferred purchase price of assets that are treated as interest in accordance with GAAP, plus (b) the portion of Capitalized Lease Obligations with respect to that period that should be treated as interest in accordance with GAAP, plus (c) all charges paid or payable (without duplication) during that period with respect to any Hedging Agreements.

“Consolidated Net Income” means, with respect to any Person, for any period, the Consolidated net income (or loss) of such Person and its Subsidiaries for such period; provided, however, that the following shall be excluded:  (a) the net income of any other Person in which such Person or one of its Subsidiaries has a joint interest with a third-party (which interest does not cause the net income of such other Person to be Consolidated into the net income of such Person), except to the extent of the amount of dividends or distributions paid to such Person or Subsidiary, (b) the net income of any Subsidiary of such Person t hat is, on the last day of such period, subject to any restriction or limitation on the payment of dividends or the making of other distributions, to the extent of such restriction or limitation and (c) the net income of any other Person arising prior to such other Person becoming a Subsidiary of such Person or merging or consolidating into such Person or its Subsidiaries.

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“Consolidated Total Debt” of any Person means all Indebtedness of a type described in clause (a), (b), (c)(i), (d), (e) or (f) of the definition thereof and all Guaranty Obligations with respect to any such Indebtedness, in each case of such Person and its Subsidiaries on a Consolidated basis.

“Constituent Documents” means, with respect to any Person, collectively and, in each case, together with any modification of any term thereof, (a) the articles of incorporation, certificate of incorporation, constitution or certificate of formation of such Person, (b) the bylaws, operating agreement or joint venture agreement of such Person, (c) any other constitutive, organizational or governing document of such Person, whether or not equivalent, and (d) any other document setting forth the manner of election or duties of the directors, officers or managing members of such Person or the designation, amount or relative rights, limitations and preferences of any Stock of such Person.

“Contractual Obligation” means, with respect to any Person, any provision of any Security issued by such Person or of any document or undertaking (other than a Loan Document) to which such Person is a party or by which it or any of its property is bound or to which any of its property is subject.

“Control Agreement” means, with respect to any deposit account, any securities account, commodity account, securities entitlement or commodity contract, an agreement, in form and substance satisfactory to the Administrative Agent, among the Administrative Agent, the financial institution or other Person at which such account is maintained or with which such entitlement or contract is carried and the Loan Party maintaining such account, effective to grant “control” (as defined under the applicable UCC) over such account to the Administrative Agent.

“Controlled Deposit Account” means each deposit account (including all funds on deposit therein) that is the subject of an effective Control Agreement and that is maintained by any Loan Party with a financial institution approved by the Administrative Agent.

“Controlled Securities Account” means each securities account or commodity account (including all financial assets held therein and all certificates and instruments, if any, representing or evidencing such financial assets) that is the subject of an effective Control Agreement and that is maintained by any Loan Party with a securities intermediary or commodity intermediary approved by the Administrative Agent.

“Copyrights” means all rights, title and interests (and all related IP Ancillary Rights) arising under any Requirement of Law in or relating to copyrights and all mask work, database and design rights, whether or not registered or published, all registrations and recordations thereof and all applications in connection therewith.

“Corporate Chart” means a document in form reasonably acceptable to the Administrative Agent and setting forth, as of a date set forth therein, for each Person that is a Loan Party, that is subject to Section 7.10 or that is a Subsidiary or joint venture of any of them, (a) the full legal name of such Person, (b) the jurisdiction of organization and any organizational number and tax identification number of such Person, (c) the location of such Person’s chief executive office (or, if applicable, sole place of business) and (d) the number of shares of each class of Stock of such Person (other than Holdings) authorized, the number outstanding and the number and percentage of such outsta nding shares for each such class owned, directly or indirectly, by any Loan Party or any Subsidiary of any of them.

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“Customary Permitted Liens” means, with respect to any Person, any of the following:

(a)          Liens (i) with respect to the payment of taxes, assessments or other governmental charges or (ii) of suppliers, carriers, materialmen, warehousemen, workmen or mechanics and other similar Liens, in each case imposed by law or arising in the ordinary course of business, and, for each of the Liens in clauses (i) and (ii) above for amounts that are not yet due or that are being contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves or other appropriate provisions are maintained on the books of such Person in accordance with GAAP;

(b)          Liens of a collection bank on items in the course of collection arising under Section 4-208 of the UCC as in effect in the State of New York or any similar section under any applicable UCC or any similar Requirement of Law of any foreign jurisdiction; pledges or cash deposits made in the ordinary course of business (i) in connection with workers’ compensation, unemployment insurance or other types of social security benefits (other than any Lien imposed by ERISA), (ii) to secure the performance of bids, tenders, leases (other than Capital Leases) sales or other trade contracts (other than for the repayment of borrowed money) or (iii) made in lieu of, or to secure the performance of, surety, customs, reclamation or performance bonds (in each case n ot related to judgments or litigation); judgment liens (other than for the payment of taxes, assessments or other governmental charges) securing judgments and other proceedings not constituting an Event of Default under Section 9.1(e) and pledges or cash deposits made in lieu of, or to secure the performance of, judgment or appeal bonds in respect of such judgments and proceedings;

(c)          Liens (i) arising by reason of zoning restrictions, easements, licenses, reservations, restrictions, covenants, rights-of-way, encroachments, minor defects or irregularities in title (including leasehold title) and other similar encumbrances on the use of real property or (ii) consisting of leases, licenses or subleases granted by a lessor, licensor or sublessor on its property (in each case other than Capital Leases) otherwise permitted under Section 8.4 that, for each of the Liens in clauses (i) and (ii) above, do not, in the aggregate, materially (x) impair the value o r marketability of such real property or (y) interfere with the ordinary conduct of the business conducted and proposed to be conducted at such real property;

(d)          Liens of landlords and mortgagees of landlords (i) arising by statute or under any lease or related Contractual Obligation entered into in the ordinary course of business, (ii) on fixtures and movable tangible property located on the real property leased or subleased from such landlord, (iii) for amounts not yet due or that are being contested in good faith by appropriate proceedings diligently conducted and (iv) for which adequate reserves or other appropriate provisions are maintained on the books of such Person in accordance with GAAP; and the title and interest of a lessor or sublessor in and to personal property leased or subleased (other than through a Capital Lease), in each case extending only to such personal property.

“Default” means any Event of Default and any event that, with the passing of time or the giving of notice or both, would become an Event of Default.

“Disclosure Documents” means, collectively, (a) all confidential information memoranda and related materials prepared in connection with the syndication of the Revolving Credit Facility and (b) all other documents filed by any Group Member with the United States Securities and Exchange Commission.

“Dollars” and the sign “$” each mean the lawful money of the United States of America.

“Domestic Person” means any “United States person” under and as defined in Section 770l(a)(30) of the Code.

“E-Fax” means any system used to receive or transmit faxes electronically.

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“Electronic Transmission” means each document, instruction, authorization, file, information and any other communication transmitted, posted or otherwise made or communicated by e-mail or E-Fax, or otherwise to or from an E-System or other equivalent service.

“Eligible Accounts” means Accounts of the Borrower reflected as accounts receivable on Borrower’s balance sheet (as of the date of determination), but solely to the extent of the unpaid portion of the obligations stated on the respective invoices issued to a customer of Borrower with respect to inventory sold and shipped or services performed in the ordinary course of the Borrower’s business, net of any credits, rebates or offsets owed by Borrower to the respective customer, other than the following:

(a)         Accounts that do not arise from the sale of goods or the performance of services by Borrower in the ordinary course of its business;

(b)         Accounts (i) upon which Borrower’s right to receive payment is not absolute or is contingent upon the fulfillment of any condition whatsoever or (ii) as to which Borrower is not able to bring suit or otherwise enforce its remedies against the Account Debtor through judicial process, or (iii) if the Account represents a progress billing consisting of an invoice for goods sold or used or services rendered pursuant to a contract under which the Account Debtor’s obligation to pay that invoice is subject to Borrower’s completion of further performance under such contract or is subject to the equitable lien of a surety bond issuer;

(c)         Any Account to the extent that any defense, counterclaim, setoff or dispute is asserted as to such Account;

(d)         Accounts that are not true and correct statements in all material respects of bona fide indebtedness incurred in the amount of such Account for merchandise sold to or services rendered and accepted by the applicable Account Debtor;

(e)         Accounts with respect to which an invoice, reasonably acceptable to the Administrative Agent in form and substance, has not been sent to the applicable Account Debtor;

(f)          Accounts that (i) are not owned by Borrower or (ii) are subject to any right, claim, security interest or other interest of any other Person, other than any applicable Customary Permitted Liens and Liens in favor of the Administrative Agent, on behalf of itself and Lenders;

(g)         Accounts that arise from a sale to any director, officer, other employee or Affiliate of any Group Member (other than Perfumania), or to any entity that has any common officer or director with any Group Member (other than Perfumania);

(h)         Accounts that are the obligation of an Account Debtor that is the United States government or a political subdivision thereof, or any state, county or municipality or department, agency or instrumentality thereof unless the Administrative Agent, in its sole discretion, has agreed to the contrary in writing and Borrower, if necessary or desirable, has complied with respect to such obligation with the Federal Assignment of Claims Act of 1940, or any applicable state, county or municipal law restricting the assignment thereof with respect to such obligation;

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(i)          Accounts that are the obligations of an Account Debtor located in a foreign country other than Canada or Puerto Rico unless payment thereof is assured by a letter of credit assigned and delivered to the Administrative Agent, satisfactory to the Administrative Agent as to form, amount and issuer;

(j)          Accounts to the extent Borrower or any Subsidiary thereof is liable for goods sold or services rendered by the applicable Account Debtor to Borrower or any Subsidiary thereof but only to the extent of the potential offset;

(k)         Accounts that arise with respect to goods that are delivered on a bill-and-hold, cash-on-delivery basis or placed on consignment, guaranteed sale or other terms by reason of which the payment by the Account Debtor is or may be conditional;

(l)          Accounts that are in default; provided, that, without limiting the generality of the foregoing, an Account shall be deemed in default upon the occurrence of any of the following:

(i)         the Account is not paid within the earlier of: 60 days (or 30 days in the case of Accounts owed by Perfumania) following its due date or 90 days (or 120 days in the case of Accounts owed by Perfumania) following its original invoice date;

(ii)        the Account Debtor obligated upon such Account suspends business, makes a general assignment for the benefit of creditors or fails to pay its debts generally as they come due; or

(iii)       a petition is filed by or against any Account Debtor obligated upon such Account under any bankruptcy law or any other federal, state or foreign (including any provincial) receivership, insolvency relief or other law or laws for the relief of debtors;

(m)         Accounts that are the obligations of an Account Debtor if 50% or more of the Dollar amount of all Accounts owing by that Account Debtor are ineligible under one or more of the other criteria set forth in this definition

(n)         Accounts as to which the Administrative Agent’s Lien thereon, on behalf of itself and Lenders, is not a first priority perfected Lien;

(o)         Accounts that are evidenced by a judgment, Instrument or Chattel  Paper;

(p)         Accounts to the extent such Account exceeds any credit limit established by the Administrative Agent, in its reasonable credit judgment, following prior notice of such limit by the Administrative Agent to Borrower;

(q)         Accounts to the extent that such Account, together with all other Accounts owing by such Account Debtor and its Affiliates (other than Macy’s or Perfumania) as of any date of determination, exceed10%of all Eligible Accounts;

(r)          Accounts owed by Macy’s to the extent that such Account, together with all other Accounts owing by Macy’s as of any date of determination, exceed25%of all Eligible Accounts;

(s)         Accounts that are payable in any currency other than Dollars; or

(t)          Accounts that are otherwise unacceptable to Administrative Agent in its reasonable credit judgment.

“Eligible Domestic Retail Accounts” means Eligible Accounts of the Borrower owed by an Account Debtor that is located in the United States, Puerto Rico or Canada; provided that such term shall only include Accounts owed by Perfumania if and for so long as Borrower is accepting inventory returns from Perfumania.

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“Eligible Inventory” means Inventory owned by the Borrower, located in the United States of America, and reflected as inventory on Parlux’s balance sheet (as of the date of determination), valued at the lower of cost or market, on a first-in, first-out basis, other than the following:

(a)         Inventory that is not owned by Borrower free and clear of all Liens and rights of any other Person (including the rights of a purchaser that has made progress payments and the rights of a surety that has issued a bond to assure Borrower’s performance with respect to that Inventory), except any applicable Customary Permitted Liens and the Liens in favor of the Administrative Agent, on behalf of itself and Lenders;

(b)         Inventory that (i) is not located on premises owned, leased or rented by Borrower and set forth in Schedule 4 to the Guaranty and Security Agreement, (ii) is stored at a leased location, unless the Administrative Agent has given its prior consent thereto and unless (x) a reasonably satisfactory and duly executed landlord waiver (as applicable) has been delivered to the Administrative Agent, or (y) Reserves satisfactory to the Administrative Agent have been established with respect thereto, (iii) is stored with a processor, other bailee or warehouseman unless a reasonably satisfactory and duly executed processor agreement or bailee letter (as applicable) has been received by Administrative Agent and R eserves reasonably satisfactory to the Administrative Agent have been established with respect thereto, (iv) is located at an owned location subject to a mortgage in favor of a lender other than Administrative Agent, unless a reasonably satisfactory and duly executed mortgagee waiver has been delivered to the Administrative Agent, or (v) is located at any site if the aggregate book value of Inventory at any such location is less than $100,000;

(c)         Inventory that is placed on consignment or is in transit, except for Inventory in transit between domestic locations of Borrower as to which the Administrative Agent’s Liens have been perfected at origin and destination;

(d)         Inventory that is covered by a negotiable document of title, unless such document has been delivered to the Administrative Agent with all necessary endorsements, free and clear of all Liens except those in favor of the Administrative Agent, on behalf of itself and Lenders;

(e)         Inventory that is excess, obsolete, unsaleable, shopworn, seconds, damaged or unfit for sale;

(f)          Inventory that consists of display items, packing or shipping materials, manufacturing supplies, raw materials, components, work-in-process (other than Semi-Finished Inventory) or replacement parts;

(g)         Inventory that consists of goods which have been returned by the buyer (other than returned goods that have been refurbished by Borrower and that are ready for sale) or have been designed by Borrower as being on hold;

(h)         Inventory that is not of a type held for sale in the ordinary course of business of Borrower;

(i)          Inventory that is not subject to a first priority lien in favor of the Administrative Agent on behalf of itself and Lenders;

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(j)           Inventory that consists of Hazardous Materials or goods that can be transported or sold only with licenses that are not readily available;

(k)          Inventory that is not covered by casualty insurance reasonably acceptable to the Administrative Agent;

(l)           Inventory subject to any licensing, trademark, trade name or copyright agreements with any third party which either: (i) expires within 12 months of any date of determination; or (ii) would require any consent of any third party for the sale or disposition of that Inventory (which consent has not been obtained) or the payment of any monies to any third party upon such sale or other disposition (to the extent of such monies) unless in either case a licensor agreement reasonably satisfactory to the Administrative Agent has been executed by such third party and Borrower and delivered to the Administrative Agent;

(m)        Inventory that is Slow-Moving Inventory; or Inventory that is otherwise unacceptable to the Administrative Agent in its reasonable credit judgment.

“Eligible Inventory Advance Rate” shall mean, with respect to any Account, the lesser of (i) 40% of the net amount of Eligible Inventory sold under such Account (valued at the lower of cost or market, on a first-in, first-out basis) and (ii) 50% of the Net Orderly Liquidation Value of such Eligible Inventory.

“Eligible Slow-Moving Inventory” means Inventory that would otherwise constitute Eligible Inventory but solely for the fact that it is Slow-Moving Inventory; provided, however, that Inventory that has not been launched for sale shall not be considered Eligible Slow-Moving Inventory if it has been in Borrower’s possession for more than three months.

“Environmental Laws” means all Requirements of Law and Permits imposing liability or standards of conduct for or relating to the regulation and protection of human health, safety, the environment and natural resources, including CERCLA, the SWDA, the Hazardous Materials Transportation Act (49 U.S.C. §§ 5101 et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. §§ 136 et seq.), the Toxic Substances Control Act (15 U.S.C. §§ 2601 et seq.), the Clean Air Act (42 U.S.C. §§ 7401 et seq.), the Federal Water Pollution Control Act (33 U.S.C. §§ 1251 et seq.), the Occupational Safety and Health Act (29 U.S.C. §§ 651 et seq.), the Safe Drinking Water Act (42 U.S.C. §§  300(f) et seq.), all regulations promulgated under any of the foregoing, all analogous Requirements of Law and Permits and any environmental transfer of ownership notification or approval statutes, including the Industrial Site Recovery Act (N.J. Stat. Ann. §§ 13:1K-6 et seq.).

“Environmental Liabilities” means all Liabilities (including costs of Remedial Actions, natural resource damages and costs and expenses of investigation and feasibility studies) that may be imposed on, incurred by or asserted against any Group Member as a result of, or related to, any claim, suit, action, investigation, proceeding or demand by any Person, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute or common law or otherwise, arising under any Environmental Law or in connection with any environmental, health or safety condition or with any Release and resulting from the ownership, lease, sublease or other operation or occupation of property by any Group Member, whether on, prior or after the d ate hereof.

“ERISA” means the United States Employee Retirement Income Security Act of 1974.

“ERISA Affiliate” means, collectively, any Group Member, and any Person under common control, or treated as a single employer, with any Group Member, within the meaning of Section 414(b), (c), (m) or (o) of the Code.

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“ERISA Event” means any of the following:  (a) a reportable event described in Section 4043(b) of ERISA (or, unless the 30-day notice requirement has been duly waived under the applicable regulations, Section 4043(c) of ERISA) with respect to a Title IV Plan, (b) the withdrawal of any ERISA Affiliate from a Title IV Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA, (c) the complete or partial withdrawal of any ERISA Affiliate from any Multiemployer Plan, (d) with respect to any Multiemployer Plan, the filing of a notice of reorganization, insolvency or termination (or treatment of a plan amendment as termination) under Section 4041A of ERISA, (e) the filing of a notice of intent to terminate a Title IV Plan (or treatment of a plan amendment as termination) under Section 4041 of ERISA, (f) the institution of proceedings to terminate a Title IV Plan or Multiemployer Plan by the PBGC, (g) the failure to make any required contribution to any Title IV Plan or Multiemployer Plan when due, (h) the imposition of a lien under Section 412 of the Code or Section 302 or 4068 of ERISA on any property (or rights to property, whether real or personal) of any ERISA Affiliate, (i) the failure of a Benefit Plan or any trust thereunder intended to qualify for tax exempt status under Section 401 or 501 of the Code or other Requirements of Law to qualify thereunder and (j) any other event or condition that might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Title IV Plan or Multiemployer Plan or for the imposition of any liability upon any ERISA Affiliate unde r Title IV of ERISA other than for PBGC premiums due but not delinquent.

“E-Signature” means the process of attaching to or logically associating with an Electronic Transmission an electronic symbol, encryption, digital signature or process (including the name or an abbreviation of the name of the party transmitting the Electronic Transmission) with the intent to sign, authenticate or accept such Electronic Transmission.

“E-System” means any electronic system, including Intralinks® and CleraPar® and any other Internet or extranet-based site, whether such electronic system is owned, operated or hosted by the Administrative Agent, any of its Related Persons or any other Person, providing for access to data protected by passcodes or other security system.

“Eurodollar Base Rate” means, with respect to any Interest Period for any Eurodollar Rate Loan, the greater of (a) the rate determined by the Administrative Agent to be the offered rate for deposits in Dollars for the applicable Interest Period appearing on the Reuters Screen LIBOR01 page as of 11:00 a.m. (London time) on the second full Business Day next preceding the first day of such Interest Period and (b) the rate determined by the Administrative Agent to be the offered rate for deposits in Dollars for an Interest Period of three months appearing on the Reuters Screen LIBOR01 page as of 11:00 a.m. (London time) on the second full Business Day next preceding the first day of such Interest Period .  In the event that such rate does not appear on the Reuters Screen LIBOR01 page at such time, the “Eurodollar Base Rate” shall be determined by reference to such other comparable publicly available service for displaying the offered rate for deposit in Dollars in the London interbank market as may be selected by the Administrative Agent and, in the absence of availability, such other method to determine such offered rate as may be selected by the Administrative Agent in its sole discretion.

“Eurodollar Rate” means, with respect to any Interest Period and for any Eurodollar Rate Loan, an interest rate per annum determined as the ratio of (a) the Eurodollar Base Rate with respect to such Interest Period for such Eurodollar Rate Loan to (b) the difference between the number one and the Eurodollar Reserve Requirements with respect to such Interest Period and for such Eurodollar Rate Loan.

“Eurodollar Rate Loan” means any Revolving Loan that bears interest based on the Eurodollar Rate.

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“Eurodollar Reserve Requirements” means, with respect to any Interest Period and for any Eurodollar Rate Loan, a rate per annum equal to the aggregate, without duplication, of the maximum rates (expressed as a decimal number) of reserve requirements in effect 2 Business Days prior to the first day of such Interest Period (including basic, supplemental, marginal and emergency reserves) under any regulations of the Federal Reserve Board or other Governmental Authority having jurisdiction with respect thereto dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as “eurocurrency liabilities” in Regulation D of the Federal Reserve Board) maintained by a member bank of the United States Federal Reserve System.

“Event of Default” has the meaning specified in Section 9.1.

“Excess Availability” means, as of any date of determination, the amount by which (a) the Maximum Revolving Loan Balance at such time exceeds (b) the aggregate Revolving Credit Outstandings at such time.

“Excluded Foreign Subsidiary” means any Subsidiary that is not a Domestic Person and in respect of which any of (a) the pledge of all of the Stock of such Subsidiary as Collateral for any Obligation of the Borrower, (b) the grant by such Subsidiary of a Lien on any of its property as Collateral for any Obligation of the Borrower or (c) such Subsidiary incurring Guaranty Obligations with respect to any Obligation of Holdings, the Borrower or any Domestic Person would, in the good faith judgment of the Borrower, result in materially adverse tax consequences to the Loan Parties and their Subsidiaries, taken as a whole; provided, however,that (x) the Administrative Agent and the Borrower may agree that, despite the foregoing, any such Subsidiary shall not be an “Excluded Foreign Subsidiary” and (y) no such Subsidiary shall be an “Excluded Foreign Subsidiary” if, with substantially similar tax consequences, such Subsidiary has entered into any Guaranty Obligations with respect to, such Subsidiary has granted a security interest in any of its property to secure, or more than 66% of the Voting Stock of such Subsidiary was pledged to secure, directly or indirectly, any Indebtedness (other than the Obligations) of any Loan Party.

“Federal Funds Rate” means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as determined by the Administrative Agent in its sole discretion.

“Federal Reserve Board” means the Board of Governors of the United States Federal Reserve System and any successor thereto.

“Fee Letter” means the Fee Letter of even date herewith between the Borrower and GE Capital.

“Financial Statement” means each financial statement delivered pursuant to Section 4.4 or 6.1.

“Fiscal Month” shall mean any of the monthly accounting periods of Holdings.

“Fiscal Quarter” shall mean any of the quarterly accounting periods of Holdings.

“Fiscal Year” shall mean the 12-month accounting period of Holdings ending March 31st of each year.  Subsequent changes of the fiscal year of Holdings shall not change the term “Fiscal Year” as used herein unless the Requisite Lenders and the Administrative Agent shall consent in writing to such change.

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“GAAP” means generally accepted accounting principles in the United States of America, as in effect from time to time, set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants, in the statements and pronouncements of the Financial Accounting Standards Board and in such other statements by such other entity as may be in general use by significant segments of the accounting profession that are applicable to the circumstances as of the date of determination.  Subject to Section 1.3, all references to “GAAP” shall be to GAAP app lied consistently with the principles used in the preparation of the Financial Statements described in Section 4.4(a).

“GE Capital” has the meaning given such term in the preamble to this Agreement.

“Governmental Authority” means any nation, sovereign or government, any state or other political subdivision thereof, any agency, authority or instrumentality thereof and any entity or authority exercising executive, legislative, taxing, judicial, regulatory or administrative functions of or pertaining to government, including any central bank, stock exchange, regulatory body, arbitrator, public sector entity, supra-national entity (including the European Union and the European Central Bank) and any self-regulatory organization (including the National Association of Insurance Commissioners).

“Gross Margin Reserve” means, as of any date of determination thereof, the book value of Eligible Domestic Retail Accounts at such time multiplied by the Borrower’s trailing twelve month gross profit percentage for sales arising from the creation of such Accounts.

“Group Members” means, collectively, Holdings, the Borrower, and all other Subsidiaries (if any) of Holdings.

“Group Members’ Accountants” means Marcum Rachlin, a division of Marcum LLP, or other nationally-recognized independent registered certified public accountants acceptable to the Administrative Agent.

“Guarantor” means Holdings; each Wholly Owned Subsidiary of Holdings (if any) listed on Schedule 4.3 (other than the Borrower or an Excluded Foreign Subsidiary) and each other Person that enters into any Guaranty Obligation with respect to any Obligation of any Loan Party.

“Guaranty and Security Agreement” means a guaranty and security agreement, in substantially the form of Exhibit H, among the Administrative Agent, the Borrower, Holdings and any other Guarantors from time to time party thereto.

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“Guaranty Obligation” means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of such Person for any Indebtedness, lease, dividend or other obligation (the “primary obligation”) of another Person (the “primary obligor”), if the purpose or intent of such Person in incurring such liability, or the economic effect thereof, is to guarantee such primary obligation or provide support, assurance or comfort to the holder of such primary obligation or to protect or indemnify such holder against loss with respect to such primary obligation, including (a) the direct or indirect guara nty, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of any primary obligation, (b) the incurrence of reimbursement obligations with respect to any letter of credit or bank guarantee in support of any primary obligation, (c) the existence of any Lien, or any right, contingent or otherwise, to receive a Lien, on the property of such Person securing any part of any primary obligation and (d) any liability of such Person for a primary obligation through any Contractual Obligation (contingent or otherwise) or other arrangement (i) to purchase, repurchase or otherwise acquire such primary obligation or any security therefor or to provide funds for the payment or discharge of such primary obligation (whether in the form of a loan, advance, stock purchase, capital contribution or otherwise), (ii) to maintain the solvency, working capital, equity capital or any balance sheet item, level of income or cash flow, liquidity or financial condition of any primary obligor, (iii) to make take-or-pay or similar payments, if required, regardless of non-performance by any other party to any Contractual Obligation, (iv) to purchase, sell or lease (as lessor or lessee) any property, or to purchase or sell services, primarily for the purpose of enabling the primary obligor to satisfy such primary obligation or to protect the holder of such primary obligation against loss or (v) to supply funds to or in any other manner invest in, such primary obligor (including to pay for property or services irrespective of whether such property is received or such services are rendered); provided, however, that “Guaranty Obligations” shall not include (x) endorsements for collection or deposit in the ordinary course of business and ( y) product warranties given in the ordinary course of business.  The outstanding amount of any Guaranty Obligation shall equal the outstanding amount of the primary obligation so guaranteed or otherwise supported or, if lower, the stated maximum amount for which such Person may be liable under such Guaranty Obligation.

“Hazardous Material” means any substance, material or waste that is classified, regulated or otherwise characterized under any Environmental Law as hazardous, toxic, a contaminant or a pollutant or by other words of similar meaning or regulatory effect, including petroleum or any fraction thereof, asbestos, polychlorinated biphenyls and radioactive substances.

“Hedging Agreement” means any Interest Rate Contract, foreign exchange, swap, option or forward contract, spot, cap, floor or collar transaction, any other derivative instrument and any other similar speculative transaction and any other similar agreement or arrangement designed to alter the risks of any Person arising from fluctuations in any underlying variable.

“Indebtedness” of any Person means, without duplication, any of the following, whether or not matured:  (a) all indebtedness for borrowed money, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all reimbursement and all obligations with respect to (i) letters of credit, bank guarantees or bankers’ acceptances or (ii) surety, customs, reclamation or performance bonds (in each case not related to judgments or litigation) other than those entered into in the ordinary course of business, (d) all obligations to pay the deferred purchase price of property or services, other than (i) trade payables incurred in the ordinary course of business and (ii) royalties or similar payments owed to any licensor with respect to any IP License, (e) all obligations created or arising under any conditional sale or other title retention agreement, regardless of whether the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property, (f) all Capitalized Lease Obligations, (g) all obligations, whether or not contingent, to purchase, redeem, retire, defease or otherwise acquire for value any of its own Stock or Stock Equivalents (or any Stock or Stock Equivalent of a direct or indirect parent entity thereof) prior to the date that is 180 days after the Scheduled Revolving Credit Termination Date, valued at, in the case of redeemable preferred Stock, the greater of the voluntary liquidation preference and the involuntary liquidation preference of such Stock plus accrued and unpaid dividends, (h) all payments that would be required to be made in respect of any Hedging Agreement in the event of a termination (including an early termination) on the date of de termination and (i) all Guaranty Obligations for obligations of any other Person constituting Indebtedness of such other Person; provided, however, that the items in each of clauses (a) through (i) above shall constitute “Indebtedness” of such Person solely to the extent, directly or indirectly, (x) such Person is liable for any part of any such item, (y) any such item is secured by a Lien on such Person’s property or (z) any other Person has a right, contingent or otherwise, to cause such Person to become liable for any part of any such item or to grant such a Lien.

“Indemnified Matter” has the meaning specified in Section 11.4.

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“Indemnitee” has the meaning specified in Section 11.4.

“Initial Projections” means those financial projections, dated June 3, 2010, covering the Fiscal Years ending in 2011 through 2013 and delivered to the Administrative Agent by the Borrower prior to the date hereof.

“Intellectual Property” means all rights, title and interests in or relating to intellectual property and industrial property arising under any Requirement of Law and all IP Ancillary Rights relating thereto, including all Copyrights, Patents, Trademarks, Internet Domain Names, Trade Secrets and IP Licenses.

“Interest Period” means, with respect to any Eurodollar Rate Loan, the period commencing on the date such Eurodollar Rate Loan is made or converted to a Eurodollar Rate Loan or, if such loan is continued, on the last day of the immediately preceding Interest Period therefor and, in each case, ending 1, 2, or 3 months thereafter, as selected by the Borrower pursuant hereto; provided, however, that (a) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day, unless the result of such extension would be to extend such Interest Perio d into another such Business Day falls in the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day, (b) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month, (c) the Borrower may not select any Interest Period ending after the Scheduled Revolving Credit Termination Date, (d) the Borrower may not select any Interest Period in respect of Loans having an aggregate principal amount of less than $5,000,000 and (e) there shall be outstanding at any one time no more than 4 Interest Periods.

“Interest Rate Contracts” means all interest rate swap agreements, interest rate cap agreements, interest rate collar agreements and interest rate insurance.

“Internet Domain Names” means all rights, title and interests (and all related IP Ancillary Rights) arising under any Requirement of Law in or relating to Internet domain names.

“Inventory” means all of the “inventory” (as such term is defined in the UCC) of the Borrower and its Subsidiaries, including, but not limited to, all merchandise, raw materials, parts, supplies, work-in-process (including Semi-Finished Inventory) and finished goods intended for sale, together with all the containers, packing, packaging, shipping and similar materials related thereto, and including such inventory as is temporarily out of the Borrower’s or such Subsidiary’s custody or possession, including inventory on the premises of others and items in transit.

“Investment” means, with respect to any Person, directly or indirectly, (a) to own, purchase or otherwise acquire, in each case whether beneficially or otherwise, any investment in, including any interest in, any Security of any other Person (other than any evidence of any Obligation), (b) to purchase or otherwise acquire, whether in one transaction or in a series of transactions, all or a significant part of the property of any other Person or a business conducted by any other Person or all or substantially all of the assets constituting the business of a division, branch, brand or other unit operation of any other Person, (c) to incur, or to remain liable under, any Guaranty Obligation for Indebtedness of any other Person, to assume the Indebtedness of any other Person or to make, hold, purchase or otherwise acquire, in each case directly or indirectly, any deposit, loan, advance, commitment to lend or advance, or other extension of credit (including by deferring or extending the date of, in each case outside the ordinary course of business, the payment of the purchase price for Sales of property or services to any other Person, to the extent such payment obligation constitutes Indebtedness of such other Person), excluding deposits with financial institutions available for withdrawal on demand, prepaid expenses, accounts receivable and similar items created in the ordinary course of business,  or (d) to make, directly or indirectly, any contribution to the capital of any other Person..

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“IP Ancillary Rights” means, with respect to any other Intellectual Property, as applicable, all foreign counterparts to, and all divisionals, reversions, continuations, continuations-in-part, reissues, reexaminations, renewals and extensions of, such Intellectual Property and all income, royalties, proceeds and Liabilities at any time due or payable or asserted under or with respect to any of the foregoing or otherwise with respect to such Intellectual Property, including all rights to sue or recover at law or in equity for any past, present or future infringement, misappropriation, dilution, violation or other impairment thereof, and, in each case, all rights to obtain any other IP Ancillary Right.

“IP License” means all Contractual Obligations (and all related IP Ancillary Rights), whether written or oral, granting any right title and interest in or relating to any Intellectual Property.

“IRS” means the Internal Revenue Service of the United States and any successor thereto.

“Lender” means, collectively, any financial institution or other Person that (a) is listed on the signature pages hereof as a “Lender” or (b) from time to time becomes a party hereto by execution of an Assignment, in each case together with its successors.

“Liabilities” means all claims, actions, suits, judgments, damages, losses, liability, obligations, responsibilities, fines, penalties, sanctions, costs, fees, taxes, commissions, charges, disbursements and expenses, in each case of any kind or nature (including interest accrued thereon or as a result thereto and fees, charges and disbursements of financial, legal and other advisors and consultants), whether joint or several, whether or not indirect, contingent, consequential, actual, punitive, treble or otherwise.

“Lien” means any mortgage, deed of trust, pledge, hypothecation, assignment, charge, deposit arrangement, encumbrance, easement, lien (statutory or other), security interest or other security arrangement and any other preference, priority or preferential arrangement of any kind or nature whatsoever, including any conditional sale contract or other title retention agreement, the interest of a lessor under a Capital Lease and any synthetic or other financing lease having substantially the same economic effect as any of the foregoing.

“Loan” means any loan made or deemed made by any Lender under this Agreement.

“Loan Documents” means, collectively, this Agreement, the Fee Letter, any Notes, the Guaranty and Security Agreement, any Mortgages and Mortgage Supporting Documents, the Control Agreements, the Secured Hedging Agreements and, when executed, each other document executed by a Loan Party and delivered to the Administrative Agent or any Lender in connection with or pursuant to any of the foregoing or the Obligations, together with any modification of any term, or any waiver with respect to, any of the foregoing.

“Loan Party” means each Borrower and each Guarantor.

“Macy’s” means Macy’s, Inc. and its Affiliates.

“Material Adverse Effect” means an effect that results in or causes, or could reasonably be expected to result in or cause, a material adverse change in any of (a) the condition (financial or otherwise), business, performance, prospects, operations or property of the Group Members, taken as a whole, (b) the ability of any Loan Party to perform its obligations under any Loan Document and (c) the validity or enforceability of any Loan Document or the rights and remedies of the Administrative Agent, the Lenders and the other Secured Parties under any Loan Document.

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“Material Environmental Liabilities” means Environmental Liabilities exceeding the Material Liability Amount in the aggregate.

“Material Indebtedness” means any Indebtedness of any Group Member having a principal amount equal to or greater than the Material Liability Amount (other than the Obligations or Indebtedness under any Hedging Agreement).

“Material Liability Amount” means $1,000,000.

“Maximum Inventory Availability Amount” means $10,000,000.

“Maximum Revolving Loan Balance” has the meaning specified in Section 2.1(a).

“Moody’s” means Moody’s Investors Service, Inc.

“Mortgage” means any mortgage, deed of trust or other document executed or required herein to be executed by any Loan Party and granting a security interest over real property in favor of the Administrative Agent as security for the Obligations.

“Mortgage Supporting Documents” means, with respect to any Mortgage for a parcel of real property, each document (including title policies or marked-up unconditional insurance binders (in each case, together with copies of all documents referred to therein), maps, ALTA (or TLTA, if applicable) as-built surveys (in form and as to date that is sufficiently acceptable to the title insurer issuing title insurance to the Administrative Agent for such title insurer to deliver endorsements to such title insurance as reasonably requested by the Administrative Agent), environmental assessments and reports, and evidence regarding recording and payment of fees, insurance premium and taxes) that the Administrative Agent may reasonably request, to create, register, perfec t, maintain, evidence the existence, substance, form or validity of or enforce a valid lien on such parcel of real property in favor of the Administrative Agent for the benefit of the Secured Parties, subject only to such Liens as the Administrative Agent may approve.

“Multiemployer Plan” means any multiemployer plan, as defined in Section 400l(a)(3) of ERISA, to which any ERISA Affiliate incurs or otherwise has any obligation or liability, contingent or otherwise.

“Net Cash Proceeds” means proceeds received in cash from (a) any Sale of, or Property Loss Event with respect to, property, net of (i) the customary out-of-pocket cash costs, fees and expenses paid or required to be paid in connection therewith, (ii) taxes paid or reasonably estimated to be payable as a result thereof and (iii) any amount required to be paid or prepaid on Indebtedness (other than the Obligations and Indebtedness owing to any Group Member) secured by the property subject thereto or (b) any sale or issuance of Stock or incurrence of Indebtedness, in each case net of brokers’, advisors’ and investment banking fees and other customary out-of-pocket underwriting discounts, commissions and other customary out-of-pocket cash costs, fees and expenses, in each case incurred in connection with such transaction; provided, however, that any such proceeds received by any Subsidiary of the Borrower that is not a Wholly Owned Subsidiary of the Borrower shall constitute “Net Cash Proceeds” only to the extent of the aggregate direct and indirect beneficial ownership interest of the Borrower therein.

“Net Liquidity” means, as of any date of determination thereof, the sum of (i) the Borrower’s Unrestricted Cash Assets as of such date plus (ii) the Excess Availability as of such date.

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“Net Orderly Liquidation Value” means, as of any date of determination thereof and with respect to any Inventory, the cash proceeds of such Inventory which could be obtained in an orderly liquidation of such Inventory (net of all liquidation expenses, costs of sale, operating expenses and retrieval and related costs) as determined by the Administrative Agent pursuant to the most recent third-party appraisal of such Inventory (in form, scope and methodology acceptable to the Administrative Agent in its reasonable credit judgment) delivered to Administrative Agent by an appraiser reasonably acceptable to Administrative Agent.

“Non-Funding Lender” has the meaning specified in Section 2.2(c).

“Non-U.S. Lender Party” means each of the Administrative Agent, each Lender, each SPV and each participant, in each case that is not a Domestic Person.

“Note” means a promissory note of the Borrower, in substantially the form of Exhibit B,payable to the order of a Lender in a principal amount equal to the amount of such Lender’s Revolving Credit Commitment.

“Notice of Borrowing” has the meaning specified in Section 2.2.

“Notice of Conversion or Continuation” has the meaning specified in Section 2.10.

“Obligations” means, with respect to any Loan Party, all amounts, obligations, liabilities, covenants and duties of every type and description owing by such Loan Party to the Administrative Agent, any Lender, any other Indemnitee, any participant, any SPV or any Secured Hedging Counterparty arising out of, under, or in connection with, any Loan Document, whether direct or indirect (regardless of whether acquired by assignment), absolute or contingent, due or to become due, whether liquidated or not, now existing or hereafter arising and however acquired, and whether or not evidenced by any instrument or for the payment of money, including, without duplication, (a) if such Loan Party is the Borrower, all Revolving Loans, (b) all interest, whether or not accrui ng after the filing of any petition in bankruptcy or after the commencement of any insolvency, reorganization or similar proceeding, and whether or not a claim for post-filing or post-petition interest is allowed in any such proceeding, and (c) all other fees, expenses (including fees, charges and disbursement of counsel), interest, commissions, charges, costs, disbursements, indemnities and reimbursement of amounts paid and other sums chargeable to such Loan Party under any Loan Document.

“Other Taxes” has the meaning specified in Section 2.17(c).

“Patents” means all rights, title and interests (and all related IP Ancillary Rights) arising under any Requirement of Law in or relating to letters patent and applications therefor.

“PBGC” means the United States Pension Benefit Guaranty Corporation and any successor thereto.

“Perfumania” means Perfumania Holdings, Inc., a Florida corporation, and its Affiliates (including Quality King Distributors, Inc. but excluding any Group Members).

“Permit” means, with respect to any Person, any permit, approval, authorization, license, registration, certificate, concession, grant, franchise, variance or permission from, and any other Contractual Obligations with, any Governmental Authority, in each case whether or not having the force of law and applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

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“Permitted Indebtedness” means any Indebtedness of any Group Member that is not prohibited by Section 8.1 or any other provision of any Loan Document.

“Permitted Investment” means any Investment of any Group Member that is not prohibited by Section 8.3 or any other provision of any Loan Document.

“Permitted Lien” means any Lien on or with respect to the property of any Group Member that is not prohibited by Section 8.2 or any other provision of any Loan Document.

“Permitted Refinancing” means Indebtedness constituting a refinancing or extension of Permitted Indebtedness that (a) has an aggregate outstanding principal amount not greater than the aggregate principal amount of such Permitted Indebtedness outstanding at the time of such refinancing or extension, (b) has a weighted average maturity (measured as of the date of such refinancing or extension) and maturity no shorter than that of such Permitted Indebtedness, (c) is not entered into as part of a Sale and Leaseback transaction, (d) is not secured by any property or any Lien other than those securing such Permitted Indebtedness and (e) is otherwise on terms no less favorable to the Group Members, taken as a whole, than those of such Permitted Indebtedness; provided, however, that, notwithstanding the foregoing, (x) the terms of such Permitted Indebtedness may be modified as part of such Permitted Refinancing if such modification would have been permitted pursuant to Section 8.11 and (y) no Guaranty Obligation for such Indebtedness shall constitute part of such Permitted Refinancing unless similar Guaranty Obligations with respect to such Permitted Indebtedness existed and constituted Permitted Indebtedness prior to such refinancing or extension.

“Permitted Reinvestment” means, with respect to the Net Cash Proceeds of any Sale or Property Loss Event, to acquire (or make Capital Expenditures to finance the acquisition, repair, improvement or construction of), to the extent otherwise permitted hereunder, property useful in the business of the Borrower or any of its Subsidiaries or, if such Property Loss Event involves loss or damage to property, to repair such loss or damage.

“Person” means any individual, partnership, corporation (including a business trust and a public benefit corporation), joint stock company, estate, association, firm, enterprise, trust, limited liability company, unincorporated association, joint venture and any other entity or Governmental Authority.

“Pro Forma Balance Sheet” has the meaning specified in Section 4.4(c).

“Projections” means, collectively, the Initial Projections and any document delivered pursuant to Section 6.1(f).

“Property Loss Event” means, with respect to any property, any loss of or damage to such property or any taking of such property or condemnation thereof.

Pro Rata Outstandings”, of any Lender at any time, means the sum of the outstanding principal amount of Revolving Loans owing to such Lender.

“Pro Rata Share” means, with respect to any Lender at any time, the percentage obtained by dividing (a) the sum of the Revolving Credit Commitments (or, if such Revolving Credit Commitments are terminated, the Pro Rata Outstandings hereunder) of such Lender then in effect by (b) the sum of the Revolving Credit Commitments (or, if such Revolving Credit  Commitments are terminated, the Pro Rata Outstandings hereunder) of all Lenders then in effect; provided, however, that, if there are no Revolving Credit Commitments and no Pro Rata Outstandings hereunder, such Lender’s Pro Rata Share shall be determined based on the Pro Rata Share most recently in effect, after giving effect to any subsequent assignment and any subsequent non-pro rata payments of any Lender pursuant to Section 2.18.

“Register” has the meaning specified in Section 2.14(b).

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“Reinvestment Prepayment Amount” means, with respect to any Net Cash Proceeds on the Reinvestment Prepayment Date therefor, the amount of such Net Cash Proceeds less any amount paid or required to be paid by any Group Member to make Permitted Reinvestments with such Net Cash Proceeds pursuant to a Contractual Obligation entered into prior to such Reinvestment Prepayment Date with any Person that is not an Affiliate of the Borrower (other than Perfumania).

“Reinvestment Prepayment Date” means, with respect to any portion of any Net Cash Proceeds of any Sale or Property Loss Event, the earliest of (a) the 180th day after the completion of the portion of such Sale or Property Loss Event corresponding to such Net Cash Proceeds, (b) the date that is 5 Business Days after the date on which the Borrower shall have notified the Administrative Agent of the Borrower’s determination not to make Permitted Reinvestments with such Net Cash Proceeds, (c) the occurrence of any Event of Default set forth in Section 9.1(e)(ii) and (d) 5 Business Days after the delivery of a notice by the Administrative Agent or the Required Lenders to the Borrower durin g the continuance of any other Event of Default.

“Related Person” means, with respect to any Person, each Affiliate of such Person (with respect to Borrower, “Affiliate” shall not include Perfumania) and each director, officer, employee, agent, trustee, representative, attorney, accountant and each insurance, environmental, legal, financial and other advisor (including those retained in connection with the satisfaction or attempted satisfaction of any condition set forth in Article III) and other consultants and agents of or to such Person or any of its Affiliates, together with, if such Person is the Administrative Agent, each other Person or individual designated, nominated or otherwise mandated by or helping the Administrat ive Agent pursuant to and in accordance with Section 10.4 or any comparable provision of any Loan Document.

“Release” means any release, threatened release, spill, emission, leaking, pumping, pouring, emitting, emptying, escape, injection, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Material into or through the environment.

“Remedial Action” means all actions required to (a) clean up, remove, treat or in any other way address any Hazardous Material in the indoor or outdoor environment, (b) prevent or minimize any Release so that a Hazardous Material does not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment or (c) perform pre-remedial studies and investigations and post-remedial monitoring and care with respect to any Hazardous Material.

“Required Lenders” means, at any time, Lenders having at such time in excess of 50% of the aggregate Revolving Credit Commitments (or, if such Revolving Credit Commitments are terminated, the Pro Rata Outstandings) then in effect, ignoring, in such calculation, the amounts held by any Non-Funding Lender.

“Requirements of Law” means, with respect to any Person, collectively, all federal, state, local, foreign, multinational or international laws, statutes, codes, treaties, rules and regulations, guidelines, ordinances, orders, judgments, writs, injunctions, decrees (including administrative or judicial precedents or authorities) and the interpretation or administration thereof by, and other determinations, directives, requirements or requests of, any Governmental Authority, in each case whether or not having the force of law and that are applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

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“Reserves” means, with respect to the Borrowing Base, (a) the Gross Margin Reserve, and (b) such other reserves against Eligible Accounts, Eligible Inventory or availability of the Revolving Credit Commitments hereunder that the Administrative Agent may, in its reasonable credit judgment, establish from time to time.  Without limiting the generality of the foregoing, (i) Reserves established to ensure the payment of accrued interest expenses or Indebtedness shall be deemed to be a reasonable exercise of Administrative Agent’s credit judgment and (ii) the Administrative Agent may, in its discretion, exclude from the Borrowing Base, or impose Reserves with respect to, Inventory at each such location where a landlord agreement or bailee or mortga gee wavier is not obtained.

“Responsible Officer” means, with respect to any Person, any of the president, chief executive officer, chief financial officer, treasurer, assistant treasurer, controller, managing member or general partner of such Person but, in any event, with respect to financial matters, any such officer that is responsible for preparing the Financial Statements delivered hereunder and, with respect to the Corporate Chart and other documents delivered pursuant to Section 6.1(e), documents delivered pursuant to Section 3.1,and documents delivered pursuant to Section 7.10 , the secretary or assistant secretary of such Person or any other officer responsible for maintaining the corporate and similar records of such Person.

“Restricted Payment” means (a) any dividend, return of capital, distribution or any other payment, whether direct or indirect (including through the use of Hedging Agreements, the making, repayment, cancellation or forgiveness of Indebtedness and similar Contractual Obligations) and whether in cash, Securities or other property, on account of any Stock or Stock Equivalent of the Borrower or any of its Subsidiaries, in each case now or hereafter outstanding, including with respect to a claim for rescission of a Sale of such Stock or Stock Equivalent and (b) any redemption, retirement, termination, defeasance, cancellation, purchase or other acquisition for value, whether direct or indirect (including through the use of Hedging Agreements, the making, repayment , cancellation or forgiveness of Indebtedness and similar Contractual Obligations), of any Stock or Stock Equivalent of any Group Member or of any direct or indirect parent entity of the Borrower, now or hereafter outstanding, and any payment or other transfer setting aside funds for any such redemption, retirement, termination, cancellation, purchase or other acquisition, whether directly or indirectly and whether to a sinking fund, a similar fund or otherwise.

“Revolving Credit Commitment” means, with respect to each Lender, the commitment of such Lender to make Revolving Loans and acquire interests in other Revolving Credit Outstandings, which commitment is in the amount set forth opposite such Lender’s name on Schedule I under the caption “Revolving Credit Commitment”, as amended to reflect Assignments and as such amount may be reduced pursuant to this Agreement.  The aggregate amount of the Revolving Credit Commitments on the date hereof equals $20,000,000.

“Revolving Credit Facility” means the Revolving Credit Commitments and the provisions herein related to the Revolving Loans.

“Revolving Credit Outstandings” means, at any time, the sum of, in each case to the extent outstanding at such time, the aggregate principal amount of the Revolving Loans.

“Revolving Credit Termination Date” shall mean the earliest of (a) the Scheduled Revolving Credit Termination Date, (b) the date of termination of the Revolving Credit Commitments pursuant to Section 2.5 or 9.2and (c) the date on which the Obligations become due and payable pursuant to Section 9.2.

“Revolving Loan” has the meaning specified in Section 2.1(a).

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“S&P” means Standard & Poor’s Rating Services.

“Sale and Leaseback Transaction” means, with respect to any Person (the “obligor”), any Contractual Obligation or other arrangement with any other Person (the “counterparty”) consisting of a lease by such obligor of any property that, directly or indirectly, has been or is to be Sold by the obligor to such counterparty or to any other Person to whom funds have been advanced by such counterparty based on a Lien on, or an assignment of, such property or any obligations of such obligor under such lease.

“Scheduled Revolving Credit Termination Date” means the second (2nd) anniversary of the date of this Agreement.

“Secured Hedging Agreement” means any Hedging Agreement that (a) has been entered into with a Secured Hedging Counterparty, (b) in the case of a Hedging Agreement not entered into with or provided or arranged by the Administrative Agent or an Affiliate of the Administrative Agent, is expressly identified as being a “Secured Hedging Agreement” hereunder in a joint notice from such Loan Party and such Person delivered to the Administrative Agent reasonably promptly after the execution of such Hedging Agreement and (c) meets the requirements of Section 8.1(f).

“Secured Hedging Counterparty” means (a) a Person who has entered into a Hedging Agreement with a Loan Party if such Hedging Agreement was provided or arranged by the Administrative Agent or an Affiliate of the Administrative Agent, and any assignee of such Person or (b) a Lender or an Affiliate of a Lender who has entered into a Hedging Agreement with a Loan Party (or a Person who was a Lender or an Affiliate of a Lender at the time of execution and delivery of the Hedging Agreement).

“Secured Parties” means the Lenders, the Administrative Agent, any Secured Hedging Counterparty, each other Indemnitee and any other holder of any Obligation of any Loan Party.

“Securities” means all Stock, Stock Equivalents, voting trust certificates, bonds, debentures, instruments and other evidence of Indebtedness, whether or not secured, convertible or subordinated, all certificates of interest, share or participation in, all certificates for the acquisition of, and all warrants, options and other rights to acquire, any Security.

“Sell” means, with respect to any property, to sell, convey, transfer, assign, license, lease or otherwise dispose of, any interest therein or to permit any Person to acquire any such interest, including, in each case, through a Sale and Leaseback Transaction or through a sale, factoring at maturity, collection of or other disposal, with or without recourse, of any notes or accounts receivable.  Conjugated forms thereof and the noun “Sale” have correlative meanings.

“Semi-Finished Inventory” means Inventory consisting of bottled perfume and ancillary saleable products that would constitute finished goods except that it has not yet been included in a box or gift set.

“Slow-Moving Inventory” means, as of any date of determination thereof, either (i) any Inventory that as of such date has been in the Borrower’s possession or control for more than 360 days or (ii) any Inventory of a type the aggregate value of which as of such date (valued at the lower of cost or market, on a first-in, first-out basis) exceeds the Borrower’s trailing twelve month sales thereof unless such Inventory consists of a product the initial sale of which by the Borrower has not been launched or was launched within the last twelve months.

“Solvent” means, with respect to any Person as of any date of determination, that, as of such date, (a) the value of the assets of such Person (both at fair value and present fair saleable value) is greater than the total amount of liabilities (including contingent and unliquidated liabilities) of such Person, (b) such Person is able to pay all liabilities of such Person as such liabilities mature and (c) such Person does not have unreasonably small capital.  In computing the amount of contingent or unliquidated liabilities at any time, such liabilities shall be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability .

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“SPV” means any special purpose funding vehicle identified as such in a writing by any Lender to the Administrative Agent.

“Stock” means all shares of capital stock (whether denominated as common stock or preferred stock), equity interests, beneficial, partnership or membership interests, joint venture interests, participations or other ownership or profit interests in or equivalents (regardless of how designated) of or in a Person (other than an individual), whether voting or non-voting.

“Stock Equivalents” means all securities convertible into or exchangeable for Stock or any other Stock Equivalent and all warrants, options or other rights to purchase, subscribe for or otherwise acquire any Stock or any other Stock Equivalent, whether or not presently convertible, exchangeable or exercisable.

“Subsidiary” means, with respect to any Person, any corporation, partnership, joint venture, limited liability company, association or other entity, the management of which is, directly or indirectly, controlled by, or of which an aggregate of more than 50% of the outstanding Voting Stock is, at the time, owned or controlled directly or indirectly by, such Person or one or more Subsidiaries of such Person.

“Substitute Lender” has the meaning specified in Section 2.18(a).

“SWDA” means the Solid Waste Disposal Act (42 U.S.C. §§ 6901 et seq.).

“Tax Affiliate” means, (a) the Borrower and its Subsidiaries and (b) any Affiliate of the Borrower with which the Borrower files or is eligible to file consolidated, combined or unitary tax returns.

“Tax Return” has the meaning specified in Section 4.8.

“Taxes” has the meaning specified in Section 2.17(a).

“Title IV Plan” means a pension plan subject to Title IV of ERISA, other than a Multiemployer Plan, to which any ERISA Affiliate incurs or otherwise has any obligation or liability, contingent or otherwise.

“Trademarks” means all rights, title and interests (and all related IP Ancillary Rights) arising under any Requirement of Law in or relating to trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers and, in each case, all goodwill associated therewith, all registrations and recordations thereof and all applications in connection therewith.

“Trade Secrets” means all right, title and interest (and all related IP Ancillary Rights) arising under any Requirement of Law in or relating to trade secrets.

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“UCC” means the Uniform Commercial Code of any applicable jurisdiction and, if the applicable jurisdiction shall not have any Uniform Commercial Code, the Uniform Commercial Code as in effect in the State of New York.

“United States” means the United States of America.

“Unrestricted Cash Assets” means cash and Cash Equivalents of the Borrower that are not subject to any right, claim, security interest or other interest of any other Person (other than Liens in favor of the Administrative Agent, on behalf of itself and Lenders, and Customary Permitted Liens of a type described in clause (b) of the definition herein of such term) and that are not held in an escrow, trust, payroll, sales tax, customs, duty or other special account.

“Unused Commitment Fee” has the meaning specified in Section 2.11.

“U.S. Lender Party” means each of the Administrative Agent, each Lender, each SPV and each participant, in each case that is a Domestic Person.

“Voting Stock” means Stock of any Person having ordinary power to vote in the election of members of the board of directors, managers, trustees or other controlling Persons, of such Person (irrespective of whether, at the time, Stock of any other class or classes of such entity shall have or might have voting power by reason of the occurrence of any contingency).

“Wholly Owned Subsidiary” of any Person means any Subsidiary of such Person, all of the Stock of which (other than nominal holdings and director’s qualifying shares) is owned by such Person, either directly or through one or more Wholly Owned Subsidiaries of such Person.

“Withdrawal Liability” means, at any time, any liability incurred (whether or not assessed) by any ERISA Affiliate and not yet satisfied or paid in full at such time with respect to any Multiemployer Plan pursuant to Section 4201 of ERISA.

Section 1.2    UCC Terms.  The following terms have the meanings given to them in the applicable UCC:  “commodity account”, “commodity contract”, “commodity intermediary”, “deposit account”, “entitlement holder”, “entitlement order”, “equipment”, “financial asset”, “general intangible”, “goods”, “instruments”, “securities account”, “securities intermediary” and “security entitlement”.

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Section 1.3    Accounting Terms and Principles.  All accounting determinations required to be made pursuant hereto shall, unless expressly otherwise provided herein, be made in accordance with GAAP.  No change in the accounting principles used in the preparation of any Financial Statement hereafter adopted by Holdings shall be given effect if such change would affect a calculation that measures compliance with any provision of Article V or VIII unless the Borrower, the Administrative Agent and the Required Lenders agree to modify such provisions to reflect such changes in GAAP and, unless such provi sions are modified, all Financial Statements, Compliance Certificates and similar documents provided hereunder shall be provided together with a reconciliation between the calculations and amounts set forth therein before and after giving effect to such change in GAAP.  Notwithstanding any other provision contained herein, all terms of an accounting or financial nature used herein shall be construed, and all computations of amounts and ratios referred to in Article V and Article VIII shall be made, without giving effect to any election under Statement of Financial Accounting Standards 159 (or any other Financial Accounting Standard having a similar result or effect) to value any Indebtedness or other liabilities of any Credit Party or any Subsidiary of any Credit Party at “fair value.”

Section 1.4    Payments.  The Administrative Agent may set up standards and procedures to determine or redetermine the equivalent in Dollars of any amount expressed in any currency other than Dollars and otherwise may, but shall not be obligated to, rely on any determination made by any Loan Party.  Any such determination or redetermination by the Administrative Agent shall be conclusive and binding for all purposes, absent manifest error.  No determination or redetermination by any Secured Party or Loan Party and no other currency conversion shall change or release any obligation of any Loan Party or of any Secured Party (other than the Administrative Agent and its Related Persons) under any Loan Document, each of which agrees to pay separately for any shortfall remaining after any conversion and payment of the amount as converted.  The Administrative Agent may round up or down, and may set up appropriate mechanisms to round up or down, any amount hereunder to nearest higher or lower amounts and may determine reasonable de minimis payment thresholds.

Section 1.5    Interpretation.  (a)  Certain Terms.  Except as set forth in any Loan Document, all accounting terms not specifically defined herein shall be construed in accordance with GAAP (except for the term “property” which shall be interpreted as broadly as possible, including, in any case, cash, Securities, other assets, rights under Contractual Obligations and Permits and any right or interest in any property).  The terms “herein”, “hereof” and similar terms refer to this Agreement as a whole.  In the computation of periods of time from a specified date to a later specified date in any Loan Document, the terms “from” means “from and including” and the words “to” and “until” each mean “to but excluding” and the word “through” means “to and including.”  In any other case, the term “including” when used in any Loan Document means “including without limitation.”  The term “documents” means a ll writings, however evidenced and whether in physical or electronic form, including all documents, instruments, agreements, notices, demands, certificates, forms, financial statements, opinions and reports.  The term “incur” means incur, create, make, issue, assume or otherwise become directly or indirectly liable in respect of or responsible for, in each case whether directly or indirectly, and the terms “incurrence” and “incurred” and similar derivatives shall have correlative meanings.

(a)          Certain References.  Unless otherwise expressly indicated, references (i) in this Agreement to an Exhibit, Schedule, Article, Section or clause refer to the appropriate Exhibit or Schedule to, or Article, Section or clause in, this Agreement and (ii) in any Loan Document, to (A) any agreement shall include, without limitation, all exhibits, schedules, appendixes and annexes to such agreement and, unless the prior consent of any Secured Party required therefor is not obtained, any modification to any term of such agreement, (B) any statute shall be to such statute as modified from time to time and to any successor legislation thereto, in each case as in effect at the time any such reference is operative and (C) any time of day shall be a reference to New York time.  Titles of articles, sections, clauses, exhibits, schedules and annexes contained in any Loan Document are without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto.  Unless otherwise expressly indicated, the meaning of any term defined (including by reference) in any Loan Document shall be equally applicable to both the singular and plural forms of such term.

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ARTICLE 2

THE REVOLVING CREDIT FACILITY

Section 2.1    Revolving Credit Commitments.  (a)  On the terms and subject to the conditions contained in this Agreement, each Lender severally, but not jointly, agrees to make loans in Dollars (each a “Revolving Loan”) to the Borrower from time to time on any Business Day during the period from the date hereof until the Revolving Credit Termination Date in an aggregate principal amount at any time outstanding for all such loans by such Lender not to exceed such Lender’s Revolving Credit Commitment; provided, however, tha t (1) not more than $500,000 in Revolving Loans may be borrowed on the date of this Agreement and (2) after giving effect to any Borrowing of Revolving Loans, the aggregate principal amount of all outstanding Revolving Loans shall not exceed the Maximum Revolving Loan Balance.  Subject to the other terms and conditions hereof, amounts borrowed under this Section 2.1 may be repaid and reborrowed from time to time.  The “Maximum Revolving Loan Balance” from time to time will be the lesser of:

(i)         the Borrowing Base then in effect, or

(ii)        the aggregate Revolving Credit Commitments then in effect;

less, in either case, the sum of such Reserves as may be imposed by the Administrative Agent in its reasonable credit judgment.

(b)           If at any time the then outstanding principal balance of Revolving Loans exceeds the Maximum Revolving Loan Balance, then the Borrower shall immediately prepay outstanding Revolving Loans in an amount sufficient to eliminate such excess.

Section 2.2    Borrowing Procedures.  (a)  Notice From the Borrower.  Each Borrowing shall be made on notice given by the Borrower to the Administrative Agent not later than 11:00 a.m. on (i) the first Business Day, in the case of a Borrowing of Base Rate Loans and (ii) the third Business Day, in the case of a Borrowing of Eurodollar Rate Loans, prior to the date of the proposed Borrowing.  Each such notice may be made in a writing substantially in the form of Exhibit C (a “Notice of Borrowing” ) duly completed or by telephone if confirmed promptly, but in any event within one Business Day and prior to such Borrowing, with such a Notice of Borrowing.  Revolving Loans shall be made as Base Rate Loans unless, outside of a suspension period pursuant to Section 2.15, the Notice of Borrowing specifies that all or a portion thereof shall be Eurodollar Rate Loans.  Each Borrowing shall be in an aggregate amount that is a minimum amount of $100,000 and an integral multiple of $10,000.

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(a)          Notice to Each Lender.  The Administrative Agent shall give to each Lender prompt notice of the Administrative Agent’s receipt of a Notice of Borrowing and, if Eurodollar Rate Loans are properly requested in such Notice of Borrowing, prompt notice of the applicable interest rate.  Each Lender shall, before 11:00 a.m. on the date of the proposed Borrowing, make available to the Administrative Agent at its address referred to in Section 11.11, such Lender’s Pro Rata Share of such proposed Borrowing.  Upon fulfillment or due waiver (i) on the Closing Date, of the applicable conditions set for th in Section 3.1 and (ii) on the Closing Date and any time thereafter, of the applicable conditions set forth in Section 3.2, the Administrative Agent shall make such funds available to the Borrower.

(b)         Non-Funding Lenders.  Unless the Administrative Agent shall have received notice from any Lender prior to the date such Lender is required to make any payment hereunder with respect to any Revolving Loan that such Lender will not make such payment (or any portion thereof) available to the Administrative Agent, the Administrative Agent may assume that such Lender has made such payment available to the Administrative Agent on the date such payment is required to be made in accordance with this Article II and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amo unt.  Any Lender that shall not have made available to the Administrative Agent any portion of any payment described above (any such Lender, a “Non-Funding Lender”) agrees to pay such amount to the Administrative Agent on demand together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at the Federal Funds Rate for the first Business Day and thereafter (i) in the case of a payment in respect of a Revolving Loan, at the interest rate applicable at the time to such Revolving Loan and (ii) otherwise, at the interest rate applicable to Base Rate Loans.  Such repayment shall then constitute the funding of the corresponding Revolving Loan (including any Revolving Loan deemed to have been made hereunder with such payment) or participation.  If any Non-Funding Lender fails to pay the amount of its sh are of any Revolving Loan upon Agent’s demand therefor, Agent shall promptly notify Borrower of such failure and Borrower shall immediately repay such amount to Agent.  The existence of any Non-Funding Lender shall not relieve any other Lender of its obligations under any Loan Document, but no other Lender shall be responsible for the failure of any Non-Funding Lender to make any payment required under any Loan Document.

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Section 2.3     [Reserved].

Section 2.4     [Reserved].

Section 2.5     Reduction and Termination of the Commitments.

(a)          Optional.  The Borrower may, upon notice to the Administrative Agent, terminate in whole or reduce in part ratably any unused portion of the Revolving Credit Commitments; provided, however, that each partial reduction shall be in an aggregate amount that is an integral multiple of $1,000,000.

(b)         Mandatory.  All outstanding Revolving Credit Commitments shall terminate on the Scheduled Revolving Credit Termination Date.

Section 2.6     Repayment of Loans.  The Borrower promises to repay the entire unpaid principal amount of all of the Revolving Loans on the Scheduled Revolving Credit Termination Date.

Section 2.7    Optional Prepayments.  The Borrower may prepay the outstanding principal amount of any Revolving Loan in whole or in part at any time (together with any breakage costs that may be owing pursuant to Section 2.16(a) after giving effect to such prepayment); provided, however, that each partial prepayment that is not of the entire outstanding amount under the Revolving Credit Facility shall be in an aggregate amount that is an integral multiple of $500,000.

Section 2.8    Mandatory Prepayments.  (a)  Equity and Debt Issuances.Upon receipt on or after the Closing Date by any Loan Party or any of its Subsidiaries of Net Cash Proceeds arising from (i) the issuance or Sale by Holdings of its own Stock (other than any issuance of common Stock of Holdings occurring in the ordinary course of business to any director, member of the management or employee of the Borrower or its Subsidiaries), the Borrower shall immediately pay or cause to be paid to the Administrative Agent an amount equal to 100% of such Net Cash Proceeds or (ii) the incurrence by any Loan Party or a ny of its Subsidiaries of Indebtedness of the type specified in clause (a) or (b) of the definition thereof (other than any such Indebtedness permitted hereunder in reliance upon any of clauses (a) through (h) of Section 8.1), the Borrower shall immediately pay or cause to be paid to the Administrative Agent an amount equal to 100% of such Net Cash Proceeds.

(a)          Asset Sales and Property Loss Events.  Upon receipt on or after the Closing Date by any Loan Party or any of its Subsidiaries of Net Cash Proceeds arising from (i) any Sale by any Group Member of any of its property other than Sales of its own Stock and Sales of property permitted hereunder in reliance upon any of clauses (a) through (e)of Section 8.4 or (ii) any Property Loss Event with respect to any property of any Group Member t o the extent resulting, in the aggregate with all other such Property Loss Events, in the receipt by any of them of Net Cash Proceeds in excess of $500,000, the Borrower shall immediately pay or cause to be paid to the Administrative Agent an amount equal to 100% of such Net Cash Proceeds; provided, however, that, upon any such receipt, as long as no Event of Default shall be continuing, any Group Member may make Permitted Reinvestments with such Net Cash Proceeds and the Borrower shall not be required to make or cause such payment to the extent (x) such Net Cash Proceeds are intended to be used to make Permitted Reinvestments and (y) on each Reinvestment Prepayment Date for such Net Cash Proceeds, the Borrower shall pay or cause to be paid to the Administrative Agent an amount equal to the Reinvestment Prepayment Amount applicable to such Reinvestment Prepayment Date and such Net Cash Proceeds.

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(b)          Excess Outstandings.  On any date on which the aggregate principal amount of Revolving Credit Outstandings exceeds the aggregate Revolving Credit Commitments, the Borrower shall pay to the Administrative Agent an amount equal to such excess.

(c)          Application of Payments.  Any payments made to the Administrative Agent pursuant to this Section 2.8 shall be applied to the Obligations in accordance with Section 2.12(b).

Section 2.9     Interest.  (a)  Rate.  All Revolving Loans and the outstanding amount of all other Obligations (other than pursuant to Secured Hedging Agreements) shall bear interest, in the case of Revolving Loans, on the unpaid principal amount thereof from the date such Revolving Loans are made and, in the case of such other Obligations, from the date such other Obligations are due and payable until, in all cases, paid in full, except as otherwise provided in clause (c) below, as follows:  (i) in the case of Base Rate Loans, at a rate per annum equal to the sum of the Base Rat e and the Applicable Margin, each as in effect from time to time, (ii) in the case of Eurodollar Rate Loans, at a rate per annum equal to the sum of the Eurodollar Rate and the Applicable Margin, each as in effect for the applicable Interest Period, and (iii) in the case of other Obligations, at a rate per annum equal to the sum of the Base Rate and the Applicable Margin for Revolving Loans that are Base Rate Loans, each as in effect from time to time.

(a)          Payments.  Interest accrued shall be payable in arrears (i) if accrued on the principal amount of any Revolving Loan, (A) at maturity (whether by acceleration or otherwise), and (B)(1) if such Revolving Loan is a Base Rate Loan, on the last day of each calendar month commencing on the first such day following the making of such Revolving Loan, (2) if such Revolving Loan is a Eurodollar Rate Loan, on the last day of each Interest Period applicable to such Revolving Loan and, if applicable, on each date during such Interest Period occurring every 3 months from the first day of such Interest Period and (ii) if accrued on any other Obligation, on demand from and after the time such Obligation is due and payable (whether by acceleration or otherwise).

(b)         Default Interest.  Notwithstanding the rates of interest specified in clause (a) above or elsewhere in any Loan Document, effective immediately upon (A) the occurrence of any Event of Default under Section 9.1(e)(ii) or (B) the delivery of a notice by the Administrative Agent or the Required Lenders to the Borrower during the continuance of any other Event of Default and, in each case, for as long as such Event of Default shall be continuing, the principal balance of all Obligations (including any Obligation that bears interest by reference to the rate applicable to any other Obligation) then due and payable shall bear interest at a rate that is two percentage points (2.00%) per annum in excess of the interest rate applicable to such Obligations from time to time, payable on demand or, in the absence of demand, on the date that would otherwise be applicable.

(c)          Savings Clause.  Anything herein to the contrary notwithstanding, the obligations of the Borrower hereunder shall be subject to the limitation that payments of interest shall not be required, for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by the respective Lender would be contrary to the provisions of any law applicable to such Lender limiting the highest rate of interest which may be lawfully contracted for, charged or received by such Lender, and in such event the Borrower shall pay such Lender interest at the highest rate permitted by applicable law (“Maximum Lawful Rate”); provided, however, that if at any time thereafter the rate of interest payable hereunder is less than the Maximum Lawful Rate, the Borrower shall continue to pay interest hereunder at the Maximum Lawful Rate until such time as the total interest received by the Administrative Agent, on behalf of Lenders, is equal to the total interest that would have been received had the interest payable hereunder been (but for the operation of this paragraph) the interest rate payable since the Closing Date as otherwise provided in this Agreement.

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Section 2.10   Conversion and Continuation Options.  (a)  Option.  The Borrower may elect (i) in the case of any Eurodollar Rate Loan, (A) to continue such Eurodollar Rate Loan or any portion thereof for an additional Interest Period on the last day of the Interest Period applicable thereto and (B) to convert such Eurodollar Rate Loan or any portion thereof into a Base Rate Loan at any time on any Business Day, subject to the payment of any breakage costs required by Section 2.16(a), and (ii) in the case of Base Rate Loans, to convert such Base Rate Loans or any portion thereof into Eurodo llar Rate Loans at any time on any Business Day upon 3 Business Days’ prior notice; provided, however, that, (x) for each Interest Period, the aggregate amount of Eurodollar Rate Loans having such Interest Period must be in a minimum amount of $100,000 and an integral multiple of $10,000 and (y) no conversion in whole or in part of Base Rate Loans to Eurodollar Rate Loans and no continuation in whole or in part of Eurodollar Rate Loans shall be permitted at any time at which (1) an Event of Default shall be continuing and the Administrative Agent or the Required Lenders shall have determined in their sole discretion not to permit such conversions or continuations or (2) such continuation or conversion would be made during a suspension imposed by Section 2.15.

(a)          Procedure.  Each such election shall be made by giving the Administrative Agent at least 3 Business Days’ prior notice in substantially the form of Exhibit E (a “Notice of Conversion or Continuation”) duly completed.  The Administrative Agent shall promptly notify each Lender of its receipt of a Notice of Conversion or Continuation and of the options selected therein.  If the Administrative Agent does not receive a timely Notice of Conversion or Continuation from the Borrower containing a permitted election to continue or co nvert any Eurodollar Rate Loan, then, upon the expiration of the applicable Interest Period, such Loan shall be automatically converted to a Base Rate Loan.  Each partial conversion or continuation shall be allocated ratably among the Lenders in accordance with their Pro Rata Share.

Section 2.11   Fees.  (a)  Unused Commitment Fee.  The Borrower shall pay to each Lender a commitment fee on the actual daily amount by which the Revolving Credit Commitment of such Lender exceeds its Pro Rata Share of the aggregate outstanding principal amount of Revolving Loans (the “Unused Commitment Fee”) from the date hereof through the Revolving Credit Termination Date at a rate per annum equal to the Applicable Margin, payable in arrears (x) on the last day of each calendar month and (y) on the Revolving Credit Termination Date.

(a)          Fee Letter.  Borrower shall pay each of the other fees specified in the Fee letter on the applicable due date thereof specified in the Fee Letter.

(b)          Additional Fees.  The Borrower shall pay to the Administrative Agent and its Related Persons its reasonable and customary fees and expenses in connection with any payments made pursuant to Section 2.16(a) (Breakage Costs).

Section 2.12   Application of Payments.  (a)  Application of Voluntary Prepayments.  Unless otherwise provided in this Section 2.12 or elsewhere in any Loan Document, all payments and any other amounts received by the Administrative Agent from or for the benefit of the Borrower shall be applied to repay the Obligations the Borrower designates.

(a)          Application of Mandatory Prepayments.  Subject to the provisions of clause (c) below with respect to the application of payments during the continuance of an Event of Default, any payment made by the Borrower to the Administrative Agent pursuant to Section 2.8 or any other prepayment of the Obligations required to be applied in accordance with this clause (b) shall be applied first, to repay the outstanding principal balance of the Re volving Loans, second, in the case of any payment required pursuant to Section 2.8(c), and, then, any excess shall be retained by the Borrower.

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(b)         Application of Payments During an Event of Default.  Each of Holdings and the Borrower hereby irrevocably waives, and agrees to cause each Loan Party and each other Group Member to waive, the right to direct the application during the continuance of an Event of Default of any and all payments in respect of any Obligation and any proceeds of Collateral and agrees that, notwithstanding the provisions of clause (a) above, the Administrative Agent may, and, upon either (A) the direction of the Required Lenders or (B) the termination of the Revolving Credit Commitment or the acceleration of any Obligation pursuant to Section 9.2, shall, apply all payments in respect of any Obligation, all funds on deposit in any Cash Collateral Account and all proceeds of Collateral (i) first, to pay Obligations in respect of any cost or expense reimbursements, fees or indemnities then due to the Administrative Agent, (ii) second, to pay Obligations in respect of any cost or expense reimbursements, fees or indemnities then due to the Lenders, (iii) third, to pay interest and fees then due and payable in respect of the Revolving Loans, (iv) fourth, to repay the outstanding principal amounts of the Revolving Loans, (v) fifth,  to pay amounts owing with respect to Secured Hedging Agreements, and (vi) sixth, to the ratable payment of all other Obligations.

(c)          Application of Payments Generally.  All payments that would otherwise be allocated to the Lenders pursuant to this Section 2.12 shall instead be allocated first, to repay interest on any portion of the Revolving Loans that the Administrative Agent may have advanced on behalf of any Lender, in each case for which the Administrative Agent has not then been reimbursed by such Lender or the Borrower, second to pay the outstanding principal amount of the foregoing obligations and third, to repay the Revolving Loans.  All repayments of any Revolving Loans shall be applied first, to repay such Revolving Loans outstanding as Base Rate Loans and then, to repay such Revolving Loans outstanding as Eurodollar Rate Loans, with those Eurodollar Rate Loans having earlier expiring Interest Periods being repaid prior to those having later expiring Interest Periods.  If sufficient amounts are not available to repay all outstanding Obligations described in any priority level set forth in this Section 2.12, the available amounts shall be applied, unless otherwise expressly specified herein, to such Obligations ratably based on the proportion of the Secured Parties’ interest in such Obligations.  Any priority level set forth i n this Section 2.12 that includes interest shall include all such interest, whether or not accruing after the filing of any petition in bankruptcy or the commencement of any insolvency, reorganization or similar proceeding, and whether or not a claim for post-filing or post-petition interest is allowed in any such proceeding.

Section 2.13   Payments and Computations.  (a)  Procedure.  The Borrower shall make each payment under any Loan Document not later than 11:00 a.m. on the day when due to the Administrative Agent by wire transfer or ACH transfer (which shall be the exclusive means of payment hereunder) to the following account (or at such other account or by such other means to such other address as the Administrative Agent shall have notified the Borrower in writing within a reasonable time prior to such payment) in immediately available Dollars and without setoff or counterclaim:

ABA No.: Account Number: Bank Name: Account Name: Reference: 021-001-033 502-797-91 Deutsche Bank Trust Company Americas, New York, New York GECC/CAF Depository, GE Capital Re: Parlux CFK1381

The Administrative Agent shall promptly thereafter cause to be distributed immediately available funds relating to the payment of principal, interest or fees to the Lenders, in accordance with the application of payments set forth in Section 2.12.  The Lenders shall make any payment under any Loan Document in immediately available Dollars and without setoff or counterclaim. Payments received by the Administrative Agent after 11:00 a.m. shall be deemed to be received on the next Business Day.

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(a)          Computations of Interests and Fees.  All computations of interest and of fees shall be made by the Administrative Agent  on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest and fees are payable.  Each determination of an interest rate or the amount of a fee hereunder shall be made by the Administrative Agent (including determinations of a Eurodollar Rate or Base Rate in accordance with the definitions of “Eurodollar Rate” and “Base Rate”, respectively) and shall be conclusive, binding and final for all purposes, absent manifest error.

(b)          Payment Dates.  Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, the due date for such payment shall be extended to the next succeeding Business Day without any increase in such payment as a result of additional interest or fees; provided, however, that such interest and fees shall continue accruing as a result of such extension of time.

(c)          Advancing Payments.  Unless the Administrative Agent shall have received notice from the Borrower to the Lenders prior to the date on which any payment is due hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender.  If and to the extent that the Borrower shall not have made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent on dema nd such amount distributed to such Lender together with interest thereon (at the Federal Funds Rate for the first Business Day and thereafter, at the rate applicable to Base Rate Loans) for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent.

Section 2.14   Evidence of Debt.  (a)  Records of Lenders.  Each Lender shall maintain in accordance with its usual practice accounts evidencing Indebtedness of the Borrower to such Lender resulting from each Revolving Loan of such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement.  In addition, each Lender having sold a participation in any of its Obligations or having identified an SPV as such to the Administrative Agent, acting as agent of the Borrower solely for this purpose and solely for tax purposes, shall establish and maintain at its address refe rred to in Section 11.11 (or at such other address as such Lender shall notify the Borrower) a record of ownership, in which such Lender shall register by book entry (A) the name and address of each such participant and SPV (and each change thereto, whether by assignment or otherwise) and (B) the rights, interest or obligation of each such participant and SPV in any Obligation, in any Revolving Credit Commitment and in any right to receive any payment hereunder.

(a)          Records of Administrative Agent.  The Administrative Agent, acting as agent of the Borrower solely for tax purposes and solely with respect to the actions described in this Section 2.14, shall establish and maintain at its address referred to in Section 11.11 (or at such other address as the Administrative Agent may notify the Borrower) (A) a record of ownership (the “Register”) in which the Administrative Agent agrees to register by book entry the interests (including any rights t o receive payment hereunder) of the Administrative Agent and each Lender in the Revolving Credit Outstandings, each of their obligations under this Agreement to participate in each Revolving Loan and any assignment of any such interest, obligation or right and (B) accounts in the Register in accordance with its usual practice in which it shall record (1) the names and addresses of the Lenders (and each change thereto pursuant to Section 2.18 (Substitution of Lenders) and Section 11.2 (Assignments and Participations; Binding Effect)), (2) the Revolving Credit Commitments of each Lender, (3) the amount of each Revolving Loan and each funding of any participation described in clause ( A) above, for Eurodollar Rate Loans, the Interest Period applicable thereto, (4) the amount of any principal or interest due and payable or paid, and (5) any other payment received by the Administrative Agent from the Borrower and its application to the Obligations.

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(b)         Registered Obligations.  Notwithstanding anything to the contrary contained in this Agreement, the Revolving Loans (including any Notes evidencing such Loans) are registered obligations, the right, title and interest of the Lenders and their respective assignees in and to such Loans shall be transferable only upon notation of such transfer in the Register and no assignment thereof shall be effective until recorded therein.  This Section 2.14 and Section 11.2 shall be construed so that the Revolving Loans are at all times maintained in “registered form” within the meaning of Sections 163(f), 871(h)(2) and 881(c)(2) of the Code and any related regulations (and any successor provisions).

(c)          Prima Facie Evidence.  The entries made in the Register and in the accounts maintained pursuant to clauses (a) and (b) above shall, to the extent permitted by applicable Requirements of Law, be prima facie evidence of the existence and amounts of the obligations recorded therein; provided, however, that no error in such account and no failure of any Lender or the Administrative Agent to maintain any such account shall affect the obligation s of any Loan Party to repay the Revolving Loans in accordance with their terms.  In addition, the Loan Parties, the Administrative Agent, the Lenders shall treat each Person whose name is recorded in the Register as a Lenderfor all purposes of this Agreement.  Information contained in the Register with respect to any Lendershall be available for access by the Borrower, the Administrative Agent, such Lender at any reasonable time and from time to time upon reasonable prior notice.  No Lender shall, in such capacity, have access to or be otherwise permitted to review any information in the Register other than information with respect to such Lender unless otherwise agreed by the Administrative Agent.

(d)          Notes.  Upon any Lender’s request, the Borrower shall promptly execute and deliver Notes to such Lender evidencing the Revolving Loans of such Lender and substantially in the form of Exhibit B; provided, however, that only one Note shall be issued to each Lender, except (i) to an existing Lender exchanging existing Notes to reflect changes in the Register relating to such Lender, in which case the new Notes delivered to such Lender shall be dated the date of the original Notes and (ii) in the case of loss, destruction or mutilation of existing Notes and similar circumstances.  Each Note, if issued, shall only be issued as means to evidence the right, title or interest of a Lender or a registered assignee in and to the related Revolving Loan, as set forth in the Register, and in no event shall any Note be considered a bearer instrument or obligation.

Section 2.15    Suspension of Eurodollar Rate Option.  Notwithstanding any provision to the contrary in this Article II, the following shall apply:

(a)          Interest Rate Unascertainable, Inadequate or Unfair.  In the event that (A) the Administrative Agent determines that adequate and fair means do not exist for ascertaining the applicable interest rates by reference to which the Eurodollar Rate is determined or (B) the Required Lenders notify the Administrative Agent that the Eurodollar Rate for any Interest Period will not adequately reflect the cost to the Lenders of making or maintaining Eurodollar Rate Loans for such Interest Period, the Administrative Agent shall promptly so notify the Borrower and the Lenders, whereupon the obligation of each Lender to make or to continue Eurodollar Rate Loans shall be suspended as provided in clause (c) below until the Administrative Agent shall notify the Borrower that the Required Lenders have determined that the circumstances causing such suspension no longer exist.

(b)          Illegality.  If any Lender determines that the introduction of, or any change in or in the interpretation of, any Requirement of Law after the date of this Agreement shall make it unlawful, or any Governmental Authority shall assert that it is unlawful, for any Lender or its applicable lending office to make Eurodollar Rate Loans or to continue to fund or maintain Eurodollar Rate Loans, then, on notice thereof and demand therefor by such Lender to the Borrower through the Administrative Agent, the obligation of such Lender to make or to continue Eurodollar Rate Loans shall be suspended as provided in clause (c) below until such Le nder shall, through the Administrative Agent, notify the Borrower that it has determined that it may lawfully make Eurodollar Rate Loans.

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(c)          Effect of Suspension.  If the obligation of any Lender to make or to continue Eurodollar Rate Loans is suspended, (A) the obligation of such Lender to convert Base Rate Loans into Eurodollar Rate Loans shall be suspended, (B) such Lender shall make a Base Rate Loan at any time such Lender would otherwise be obligated to make a Eurodollar Rate Loan, (C) the Borrower may revoke any pending Notice of Borrowing or Notice of Conversion or Continuation to make or continue any Eurodollar Rate Loan or to convert any Base Rate Loan into a Eurodollar Rate Loan and (D) each Eurodollar Rate Loan of such Lender shall automatically and immediately (or, in the case of any suspension pursuant to clause (a) above, on the last day of the current Interest Period thereof) be converted into a Base Rate Loan.

Section 2.16   Breakage Costs; Increased Costs; Capital Requirements.  (a)  Breakage Costs.  The Borrower shall compensate each Lender, upon demand from such Lender to such Borrower (with copy to the Administrative Agent), for all Liabilities (including, in each case, those incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to prepare to fund, to fund or to maintain the Eurodollar Rate Loans of such Lender to the Borrower but excluding any loss of the Applicable Margin on the relevant Loans) that such Lender may incur (A) to the extent, for any reason other than solely by reason of such Lender being a Non - -Funding Lender, a proposed Borrowing, conversion into or continuation of Eurodollar Rate Loans does not occur on a date specified therefor in a Notice of Borrowing or a Notice of Conversion or Continuation or in a similar request made by telephone by the Borrower, (B) to the extent any Eurodollar Rate Loan is paid (whether through a scheduled, optional or mandatory prepayment) or converted to a Base Rate Loan (including because of Section 2.15) on a date that is not the last day of the applicable Interest Period or (C) as a consequence of any failure by the Borrower to repay Eurodollar Rate Loans when required by the terms hereof.  For purposes of this clause (a), each Lender shall be deemed to have funded each Eurodollar Rate Loan made by it using a matching deposit or other borrowing in the London interbank market.

(a)          Increased Costs.  If at any time any Lender determines that, after the date hereof, the adoption of, or any change in or in the interpretation, application or administration of, or compliance with, any Requirement of Law (other than any imposition or increase of Eurodollar Reserve Requirements) from any Governmental Authority shall have the effect of (i) increasing the cost to such Lender of making, funding or maintaining any Eurodollar Rate Loan or to agree to do so or of participating, or agreeing to participate, in extensions of credit or (ii) imposing any other cost to such Lender with respect to compliance with its obligations under any Loan Document, then, upon demand by such Lender (with copy to the Administrative Agent), the Borrower shall pay to the Administrative Agent for the account of such Lender amounts sufficient to compensate such Lender for such increased cost.

(b)          Increased Capital Requirements.  If at any time any Lender that, after the date hereof, the adoption of, or any change in or in the interpretation, application or administration of, or compliance with, any Requirement of Law (other than any imposition or increase of Eurodollar Reserve Requirements) from any Governmental Authority regarding capital adequacy, reserves, special deposits, compulsory loans, insurance charges against property of, deposits with or for the account of, Obligations owing to, or other credit extended or participated in by, any Lender or any similar requirement (in each case other than any imposition or incre ase of Eurodollar Reserve Requirements) shall have the effect of reducing the rate of return on the capital of such Lender’s (or any corporation controlling such Lender) as a consequence of its obligations under or with respect to any Loan Document to a level below that which, taking into account the capital adequacy policies of such Lenderor corporation, such Lender or corporation could have achieved but for such adoption or change, then, upon demand from time to time by such Lender (with a copy of such demand to the Administrative Agent), the Borrower shall pay to the Administrative Agent for the account of such Lender amounts sufficient to compensate such Lender for such reduction.

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(c)          Compensation Certificate.  Each demand for compensation under this Section 2.16 shall be accompanied by a certificate of the Lender claiming such compensation, setting forth the amounts to be paid hereunder, which certificate shall be conclusive, binding and final for all purposes, absent manifest error.  In determining such amount, such Lendermay use any reasonable averaging and attribution methods.  Notwithstanding the foregoing, (i) the applicable Lender shall take such actions (including changing the office of location of the funding of the Revolving Loans) that the Borrower may reasonably request in order to reduce the amounts payable under Sections 2.16(b) and (c); provided that the Borrower shall reimburse such Lender for any costs incurred by such Lender in doing so to the extent that such Lender reasonably determines that such costs are allocable to the Borrower with respect to the existence of such Lender’s Revolving Loans or Revolving Credit Commitment; provided further that such Lender shall only be required to take such actions if it determines in good faith that such actions would not be disadvantageous to it, and (ii) the Borrower shall not be required to compensate a Lender under Section 2.16(b) or (c) for any costs or additional amounts arising more than 90 days prior to the date that such Lender notifies the Borrower of the event giving rise to such costs and amounts of such Lender’s intention to claim compensation therefor and, if the event giving rise to such increased costs and amounts is retroactive, then the 90-day period referred to in this clause (ii) shall be extended to include the period of retroactive effect therefor.

Section 2.17   Taxes.  (a)  Payments Free and Clear of Taxes.  Except as otherwise provided in this Section 2.17, each payment by any Loan Party under any Loan Document shall be made free and clear of all present or future taxes, levies, imposts, deductions, charges or withholdings and all liabilities with respect thereto (and without deduction for any of them) (collectively, but excluding the taxes set forth in clauses (i) and (ii) below, the “Taxes”) other than for (i) taxes measured by net income (including branch profits taxes) and franchise taxes imposed in lieu of net income taxes, in each case imposed on any Secured Party as a result of a present or former connection between such Secured Party and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than such connection arising solely from any Secured Party having executed, delivered or performed its obligations or received a payment under, or enforced, any Loan Document) or (ii) taxes that are directly attributable to the failure (other than as a result of a change in any Requirement of Law) by any Secured Party to deliver the documentation required to be delivered pursuant to clause (f) below.

(a)          Gross-Up.  If any Taxes shall be required by law to be deducted from or in respect of any amount payable under any Loan Document (other than any Secured Hedging Agreement) to any Secured Party (i) such amount shall be increased as necessary to ensure that, after all required deductions for Taxes are made (including deductions applicable to any increases to any amount under this Section 2.17), such Secured Party receives the amount it would have received had no such deductions been made, (ii) the relevant Loan Party shall make such deductions, (iii) the relevant Loan Party shall timely pay the full amount deducted to the relev ant taxing authority or other authority in accordance with applicable Requirements of Law and (iv) within 30 days after such payment is made, the relevant Loan Party shall deliver to the Administrative Agent an original or certified copy of a receipt evidencing such payment; provided, however, that no such increase shall be made with respect to, and no Loan Party shall be required to indemnify any such Secured Party pursuant to clause (d) belowfor, withholding taxes to the extent that the obligation to withhold amounts existed on the date that such Secured Party became a “Secured Party” under this Agreement in the capacity under which such Secured Party makes a claim under this clau se (b), except in each case to the extent such Secured Party is a direct or indirect assignee (other than pursuant to Section 2.18 (Substitution of Lenders)) of any other Secured Party that was entitled, at the time the assignment of such other Secured Party became effective, to receive additional amounts under this clause (b).

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(b)          Other Taxes.  In addition, the Borrower agrees to pay, and authorizes the Administrative Agent to pay in its name, any stamp, documentary, excise or property tax, charges or similar levies imposed by any applicable Requirement of Law or Governmental Authority and all Liabilities with respect thereto (including by reason of any delay in payment thereof), in each case arising from the execution, delivery or registration of, or otherwise with respect to, any Loan Document or any transaction contemplated therein (collectively, “Other Taxes”).  Within 30 days after the date of any payment of Taxes or Other Taxes b y any Loan Party, the Borrower shall furnish to the Administrative Agent, at its address referred to in Section 11.11, the original or a certified copy of a receipt evidencing payment thereof.

(c)          Indemnification.  The Borrower shall reimburse and indemnify, within 30 days after receipt of demand therefor (with copy to the Administrative Agent), each Secured Party for all Taxes and Other Taxes (including any Taxes and Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.17) paid by such Secured Party and any Liabilities arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted.  A certificate of the Secured Party (or of the Administrative Agent on behalf of such Secured Party) claiming any compensation under this clause (d), setting forth the amounts to be paid thereunder and delivered to the Borrower with copy to the Administrative Agent, shall be conclusive, binding and final for all purposes, absent manifest error.  In determining such amount, the Administrative Agent and such Secured Party may use any reasonable averaging and attribution methods.

(d)         Mitigation.  Any Lender claiming any additional amounts payable pursuant to this Section 2.17 shall use its reasonable efforts (consistent with its internal policies and Requirements of Law) to change the jurisdiction of its lending office if such a change would reduce any such additional amounts (or any similar amount that may thereafter accrue) and would not, in the sole determination of such Lender, be otherwise disadvantageous to such Lender.

(e)          Tax Forms.  (i) Each Non-U.S. Lender Party that, at any of the following times, is entitled to an exemption from United States withholding tax or, after a change in any Requirement of Law, is subject to such withholding tax at a reduced rate under an applicable tax treaty, shall (w) on or prior to the date such Non-U.S. Lender Party becomes a “Non-U.S. Lender Party” hereunder, (x) on or prior to the date on which any such form or certification expires or becomes obsolete, (y) after the occurrence of any event requiring a change in the most recent form or certification previously delivered by it pursuant to this clause
60;(i) and (z) from time to time if requested by the Borrower or the Administrative Agent (or, in the case of a participant or SPV, the relevant Lender), provide the Administrative Agent and the Borrower (or, in the case of a participant or SPV, the relevant Lender) with two completed originals of each of the following, as applicable:  (A) Forms W-8ECI (claiming exemption from U.S. withholding tax because the income is effectively connected with a U.S. trade or business), W-8BEN (claiming exemption from, or a reduction of, U.S. withholding tax under an income tax treaty) or any successor forms, (B) in the case of a Non-U.S. Lender Party claiming exemption under Sections 871(h) or 881(c) of the Code, Form W-8BEN (claiming exemption from U.S. withholding tax under the portfolio interest exemption) or any successor form and a certificate in form and substance acceptable to the Administrative Agent that such Non-U.S. Lender Party is not (1) a “bank” within the meaning of Section 881( c)(3)(A) of the Code, (2) a “10 percent shareholder” of the Borrower within the meaning of Section 881(c)(3)(B) of the Code or (3) a “controlled foreign corporation” described in Section 881(c)(3)(C) of the Code or (C) any other applicable document prescribed by the IRS certifying as to the entitlement of such Non-U.S. Lender Party to such exemption from United States withholding tax or reduced rate with respect to all payments to be made to such Non-U.S. Lender Party under the Loan Documents.  Unless the Borrower and the Administrative Agent have received forms or other documents satisfactory to them indicating that payments under any Loan Document to or for a Non-U.S. Lender Party are not subject to United States withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, the Loan Parties and the Administrative Agent shall withhold amounts required to be withheld by applicable Requirements of Law from such payments at the applicable statutory rate.

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(i)         Each U.S. Lender Party shall (A) on or prior to the date such U.S. Lender Party becomes a “U.S. Lender Party” hereunder, (B) on or prior to the date on which any such form or certification expires or becomes obsolete, (C) after the occurrence of any event requiring a change in the most recent form or certification previously delivered by it pursuant to this clause (f) and (D) from time to time if requested by the Borrower or the Administrative Agent (or, in the case of a participant or SPV, the relevant Lender), provide the Administrative Agent and the Borrower (or, in the case of a participant or SPV, the relevant Lender) with two completed originals of Form W-9 (certifying that such U.S. Lender Party is entitled to an exemption from U.S. backup withholding tax) or any successor form.

(ii)        Each Lender having sold a participation in any of its Obligations or identified an SPV as such to the Administrative Agent shall collect from such participant or SPV the documents described in this clause (f) and provide them to the Administrative Agent.

Section 2.18   Substitution of Lenders.  (a)  Substitution Right.  In the event that any Lender that is not an Affiliate of the Administrative Agent (an “Affected Lender”), (i) makes a claim under clause (b) (Increased Costs) or (c) (Increased Capital Requirements) of Se ction 2.16, (ii) notifies the Borrower pursuant to Section 2.15(b) (Illegality) that it becomes illegal for such Lender to continue to fund or make any Eurodollar Rate Loan, (iii) makes a claim for payment pursuant to Section 2.17(b) (Taxes), (iv) becomes a Non-Funding Lender or (v) does not consent to any amendment, waiver or consent to any Loan Document for which the consent of the Required Lenders is obtained but that requires the consent of other Lenders, the Borrower may either pay in full such Affected Lender with respect to amounts due  with the consent of the Administrative Agent or substitute for such Affected Lender any other Lender or any Affiliate or Approved Fund of any other Lender or any other Person accept able (which acceptance shall not be unreasonably withheld or delayed) to the Administrative Agent (in each case, a “Substitute Lender”).

(a)          Procedure.  To substitute such Affected Lender or pay in full the Obligations owed to such Affected Lender under the Revolving Credit Facility, the Borrower shall deliver a notice to the Administrative Agent and such Affected Lender.  The effectiveness of such payment or substitution shall be subject to the delivery to the Administrative Agent by the Borrower (or, as may be applicable in the case of a substitution, by the Substitute Lender) of (i) payment for the account of such Affected Lender, of, to the extent accrued through, and outstanding on, the effective date for such payment or substitution, all Obligations owing to such Affected Lender with respect to the Revolving Credit F acility (including those that will be owed because of such payment and all Obligations that would be owed to such Lender if it was solely a Lender in the Revolving Credit Facility), (ii) in the case of a payment in full of the Obligations owing to such Affected Lender in the Revolving Credit Facility, payment of any amount that, after giving effect to the termination of the Revolving Credit Commitment of such Affected Lender, is required to be paid pursuant to Section 2.8(c) (Excess Outstandings) and (iii) in the case of a substitution, (A) payment of the assignment fee set forth in Section 11.2(c) and (B) an assumption agreement in form and substance satisfactory to the Administrative Agent whereby the Substitute Lender shall, among other things, agree to be bound by the terms of the Loan Documents and ass ume the Revolving Credit Commitment of the Affected Lender.

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(b)         Effectiveness.  Upon satisfaction of the conditions set forth in clause (b) above, the Administrative Agent shall record such substitution or payment in the Register, whereupon (i) in the case of any payment in full, such Affected Lender’s Revolving Credit Commitment shall be terminated and (ii) in the case of any substitution in the Revolving Credit Facility, (A) the Affected Lender shall sell and be relieved of, and the Substitute Lender shall purchase and assume, all rights and claims of such Affected Lender under the Loan Documents with respect to the Revolving Credit Facility, except that the Affected Lender shall retain such rights expressly providing that they survive the repayment of the Obligations and the termination of the Revolving Credit Commitments, (B) the Substitute Lender shall become a “Lender” hereunder having a Revolving Credit Commitment in the amount of such Affected Lender’s Revolving Credit Commitment and (C) the Affected Lender shall execute and deliver to the Administrative Agent an Assignment to evidence such substitution and deliver any Note in its possession with respect to the Revolving Credit Facility; provided, however, that the failure of any Affected Lender to execute any such Assignment or deliver any such Note shall not render such sale and purchase (or the corresponding assignment) invalid.

Section 2.19   Eligible Accounts.  All of the Accounts owned by Borrower and properly reflected as “Eligible Accounts” in the most recent Borrowing Base Certificate delivered by Borrower to the Administrative Agent shall be “Eligible Accounts” for purposes of this Agreement.  The Administrative Agent shall have the right to establish, modify or eliminate Reserves against Eligible Accounts from time to time in its reasonable credit judgment.  In addition, the Administrative Agent reserves the right, at any time and from time to time after the date of this Agreement, to adjust any of the applicable criteria, to establish new criteria an d to adjust advance rates with respect to Eligible Accounts, in its reasonable credit judgment, subject to the approval of Required Lenders in the case of adjustments which have the effect of making more credit available.

Section 2.20   Eligible Inventory.  All of the Inventory owned by the Borrower and properly reflected as “Eligible Inventory” in the most recent Borrowing Base Certificate delivered by Borrower to the Administrative Agent shall be “Eligible Inventory” for purposes of this Agreement.  the Administrative Agent shall have the right to establish, modify, or eliminate Reserves against Eligible Inventory from time to time in its reasonable credit judgment.  In addition, the Administrative Agent reserves the right, at any time and from time to time after the date of this Agreement, to adjust any of the applicable criteria, to establish new criteria and to adjust advance rates with respect to Eligible Inve ntoryin its reasonable credit judgment, subject to the approval of Required Lenders in the case of adjustmentswhich have the effect of making more credit available.

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ARTICLE 3

CONDITIONS TO REVOLVING LOANS

Section 3.1    Conditions Precedent to Initial Revolving Loans.  The obligation of each Lender to make any Revolving Loan on the Closing Date is subject to the satisfaction or due waiver of each of the following conditions precedent on or before June 25, 2010:

(a)          Certain Documents.  The Administrative Agent shall have received on or prior to the date of this Agreement each of the following, each dated the date of this Agreement unless otherwise agreed by the Administrative Agent, in form and substance satisfactory to the Administrative Agent and each Lender:

(i)         this Agreement duly executed by Holdings and the Borrower and, for the account of each Lender having requested the same by notice to the Administrative Agent and the Borrower received by each at least 3 Business Days prior to the date of this Agreement (or such later date as may be agreed by the Borrower), Notes conforming to the requirements set forth in Section 2.14(e);

(ii)        the Fee Letter duly executed by the Borrower and Holdings;

(iii)       the Guaranty and Security Agreement, duly executed by Borrower and Holdings, together with (A) evidence satisfactory to the Administrative Agent that the Administrative Agent (for the benefit of itself and the Lenders) has valid and perfected security interests in the Collateral covered by the Guaranty and Security Agreement, including the filing of financing statements under the UCC and other applicable documents under the laws of any jurisdiction with respect to the perfection of such security interests), (B) copies of UCC financing statement, Intellectual Property and other appropriate search reports and of all effective prior filings listed therein, together with evidence of the termination of such prior filings and other documents with respect to the priority of the security in terest of the Administrative Agent in such Collateral, in each case as may be reasonably requested by the Administrative Agent, (C) all documents representing all Securities being pledged pursuant to the Guaranty and Security Agreement and related undated powers or endorsements duly executed in blank and (D) all Control Agreements that, in the reasonable judgment of the Administrative Agent, are required for the Loan Parties to comply with the Loan Documents as of the date of this Agreement, each duly executed by, in addition to the applicable Loan Party, the applicable financial institution;

(iv)       duly executed favorable opinions of counsel to the Loan Parties, each addressed to the Administrative Agent and the Lenders and addressing such matters as the Administrative Agent may reasonably request;

(v)        a copy of each Constituent Document of each Loan Party that is on file with any Governmental Authority in any jurisdiction, certified as of a recent date by such Governmental Authority, together with, if applicable, certificates attesting to the good standing of such Loan Party in such jurisdiction and each other jurisdiction where such Loan Party is qualified to do business as a foreign entity or where such qualification is necessary (and, if appropriate in any such jurisdiction, related tax certificates);

(vi)       a certificate of the secretary or other officer of each Loan Party in charge of maintaining books and records of such Loan Party certifying as to (A) the names and signatures of each officer of such Loan Party authorized to execute and deliver any Loan Document, (B) the Constituent Documents of such Loan Party attached to such certificate are complete and correct copies of such Constituent Documents as in effect on the date of such certification (or, for any such Constituent Document delivered pursuant to clause (v) above, that there have been no changes from such Constituent Document so delivered) and (C) the resolutions of such Loan Party’s board of directors or other appropriate governing body approving and aut horizing the execution, delivery and performance of each Loan Document to which such Loan Party is a party;

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(vii)      a certificate of a Responsible Officer of the Borrower to the effect that (A) the condition set forth in Section 3.1(c) has been satisfied, and (B) attached thereto are complete and correct copies of received the historical and pro forma financial statements and the Initial Projections set forth in Section 4.4;

(viii)     a duly executed Borrowing Base Certificate, certified by a Responsible Officer of the Borrower and dated no earlier than June 18, 2010;

(ix)        insurance certificates in form and substance satisfactory to the Administrative Agent demonstrating that the insurance policies required by Section 7.5 are in full force and effect and have all endorsements required by such Section 7.5;

(x)         the Administrative Agent, on behalf of Lenders, shall have received such duly executed landlord waives. processor agreements, licensor agreements, and bailee letters as are required to make a sufficient amount of Borrower’s Inventory constitute Eligible Inventory so as to satisfy the requirement of Section 3.1(d);

(xi)        the Administrative Agent shall have received the report of a satisfactory field examination by the Administrative Agent or its representatives of the Group Members’ respective business, operations, financial condition and assets and satisfactory pre-funding audit and borrowing base review; and

(xii)       such other documents and information as any Lender through the Administrative Agent may reasonably request.

(b)         Fee and Expenses.  There shall have been paid to the Administrative Agent, for the account of the Administrative Agent, its Related Persons, or any Lender, as the case may be, all fees and all reimbursements of costs or expenses, in each case due and payable under any Loan Document on or before the date of this Agreement.

(c)         Consents.  Each Group Member shall have received all consents and authorizations required pursuant to any material Contractual Obligation with any other Person and shall have obtained all Permits of, and effected all notices to and filings with, any Governmental Authority, in each case, as may be necessary in connection with the consummation of the transactions contemplated by this Agreement and the other  Loan Documents.

(d)         Minimum Net Liquidity; Maximum Total Indebtedness.  The Administrative Agent shall have received evidence satisfactory to it that, after giving effect to the funding of the initial Revolving Loans (on a pro forma basis and with Borrower’s trade payables being paid currently and its expenses and liabilities being paid in the ordinary course of business and without acceleration of its sales and without deterioration of its working capital),  (i) Net Liquidity as of the date of this Agreement shall be not less than $12,500,000 and (ii) the total Indebtedness of any and all Group Members shall not exceed $500,000.

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Section 3.2     Conditions Precedent to Each Revolving Loan.  The obligation of each Lender on any date (including the Closing Date) to make any Revolving Loanis subject to the satisfaction of each of the following conditions precedent:

(a)         Request.  The Administrative Agent shall have received, to the extent required by Article II, a written, timely and duly executed and completed Notice of Borrowing.

(b)         Representations and Warranties; No Defaults.  The following statements shall be true on such date, both before and after giving effect to the making of such Revolving Loan:  (i) the representations and warranties set forth in any Loan Document shall be true and correct (A) if such date is the Closing Date, on and as of such date and (B) otherwise, in all material respects on and as of such date or, to the extent such representations and warranties expressly relate to an earlier date, on and as of such earlier date and (ii) no Default or Event of Default shall have occurred and be continuing.

(c)         Additional Matters.  The Administrative Agent shall have received such additional documents and information as any Lender, through the Administrative Agent, may reasonably request.

The representations and warranties set forth in any Notice of Borrowing(or any certificate delivered in connection therewith) shall be deemed to be made again on and as of the date of the relevant Revolving Loan and the acceptance of the proceeds thereof.

Section 3.3     Determinations of Initial Borrowing Conditions.  For purposes of determining compliance with the conditions specified in Section 3.1, each Lender shall be deemed to be satisfied with each document and each other matter required to be satisfactory to such Lender unless, prior to the Closing Date, the Administrative Agent receives notice from such Lender specifying such Lender’s objections and such Lender has not made available its Pro Rata Share of any Borrowing scheduled to be made on the Closing Date.

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ARTICLE 4

REPRESENTATIONS AND WARRANTIES

To induce the Lendersand the Administrative Agent to enter into the Loan Documents, each of Holdings and the Borrower (and, to the extent set forth in any other Loan Document, each other Loan Party) represents and warrants to each of them each of the following on and as of the date of this Agreement and on and as of the date of each Revolving Loan:

Section 4.1    Corporate Existence; Compliance with Law.  Each Group Member (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) is duly qualified to do business as a foreign entity and in good standing under the laws of each jurisdiction where such qualification is necessary, except where the failure to be so qualified or in good standing would not, in the aggregate, have a Material Adverse Effect, (c) has all requisite power and authority and the legal right to own, pledge, mortgage and operate its property, to lease or sublease any property it operates under lease or sublease and to conduct its business as now or currently proposed to be conducted, (d) is in complian ce with its Constituent Documents, (e) is in compliance with all applicable Requirements of Law except where the failure to be in compliance would not have a Material Adverse Effect and (f) has all necessary Permits from or by, has made all necessary filings with, and has given all necessary notices to, each Governmental Authority having jurisdiction, to the extent required for such ownership, lease, sublease, operation, occupation or conduct of business, except where the failure to obtain such Permits, make such filings or give such notices would not, in the aggregate, have a Material Adverse Effect.

Section 4.2    Loan and Other Documents.  (a) Power and Authority.  The execution, delivery and performance by each Loan Party of the Loan Documents to which it is a party (i) are within such Loan Party’s corporate or similar powers and, at the time of execution thereof, have been duly authorized by all necessary corporate and similar action (including, if applicable, consent of holders of its Securities), (ii) do not (A) contravene such Loan Party’s Constituent Documents, (B) violate any applicable Requirement of Law, (C) conflict with, contravene, constitute a default or breach under, or result in or permit the termination or acceleration of, any ma terial Contractual Obligation of any Loan Party or any of its Subsidiaries (including other Loan Documents) other than those that would not, in the aggregate, have a Material Adverse Effect and are not created or caused by, or a conflict, breach, default or termination or acceleration event under, any Loan Document or (D) result in the imposition of any Lien (other than a Permitted Lien) upon any property of any Loan Party or any of its Subsidiaries and (iii) do not require any Permit of, or filing with, any Governmental Authority or any consent of, or notice to, any Person, other than the filings required to perfect the Liens created by the Loan Documents.

(a)          Due Execution and Delivery.  From and after its delivery to the Administrative Agent, each Loan Document has been duly executed and delivered to the other parties thereto by each Loan Party party thereto, is the legal, valid and binding obligation of such Loan Party and is enforceable against such Loan Party in accordance with its terms.

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Section 4.3    Ownership of Group Members.  Set forth on Schedule 4.3 is a complete and accurate list showing, as of the date of this Agreement, for each Group Member (other than Holdings) and each Subsidiary of any Group Member and each joint venture of any of them, its jurisdiction of organization, the number of shares of each class of Stock authorized (if applicable), the number outstanding on the date of this Agreement and the number and percentage of the outstanding shares of each such class owned (directly or indirectly) by the Borrower or Holdings.  All outstanding Stock of each of them has been validly issued, is fully paid and non-assessable (to the exte nt applicable) and, except in the case of Holdings, is owned beneficially and of record by a Group Member (or, in the case of the Borrower, by Holdings) and all such Stock (other than Stock of Holdings) is  free and clear of all Liens other than the security interests created by the Loan Documents and, in the case of joint ventures, Permitted Liens.  There are no Stock Equivalents with respect to the Stock of any Group Member (other than Holdings) or any Subsidiary of any Group Member or any joint venture of any of them and, as of the date of this Agreement, except as set forth on Schedule 4.3, there are no Stock Equivalents with respect to the Stock of Holdings.  There are no Contractual Obligations or other understandings to which any Group Member, any Subsidiary of any Group Member or any joint venture of any of them is a party with respect to (including any restriction on) the issuance, voting, Sale or ple dge of any Stock or Stock Equivalent of any Group Member or any such Subsidiary or joint venture.

Section 4.4    Financial Statements.  (a)  Each of (i) the draft Consolidated balance sheet of Holdings as at March 31, 2010 and the related draft Consolidated statements of income, retained earnings and cash flows of Holdings for the Fiscal Year then ended (collectively, the “Draft Annual Financial Statements”), and (ii) subject to the absence of footnote disclosure and normal recurring year-end audit adjustments, the unaudited Consolidated balance sheets of Holdings as at May 31, 2010 and the related Consolidated statements of income, retained earnings and cash flows of Holdings for the two Fiscal Months then ended, copies of each of which have been furn ished to the Administrative Agent, fairly present in all material respects the Consolidated financial position, results of operations and cash flow of the Holdings and its Subsidiaries as at the dates indicated and for the periods indicated in accordance with GAAP. The final audited Consolidated balance sheet of Holdings as at March 31, 2010 and the related Consolidated statements of income, retained earnings and cash flows of Holdings for the Fiscal Year then ended certified by Marcum Rachlin, a division of Marcum LLP, that will be filed by Holdings with the SEC on or about June 29, 2010 will not be materially different from the Draft Annual Financial Statements.

(a)           The Initial Projections have been prepared by the Borrower in light of the past operations of the business of the Holdings and its Subsidiaries and reflect projections for the three-year period beginning on April 1, 2010 on a monthly basis for the first year and on a year-by-year basis thereafter.  As of the date of this Agreement, the Initial Projections are based upon estimates and assumptions stated therein, all of which the Borrower believes to be reasonable and fair in light of conditions and facts known to the Borrower as of the date of this Agreement and reflect the good faith, reasonable and fair estimates by the Borrower of the future Consolidated financial performance of Holdings and its Subsidiaries and the other information projected therei n for the periods set forth therein.

(b)           The unaudited Consolidated balance sheet of Holdings (the “Pro Forma Balance Sheet”) delivered to the Administrative Agent prior to the date hereof, has been prepared as of May 31, 2010 and reflects as of such date, on a pro forma basis for the other transactions contemplated herein to occur on the date of this Agreement, the Consolidated financial condition of Holdings, and the assumptions expressed therein are reasonable based on the information available to Holdings and the Borrower at such date and on the date of this Agreement.

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Section 4.5     Material Adverse Effect.  Since March 31, 2010, there have been no events, circumstances, developments or other changes in facts that would, in the aggregate, have a Material Adverse Effect.

Section 4.6    Solvency.  Both before and after giving effect to (a) the Revolving Loans made on or prior to the date this representation and warranty is made, (b) the disbursement of the proceeds of such Revolving Loans, and (c) the payment and accrual of all transaction costs in connection with the foregoing, both the Loan Parties taken as a whole and the Borrower are Solvent.

Section 4.7    Litigation.  There are no pending (or, to the knowledge of any Group Member, threatened) actions, investigations, suits, proceedings, audits, claims, demands, orders or disputes affecting the Borrower or any of its Subsidiaries with, by or before any Governmental Authority other than those that cannot reasonably be expected to affect the Obligations and the Loan Documents,and would not, in the aggregate, have a Material Adverse Effect.

Section 4.8    Taxes.  All federal, state, local and foreign income and franchise and other material tax returns, reports and statements (collectively, the “Tax Returns”) required to be filed by any Tax Affiliate have been filed with the appropriate Governmental Authorities in all jurisdictions in which such Tax Returns are required to be filed, all such Tax Returns are true and correct in all material respects, and all taxes, charges and other impositions reflected therein or otherwise due and payable have been paid prior to the date on which any Liability may be added thereto for non-payment thereof except for those contested in good faith by appropriate proceedin gs diligently conducted and for which adequate reserves are maintained on the books of the appropriate Tax Affiliate in accordance with GAAP.  Except as set forth on Schedule 4.8, no Tax Return is under audit or examination by any Governmental Authority and no notice of such an audit or examination or any assertion of any claim for Taxes has been given or made by any Governmental Authority.  Proper and accurate amounts have been withheld by each Tax Affiliate from their respective employees for all periods in full and complete compliance with the tax, social security and unemployment withholding provisions of applicable Requirements of Law and such withholdings have been timely paid to the respective Governmental Authorities.  No Tax Affiliate has participated in a “reportable transaction” within the meaning of Treasury Regulation Section 1.6011-4(b) or has been a member of an affiliated, combined or unitary group other than the group of which a Tax Affiliate is the common parent.

Section 4.9    Margin Regulations.  The Borrower is not engaged in the business of extending credit for the purpose of, and no proceeds of any Revolving Loan or other extensions of credit hereunder will be used for the purpose of, buying or carrying margin stock (within the meaning of Regulation U of the Federal Reserve Board) or extending credit to others for the purpose of purchasing or carrying any such margin stock, in each case in contravention of Regulation T, U or X of the Federal Reserve Board.

Section 4.10   No Burdensome Obligations; No Defaults.  No Group Member is a party to any Contractual Obligation, no Group Member has Constituent Documents containing obligations, and, to the knowledge of any Group Member, there are no applicable Requirements of Law, in each case the compliance with which would have, in the aggregate, a Material Adverse Effect.  No Group Member (and, to the knowledge of each Group Member, no other party thereto) is in default under or with respect to any Contractual Obligation of any Group Member, other than those that would not, in the aggregate, have a Material Adverse Effect.

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Section 4.11   Investment Company Act.  No Group Member is an “investment company” or an “affiliated person” of, or “promoter” or “principal underwriter” for, an “investment company”, as such terms are defined in the Investment Company Act of 1940.

Section 4.12   Labor Matters.  There are no strikes, work stoppages, slowdowns or lockouts existing, pending (or, to the knowledge of any Group Member, threatened) against or involving any Group Member, except, for those that would not, in the aggregate, have a Material Adverse Effect.  Except as set forth on Schedule 4.12, as of the date of this Agreement, (a) there is no collective bargaining or similar agreement with any union, labor organization, works council or similar representative covering any employee of any Group Member, (b) no petition for certification or election of any such representative is existing or pending with respect to any employee of any G roup Member and (c) no such representative has sought certification or recognition with respect to any employee of any Group Member.

Section 4.13   ERISA.  Schedule 4.13 sets forth, as of the date of this Agreement, a complete and correct list of, and that separately identifies, (a) all Title IV Plans, (b) all Multiemployer Plans and (c) all material Benefit Plans.  Each Benefit Plan, and each trust thereunder, intended to qualify for tax exempt status under Section 401or 501 of the Code or other Requirements of Law so qualifies.  Except for those that would not, in the aggregate, have a Material Adverse Effect, (x) each Benefit Plan is in compliance with applicable provisions of ERISA, the Code and other Requirements of L aw, (y) there are no existing or pending (or to the knowledge of any Group Member, threatened) claims (other than routine claims for benefits in the normal course), sanctions, actions, lawsuits or other proceedings or investigation involving any Benefit Plan to which any Group Member incurs or otherwise has or could have an obligation or any Liability and (z) no ERISA Event is reasonably expected to occur.  On the date of this Agreement, no ERISA Event has occurred in connection with which obligations and liabilities (contingent or otherwise) remain outstanding.  No ERISA Affiliate would have any Withdrawal Liability as a result of a complete withdrawal from any Multiemployer Plan on the date this representation is made.

Section 4.14   Environmental Matters.  Except as set forth on Schedule 4.14, (a) the operations of each Group Member are and have been in compliance with all applicable Environmental Laws, including obtaining, maintaining and complying with all Permits required by any applicable Environmental Law, other than non-compliances that, in the aggregate, would not have a reasonable likelihood of resulting in Material Environmental Liabilities, (b) no Group Member is party to, and no Group Member and no real property currently (or to the knowledge of any Group Member previously) owned, leased, subleased, operated or otherwise occupied by or for any Group Member is subject to or th e subject of, any Contractual Obligation or any pending (or, to the knowledge of any Group Member, threatened) order, action, investigation, suit, proceeding, audit, claim, demand, dispute or notice of violation or of potential liability or similar notice under or pursuant to any Environmental Law other than those that, in the aggregate, are not reasonably likely to result in Material Environmental Liabilities, (c) no Lien in favor of any Governmental Authority securing, in whole or in part, Environmental Liabilities has attached to any property of any Group Member and, to the knowledge of any Group Member, no facts, circumstances or conditions exist that could reasonably be expected to result in any such Lien attaching to any such property, (d) no Group Member has caused or suffered to occur a Release of Hazardous Materials at, to or from any real property of any Group Member and each such real property is free of contamination by any Hazardous Materials except for such Release or contamination that could n ot reasonably be expected to result, in the aggregate, in Material Environmental Liabilities, (e) no Group Member (i) is or has been engaged in, or has permitted any current or former tenant to engage in, operations, or (ii) knows of any facts, circumstances or conditions, including receipt of any information request or notice of potential responsibility under CERCLA or similar Environmental Laws, that, in the aggregate, would have a reasonable likelihood of resulting in Material Environmental Liabilities and (f) each Group Member has made available to the Administrative Agent copies of all existing environmental reports, reviews and audits and all documents pertaining to actual or potential Environmental Liabilities, in each case to the extent such reports, reviews, audits and documents are in their possession, custody or control.

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Section 4.15   Intellectual Property.  Each Group Member owns or licenses all Intellectual Property that is necessary for the operations of its businesses.  To the knowledge of each Group Member, (a) the conduct and operations of the businesses of each Group Member does not infringe, misappropriate, dilute, violate or otherwise impair any Intellectual Property owned by any other Person and (b) no other Person has contested any right, title or interest of any Group Member in, or relating to, any Intellectual Property, other than, in each case, as cannot reasonably be expected to affect the Loan Documents and the transactions contemplated therein and would not, in the aggregate, have a Material Adverse Effect.  In addition, (x) there are no pending (or, to the knowledge of any Group Member, threatened) actions, investigations, suits, proceedings, audits, claims, demands, orders or disputes affecting any Group Member with respect to, (y) no judgment or order regarding any such claim has been rendered by any competent Governmental Authority, no settlement agreement or similar Contractual Obligation has been entered into by any Group Member, with respect to and (z) no Group Member knows or has any reason to know of any valid basis for any claim based on, any such infringement, misappropriation, dilution, violation or impairment or contest, other than, in each case, as cannot reasonably be expected to affect the Loan Documents and the transactions contemplated therein and would not, in the aggregate, have a Material Adverse Effect.

Section 4.16   Title; Real Property.  (a)  Each Group Member has good and marketable fee simple title to all owned real property and valid leasehold interests in all leased real property, and owns all personal property, in each case that is purported to be owned or leased by it, including those reflected on the most recent Financial Statements delivered by the Borrower, and none of such property is subject to any Lien except Permitted Liens.

(a)           Set forth on Schedule 4.16 is, as of the date of this Agreement, (i) a complete and accurate list of all real property owned in fee simple by any Group Member or in which any Group Member owns a leasehold interest setting forth, for each such real property, the current street address (including, where applicable, county, state and other relevant jurisdictions), the record owner thereof and, where applicable, each lessee and sublessee thereof, (ii) any lease, sublease, license or sublicense of such real property by any Group Member and (iii) for each such real property that the Administrative Agent has requested be subject to a Mortgage or that is otherwise material to the business of any Group Member, each Contractual Obligation by any Group Member, whether contingent or otherwise, to Sell such real property.

Section 4.17   Full Disclosure.  The information prepared or furnished by or on behalf of any Group Member in connection with any Loan Document (including the information contained in any Financial Statement or Disclosure Document but excluding any Disclosure Document prepared by the Administrative Agent or any Lender) does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein, in light of the circumstances when made, not misleading; provided, however, that projections contained therein are not to be viewed as factual and that actual results during the periods covered thereby may differ from the results set forth in such projections by a material amount.  All projections that are part of such information (including those set forth in any Projections delivered subsequent to the date of this Agreement) are based upon good faith estimates and stated assumptions believed to be reasonable and fair as of the date made in light of conditions and facts then known and, as of such date, reflect good faith, reasonable and fair estimates of the information projected for the periods set forth therein.  All facts known to any Group Member and material to an understanding of the financial condition, business, property or prospects of the Group Member taken as one enterprise have been disclosed to the Lenders.

Section 4.18   Patriot Act.    No Group Member (and, to the knowledge of each Group Member, no joint venture or subsidiary thereof) is in violation in any material respects of any United States Requirements of Law relating to terrorism, sanctions or money laundering (the “Anti-Terrorism Laws”), including the United States Executive Order No. 13224 on Terrorist Financing (the “Anti-Terrorism Order”) and the Patriot Act.

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ARTICLE 5

FINANCIAL COVENANTS

As long as any Obligation or any Revolving Credit Commitment remains outstanding, each of Holdings and the Borrower (and, to the extent set forth in any other Loan Document, each other Loan Party) agrees with the Lenders and the Administrative Agent to comply with each of the following covenants for each Fiscal Month ending after the date of this Agreement; provided, however, that Holdings and Borrower shall be obligated to comply with the covenants in Sections 5.1, 5.2 and 5.3 below only if Net Liquidity was l ess than (i) $12,500,000 at any time during the period beginning on the date of this Agreement and ending on October 31, 2010 or (ii) $15,000,000 at any time on or after November 1, 2010:

Section 5.1    Minimum Consolidated EBITDA.  Holdings shall not have, on the last day of each Fiscal Month shown below, a Consolidated EBITDA  for the 12 Fiscal Month period ending on such day (or, in the case of any Fiscal Month shown below that ends on or prior to March 31, 2011, for the cumulative period beginning on April 1, 2010 and ending on the last day of such Fiscal Month) less than the minimum amount set forth for such Fiscal Month below:

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FISCAL MONTH ENDING	MINIMUM CONSOLIDATED EBITDA
July 31, 2010	*
August 31, 2010	*
September 30, 2010	*
October 31. 2010	*
November 30, 2010	*
December 31, 2010	*
January 31, 2011	*
February 28, 2011	*
March 31. 2011	*
April 30, 2011	*
May 31, 2011	*
June 30, 2011	*
July 31. 2011	*
August 31. 2011	*
September 30, 2011	*
October 31, 2011	*
November 30, 2011	*
December 31, 2011	*
January 31, 2012	*
February 28, 2012	*
March 31, 2012	*
April 30, 2012	*
May 31, 2012	*
June 30, 2012	*

____________

* Confidential terms omitted and provided separately to the Securities and Exchange Commission.

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Section 5.2    Minimum Consolidated Interest Coverage Ratio.  Holdings shall not have, on the last day of each Fiscal Month shown below, a Consolidated Interest Coverage Ratio for the 12 Fiscal Month period ending on such day (or, in the case of any Fiscal Month shown below that ends on or prior to March 31, 2011, for the cumulative period beginning on April 1, 2010 and ending on the last day of such Fiscal Month) less than the minimum ratio set forth for such Fiscal Month below:

FISCAL MONTH ENDING	MINIMUM CONSOLIDATED INTEREST COVERAGE RATIO
September 30, 2010 or thereafter	8.00 to 1.00

Section 5.3    Maximum Capital Expenditures.  No Group Member shall incur, or permit to be incurred, Capital Expenditures in the aggregate during each Fiscal Year set forth below in excess of the maximum amount set forth below for such Fiscal Year:

FISCAL YEAR ENDING	MAXIMUM CAPITAL EXPENDITURES
Fiscal Year 2011	$1,500,000
Fiscal Year 2012	$1,000,000
Fiscal Year 2013	$1,000,000

provided, however, that, to the extent that actual Capital Expenditures incurred in any such Fiscal Year shall be less than the maximum amount set forth above for such Fiscal Year (without giving effect to the carryover permitted by this proviso), 50%of the difference between such stated maximum amount and such actual Capital Expenditures shall, in addition to any amount permitted above, be available for Capital Expenditures in the next succeeding Fiscal Year; and provided, further, that any Capital Expenditures in curred in any Fiscal Year shall be deemed to have been incurred first,in respect of amounts permitted pursuant to this Section 5.3 without giving effect to the preceding proviso and then, in respect of any amount permitted solely by reason of the preceding proviso.

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ARTICLE 6

REPORTING COVENANTS

As long as any Obligation or any Revolving Credit Commitment remains outstanding, each of Holdings and the Borrower (and, to the extent set forth in any other Loan Document, each other Loan Party) agrees with the Lenders and the Administrative Agent to comply with each of the following covenants:

Section 6.1    Financial Statements.  The Borrower shall deliver to the Administrative Agent each of the following:

(a)           Monthly Reports.  As soon as available, and in any event within 30 days after the end of each fiscal month in each Fiscal Quarter, the Consolidated unaudited balance sheet of Holdings as of the close of such fiscal month and related Consolidated statements of income and cash flow for such fiscal month and that portion of the Fiscal Year ending as of the close of such fiscal month, setting forth in comparative form the figures for the corresponding period in the prior Fiscal Year, in each case certified by a Responsible Officer of the Borrower as fairly presenting in all material respects the Consolidated financial position, results of operations and cash flow of Holdings as at the dates i ndicated and for the periods indicated in accordance with GAAP (subject to the absence of footnote disclosure and normal year-end audit adjustments).

(b)           Quarterly Reports.  As soon as available, and in any event within 45 days after the end of each of the first three Fiscal Quarters of each Fiscal Year, the Consolidated unaudited balance sheet of Holdings as of the close of such Fiscal Quarter and related Consolidated statements of income and cash flow for such Fiscal Quarter and that portion of the Fiscal Year ending as of the close of such Fiscal Quarter, setting forth in comparative form the figures for the corresponding period in the prior Fiscal Year and the figures contained in the latest Projections, in each case certified by a Responsible Officer of the Borrower as fairly presenting in all material respects the Consolidated financ ial position, results of operations and cash flow of Holdings as at the dates indicated and for the periods indicated in accordance with GAAP (subject to the absence of footnote disclosure and normal year-end audit adjustments).

(c)           Annual Reports.  As soon as available, and in any event within 90 days after the end of each Fiscal Year, the Consolidated balance sheet of Holdings as of the end of such year and related Consolidated statements of income, stockholders’ equity and cash flow for such Fiscal Year, each prepared in accordance with GAAP, together with a certification by the Group Members’ Accountants that (i) such Consolidated Financial Statements fairly present in all material respects the Consolidated financial position, results of operations and cash flow of Holdings as at the dates indicated and for the periods indicated therein in accordance with GAAP without qualification as to the scope of the audit or as to going concern and without any other similar qualification and (ii) in the course of the regular audit of the businesses of the Group Members, which audit was conducted in accordance with the standards of the United States' Public Company Accounting Oversight Board (or any successor entity), such Group Members’ Accountants have obtained no knowledge that a Default in respect of any financial covenant contained in Article V is continuing or, if in the opinion of the Group Members’ Accountants such a Default is continuing, a statement as to the nature thereof.

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(d)           Compliance Certificate.  Together with each delivery of any Financial Statement pursuant to clause (a), (b)or (c) above, a Compliance Certificate duly executed by a Responsible Officer of the Borrower that, among other things, demonstrates compliance with each financial covenant contained in Article V (regardless of whether or not Holdings and Borrower are required at such time to comply with all such covenants) and states that no Default is continuing as of the date of delivery of such Compliance Certificate or, if a Default is continuing, states the nature thereof and the action that the Borrower proposes to take with respect thereto.

(e)           Corporate Chart and Other Collateral Updates.  As part of the Compliance Certificate delivered pursuant to clause (d) above, each in form and substance satisfactory to the Administrative Agent, a certificate by a Responsible Officer of the Borrower that (i) the Corporate Chart attached thereto (or the last Corporate Chart delivered pursuant to this clause (e)) is correct and complete as of the date of such Compliance Certificate, (ii) the Loan Parties have delivered all documents (including updated schedules as to locations of Collateral and acquisition of Inte llectual Property or real property) they are required to deliver pursuant to any Loan Document on or prior to the date of delivery of such Compliance Certificate and (iii) complete and correct copies of all documents modifying any term of any Constituent Document of any Group Member or any Subsidiary or joint venture thereof on or prior to the date of delivery of such Compliance Certificate have been delivered to the Administrative Agent or are attached to such certificate.

(f)           Additional Projections.  As soon as available and in any event not later than 30 days after the end of each Fiscal Year, any significant revisions to, (i) the annual business plan of the Group Members for the Fiscal Year next succeeding such Fiscal Year and (ii) forecasts prepared by management of the Borrower (A) for each Fiscal Quarter in such next succeeding Fiscal Year and (B) for each other succeeding Fiscal Year through the Fiscal Year containing the Scheduled Revolving Credit Termination Date, in each case including in such forecasts (x) a projected year-end Consolidated balance sheet, income statement and statement of cash flows, (y) a statement of all of the material assumpt ions on which such forecasts are based and (z) substantially the same type of financial information as that contained in the Initial Projections.

(g)           Management Discussion and Analysis.  Together with each delivery of any Compliance Certificate pursuant to clause (d) above, a discussion and analysis of the financial condition and results of operations of the Group Members for the portion of the Fiscal Year then elapsed and discussing the reasons for any significant variations from the Projections for such period and the figures for the corresponding period in the previous Fiscal Year.

(h)           Intercompany Loan Balances.  Together with each delivery of any Compliance Certificate pursuant to clause (d) above, a summary of the outstanding balances of all intercompany Indebtedness as of the last day of the Fiscal Quarter covered by such Financial Statement, certified as complete and correct by a Responsible Officer of the Borrower as part of the Compliance Certificate delivered in connection with such Financial Statements.

(i)           Audit Reports, Management Letters, Etc.  Together with each delivery of any Financial Statement for any Fiscal Year pursuant to clause (c) above, copies of each management letter, audit report or similar letter or report received by any Group Member from any independent registered certified public accountant (including the Group Members’ Accountants) in connection with such Financial Statements or any audit thereof, each certified to be complete and correct copies by a Responsible Officer of the Borrower as part of the Compliance Certificate delivered in connection with such Financial Statements.

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(j)           Insurance.  Together with each delivery of any Financial Statement for any Fiscal Year pursuant to clause (c) above, each in form and substance satisfactory to the Administrative Agent and certified as complete and correct by a Responsible Officer of the Borrower as part of the Compliance Certificate delivered in connection with such Financial Statements, a summary of all material insurance coverage maintained as of the date thereof by any Group Member, together with such other related documents and information as the Administrative Agent may reasonably require.

(k)           Borrowing Base Certificate.  As soon as available and in any event within one (1) Business Day after the end of each calendar week, and at such other times as the Administrative Agent may reasonably require, a Borrowing Base Certificate, certified on behalf of the Borrower by a Responsible Officer, setting forth the Borrowing Base as at the end of the most-recently ended fiscal month or as at such other date as the Administrative Agent may reasonably require.

(l)           Other Borrowing Base Reports.

(i)           Concurrently with the delivery of the first Borrowing Base Certificate in each Fiscal Month, a summary of the Borrower’s Inventory by location and type with a supporting perpetual Inventory report, in each case accompanied by such supporting detail and documentation as shall be requested by the Administrative Agent in its reasonable discretion;

(ii)           Concurrently with the delivery of the first Borrowing Base Certificate in each Fiscal Month, a monthly trial balance showing Accounts outstanding aged from invoice date as follows:  1 to 30 days, 31 to 60 days, 61 to 90 days, 91 days to 120 days and 121 days or more, accompanied by such supporting detail and documentation as shall be requested by the Administrative Agent in its reasonable discretion;

(iii)           On a weekly basis (or a monthly basis if and for so long as the Revolving Credit Outstandings are zero) or at such more frequent intervals as the Administrative Agent may request from time to time (together with a copy of all or any part of such delivery requested by any Lender in writing after the date of this Agreement), collateral reports with respect to Borrower, including all additions and reductions (cash and non-cash) with respect to Accounts of Borrower, in each case accompanied by such supporting detail and documentation as shall be requested by the Administrative Agent in its reasonable discretion each of which shall be prepared by the Borrower as of the last day of the immediately preceding week (or month as provided above) or the date 2 days prior to the date of any request;

(iv)           to the Administrative Agent, at the time of delivery of each of the monthly financial statements delivered pursuant to Section 6.1(a);

(1)           a reconciliation of the most recent Borrowing Base, general ledger and month-end Inventory reports of Borrower to Borrower’s general ledger and monthly financial statements delivered pursuant to Section 6.1(a), in each case accompanied by such supporting detail and documentation as shall be requested by the Administrative Agent in its reasonable discretion;

(2)           a reconciliation of the perpetual inventory by location to Borrower’s most recent Borrowing Base Certificate, general ledger and monthly Financial Statements delivered pursuant to Section 6.1(a), in each case accompanied by such supporting detail and documentation as shall be requested by the Administrative Agent in its reasonable discretion;

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(3)           an aging of accounts payable and a reconciliation of that accounts payable aging to Borrower’s general ledger and monthly Financial Statements delivered pursuant to this Section 6.1, in each case accompanied by such supporting detail and documentation as shall be requested by the Administrative Agent in its reasonable discretion;

(4)           a reconciliation of the outstanding Revolving Loans as set forth in the monthly loan account statement provided by the Administrative Agent to Borrower’s general ledger and monthly Financial Statements delivered pursuant to Section 6.1(a), in each case accompanied by such supporting detail and documentation as shall be requested by the Administrative Agent in its reasonable discretion.

(m)           Government Contracts.  At the time of delivery of each of the quarterly financial statements delivered pursuant to Section 6.1, (i) a listing of government contracts of  Borrower subject to the Federal Assignment of Claims Act of 1940; and (ii) a list of any applications for the registration of any Patent, Trademark or Copyright filed by any Group Member with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in the prior Fiscal Quarter.

(n)           Audits.  Upon the request of the Administrative Agent, at any time if an Event of Default shall have occurred and be continuing but otherwise not more often than three times in each period of twelve consecutive months, the Borrower will obtain and deliver at Borrower’s expense to the Administrative Agent a report of an independent collateral auditor satisfactory to the Administrative Agent with respect to the Accounts and Inventory of the Group Members.

(o)           Inventory Appraisals.  From time to time the Administrative Agent may, or may require the Borrower to, in either case at the Borrower’s expense, obtain appraisals in form and substance and from appraisers reasonably satisfactory to the Administrative Agent stating the then current Net Orderly Liquidation Value of all or any portion of the Inventory of the Borrower; provided that, if no Default or Event of Default shall have occurred and be then continuing, Borrower shall not be liable for the expense of more than two such appraisals in any period of twelve consecutive months.

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Section 6.2    Other Events.  The Borrower shall give the Administrative Agent notice of each of the following (which may be made by telephone if promptly confirmed in writing) promptly after any Responsible officer of any Group Member knows or has reason to know of it:  (a)(i) any Default and (ii) any event that would have a Material Adverse Effect, specifying, in each case, the nature and anticipated effect thereof and any action proposed to be taken in connection therewith, (b) any event (other than any event involving loss or damage to property) reasonably expected to result in a mandatory payment of the Obligations pursuant to Section 2.8, stating the materi al terms and conditions of such transaction and estimating the Net Cash Proceeds thereof, (c) the commencement of, or any material developments in, any action, investigation, suit, proceeding, audit, claim, demand, order or dispute with, by or before any Governmental Authority affecting any Group Member or any property of any Group Member that (i) seeks injunctive or similar relief, (ii) in the reasonable judgment of the Borrower, exposes any Group Member to liability in an aggregate amount in excess of $1,000,000 or (iii) if adversely determined would have a Material Adverse Effect, (d) the acquisition of any material real property or the entering into any material lease, (e) if the Accounts owing by any Account Debtor and its Affiliates (other than Perfumania and Macy’s) to Borrower and its Subsidiaries exceed ten percent (10%) of all Accounts owing by all Account Debtors as of any date, and (f) if the Accounts owing by Macy’s to Borrower and its Subsidiaries exceed twenty-fivepercent (25%)of all Accounts owing by all Account Debtors as of any date.

Section 6.3    Copies of Notices and Reports.  The Borrower shall promptly deliver to the Administrative Agent copies of each of the following:  (a) all reports that Holdings transmits to its security holders generally, (b) to the extent not publicly available through EDGAR or other similar service, all documents that any Group Member files with the Securities and Exchange Commission, the National Association of Securities Dealers, Inc., any securities exchange or any Governmental Authority exercising similar functions, (c) all press releases not made available directly to the general public, and (d) any material document transmitted or received pursuant to, or in connection with, any Contractual Obligation governing Indebtedness o f any Group Member.

Section 6.4    Taxes.  The Borrower shall give the Administrative Agent notice of each of the following (which may be made by telephone if promptly confirmed in writing) promptly after any Responsible Officer of any Group Member knows or has reason to know of it:  (a) the creation, or filing with the IRS or any other Governmental Authority, of any Contractual Obligation or other document extending, or having the effect of extending, the period for assessment or collection of any taxes with respect to any Tax Affiliate and (b) the creation of any Contractual Obligation of any Tax Affiliate, or the receipt of any request directed to any Tax Affiliate, to make any adjustment under Section 481(a) of the Code, by reason of a change in a ccounting method or otherwise, which would have a Material Adverse Effect.

Section 6.5    Labor Matters.  The Borrower shall give the Administrative Agent notice of each of the following (which may be made by telephone if promptly confirmed in writing), promptly after, and in any event within 30 days after any Responsible Officer of any Group Member knows or has reason to know of it:  (a) the commencement of any material labor dispute to which any Group Member is or may become a party, including any strikes, lockouts or other disputes relating to any of such Person’s plants and other facilities and (b) the incurrence by any Group Member of any Worker Adjustment and Retraining Notification Act or related or similar liability incurred with respect to the closing of any plant or other facility of any s uch Person (other than, in the case of this clause (b), those that would not, in the aggregate, have a Material Adverse Effect).

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Section 6.6    ERISA Matters.  The Borrower shall give the Administrative Agent (a) on or prior to any filing by any ERISA Affiliate of any notice of intent to terminate any Title IV Plan, a copy of such notice and (b) promptly, and in any event within 10 days, after any Responsible Officer of any ERISA Affiliate knows or has reason to know that a request for a minimum funding waiver under Section 412 of the Code has been filed with respect to any Title IV Plan or Multiemployer Plan, a notice (which may be made by telephone if promptly confirmed in writing) describing such waiver request and any action that any ERISA Affiliate proposes to take with respect thereto, together with a copy of any notice filed with the PBGC or the IRS pertaining thereto.

Section 6.7    Environmental Matters.  (a)  The Borrower shall provide the Administrative Agent notice of each of the following (which may be made by telephone if promptly confirmed by the Administrative Agent in writing) promptly after any Responsible Officer of any Group Member knows or has reason to know of it (and, upon reasonable request of the Administrative Agent, documents and information in connection therewith):  (i)(A) unpermitted Releases, (B) the receipt by any Group Member of any notice of violation of or potential liability or similar notice under, or the existence of any condition that could reasonably be expected to result in violations of or liabilities under, any Environmental Law or (C) the commencement of, or any material change to, any action, investigation, suit, proceeding, audit, claim, demand, dispute alleging a violation of or liability under any Environmental Law, that, for each of clauses (A), (B) and (C) above (and, in the case of clause (C), if adversely determined), in the aggregate for each such clause, could reasonably be expected to result in Environmental Liabilities in excess of the Material Liability Amount, (ii) the receipt by any Group Member of notificationthat any property of any Group Member is subject to any Lien in favor of any Governmental Authority securing, in whole or in part, Environmental Liabilities and (iii) any proposed acquisition or lease of real property if such acquisition or lease would have a reasonable likelihood of resulting in aggregate Environmental Liabilities in excess of the Material Liability Amount.

(a)           Upon request of the Administrative Agent, the Borrower shall provide the Administrative Agent a report containing an update as to the status of any environmental, health or safety compliance, hazard or liability issue identified in any document delivered to any Secured Party pursuant to any Loan Document or as to any condition reasonably believed by the Administrative Agent to result in materialEnvironmental Liabilities.

Section 6.8    Other Information.  The Borrower shall provide the Administrative Agent with such other documents and information with respect to the business, property, condition (financial or otherwise), legal, financial or corporate or similar affairs or operations of any Group Member as the Administrative Agent or such Lender through the Administrative Agent may from time to time reasonably request.

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ARTICLE 7

AFFIRMATIVE COVENANTS

As long as any Obligation or any Revolving Credit Commitment remains outstanding, each of Holdings and the Borrower (and, to the extent set forth in any other Loan Document, each other Loan Party) agrees with the Lenders  and the Administrative Agent to comply with each of the following covenants:

Section 7.1    Maintenance of Corporate Existence.  Each Group Member shall (a) preserve and maintain its legal existence, except in the consummation of transactions expressly permitted by Sections 8.4 and 8.7, and (b) preserve and maintain its rights (charter and statutory), privileges franchises and Permits necessary or desirable in the conduct of its business, except, in the case of this clause (b), where the failure to do so would not, in the aggregate, have a Material Adverse Effect.

Section 7.2    Compliance with Laws, Etc.  Each Group Member shall comply with all applicable Requirements of Law, Contractual Obligations and Permits, except for such failures to comply that would not, in the aggregate, have a Material Adverse Effect.

Section 7.3    Payment of Obligations.  Each Group Member shall pay or discharge before they become delinquent (a) all material claims, taxes, assessments, charges and levies imposed by any Governmental Authority and (b) all other lawful claims that if unpaid would, by the operation of applicable Requirements of Law, become a Lien upon any property of any Group Member, except, in each case, for those whose amount or validity is being contested in good faith by proper proceedings diligently conducted and for which adequate reserves are maintained on the books of the appropriate Group Member in accordance with GAAP.

Section 7.4    Maintenance of Property.  Each Group Member shall maintain and preserve (a) in good working order and condition all of its property necessary in the conduct of its business and (b) all rights, permits, licenses, approvals and privileges (including all Permits) necessary, used or useful, whether because of its ownership, lease, sublease or other operation or occupation of property or other conduct of its business, and shall make all necessary or appropriate filings with, and give all required notices to, Government Authorities, except for such failures to maintain and preserve the items set forth in clauses (a) and (b) above that would not, in the aggregate, have a Material Adverse Effect.

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Section 7.5    Maintenance of Insurance.  Each Group Member shall (a) maintain or cause to be maintained in full force and effect all policies of insurance of any kind with respect to the property and businesses of the Group Members (including policies of life, fire, theft, product liability, public liability, flood insurance, property damage, other casualty, employee fidelity, workers’ compensation, business interruption and employee health and welfare insurance) with financially sound and reputable insurance companies or associations (in each case that are not Affiliates of the Borrower) of a nature and providing such coverage as is sufficient and as is customarily carried by businesses of the size and character of the business of th e Group Members and (b) cause all such insurance relating to any property or business of any Loan Party to name the Administrative Agent on behalf of the Secured Parties as additional insured or loss payee, as appropriate, and to provide that no cancellation, material addition in amount or material change in coverage shall be effective until after 45 days’ notice thereof to the Administrative Agent.

Section 7.6    Keeping of Books.  The Group Members shall keep proper books of record and account, in which full, true and correct entries shall be made in accordance with GAAP and all other applicable Requirements of Law of all financial transactions and the assets and business of each Group Member.

Section 7.7    Access to Books and Property.  Each Group Member shall permit the Administrative Agent, the Lenders and any Related Person of any of them, as often as reasonably requested, at any reasonable time during normal business hours and with reasonable advance notice (except that, during the continuance of an Event of Default, no such notice shall be required) to (a) visit and inspect the property of each Group Member and examine and make copies of and abstracts from, the corporate (and similar), financial, operating and other books and records of each Group Member, (b) discuss the affairs, finances and accounts of each Group Member with any officer or director of any Gr oup Member, (c) communicate directly with any registered certified public accountants (including the Group Members’ Accountants) of any Group Member and (d) inspect, review, evaluate and make physical verifications and appraisals of the Inventory and other Collateral in any manner and through any medium that the Administrative Agent considers advisable.  Each Group Member shall authorize their respective registered certified public accountants (including the Group Members’ Accountants) to communicate directly with the Administrative Agent, the Lenders and their Related Persons and to disclose to the Administrative Agent, the Lenders and their Related Persons all financial statements and other documents and information as they might have and the Administrative Agent or any Lender reasonably requests with respect to any Group Member.

Section 7.8    Environmental.  Each Group Member shall comply with, and maintain itsreal property, whether owned, leased, subleased or otherwise operated or occupied, in compliance with, all applicable Environmental Laws (including by implementing any Remedial Action necessary to achieve such compliance or that is required by orders and directives of any Governmental Authority) except for failures to comply that would not, in the aggregate, have a Material Adverse Effect.  Without limiting the foregoing, if an Event of Default is continuing or if the Administrative Agent at any time has a reasonable basis to believe that there exist violations of Environmental Laws by an y Group Member or that there exist any Environmental Liabilities, in each case, that would have, in the aggregate, a Material Adverse Effect, then each Group Member shall, promptly upon receipt of request from the Administrative Agent, cause the performance of, and allow the Administrative Agent and its Related Persons access to such real property for the purpose of conducting, such environmental audits and assessments, including subsurface sampling of soil and groundwater, and cause the preparation of such reports, in each case as the Administrative Agent may from time to time reasonably request.  Such audits, assessments and reports, to the extent not conducted by the Administrative Agent or any of its Related Persons, shall be conducted and prepared by reputable environmental consulting firms reasonably acceptable to the Administrative Agent and shall be in form and substance reasonably acceptable to the Administrative Agent.

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Section 7.9     Use of Proceeds.  The proceeds of the Revolving Loans shall be used by the Borrower (and, to the extent distributed to them by the Borrower, each other Group Member) solely (a) for the payment of transaction costs, fees and expenses relating to the Revolving Credit Facility, (b) for the payment of transaction costs, fees and expenses incurred in connection with the Loan Documents and the transactions contemplated therein and (c) for working capital and general corporate and similar purposes.

Section 7.10   Additional Collateral and Guaranties.  To the extent not delivered to the Administrative Agent on or before the date of this Agreement (including in respect of after-acquired property and Persons that become Subsidiaries of any Loan Party after the date of this Agreement), each Group Member shall, promptly, do each of the following, unless otherwise agreed by the Administrative Agent:

(a)           deliver to the Administrative Agent such modifications to the terms of the Loan Documents (or, to the extent applicable as determined by the Administrative Agent, such other documents), in each case in form and substance reasonably satisfactory to the Administrative Agent and as the Administrative Agent deems necessary or advisable in order to ensure the following:

(i)          (A) each Subsidiary of any Loan Party that has entered into Guaranty Obligations with respect to any Indebtedness of the Borrower and (B) each Wholly Owned Subsidiary of any Loan Party shall guaranty, as primary obligor and not as surety, the payment of the Obligations of the Borrower; and

(ii)         each Loan Party (including any Person required to become a Guarantor pursuant to clause (i) above) shall effectively grant to the Administrative Agent, for the benefit of the Secured Parties, a valid and enforceable security interest in all of its property, including all of its Stock and Stock Equivalents and other Securities, as security for the Obligations of such Loan Party;

provided, however, that, unless the Borrower and the Administrative Agent otherwise agree, in no event shall (x) any Excluded Foreign Subsidiary be required to guaranty the payment of any Obligation, (y) the Loan Parties, individually or collectively, be required to pledge in excess of 66% of the outstanding Voting Stock of any Excluded Foreign Subsidiary or (z) a security interest be required to be granted on any property of any Excluded Foreign Subsidiary as security for any Obligation;

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(b)           deliver to the Administrative Agent all documents representing all Stock, Stock Equivalents and other Securities pledged pursuant to the documents delivered pursuant to clause (a) above, together with undated powers or endorsements duly executed in blank;

(c)           to take all other actions necessary or advisable to ensure the validity or continuing validity of any guaranty for any Obligation or any Lien securing any Obligation, to perfect, maintain, evidence or enforce any Lien securing any Obligation or to ensure such Liens have the same priority as that of the Liens on similar Collateral set forth in the Loan Documents executed on the date of this Agreement (or, for Collateral located outside the United States, a similar priority acceptable to the Administrative Agent), including the filing of UCC financing statements in such jurisdictions as may be required by the Loan Documents or applicable Requirements of Law or as the Administrative Agent may otherwise reasonably request; and

(d)           deliver to the Administrative Agent legal opinions relating to the matters described in this Section 7.10, which opinions shall be as reasonably required by, and in form and substance and from counsel reasonably satisfactory to, the Administrative Agent.

Section 7.11    Deposit Accounts; Securities Accounts; Cash Collateral Accounts; Maximum Cash and Cash Equivalents.  (a)  Each Group Member (other than Excluded Foreign Subsidiaries) shall have a lockbox arrangement reasonably satisfactory to the Administrative Agent in place on the date of this Agreement with Regions Bank (or another depository institution reasonably satisfactory to the Administrative Agent) for the receipt of payments on its Accounts in the form of checks and other written instruments for the payment of money and commencing on the date of this Agreement each such Group Member shall direct its A ccount Debtors to send such items to such lockbox for collection and clearance, and commencing 90 days after the date of this Agreement such Group Member shall take such reasonable steps as may be necessary to ensure that all of its Account Debtors send such items directly to such lockbox or pay their Accounts by wire or automated clearinghouse transfers directly to a Controlled Deposit Account.   Each Group Member (other than Excluded Foreign Subsidiaries) shall deposit all payments received by it in one or more deposit accounts that are Controlled Deposit Accounts; provided, however, that each such Group Member may maintain zero-balance deposit accounts for the purpose of managing local disbursements and may maintain payroll, withholding tax and other fiduciary accounts.  Each Group Member (other than Excluded Foreign Subsidiaries) shall deposit all of its Cash Equivalents in securities accounts that are Controlled Securities Accounts, in each case except for cash and Cash Equivalents the aggregate value of which does not exceed $100,000 at any time.  Each Group Member (other than Excluded Foreign Subsidiaries) shall enter into, and cause each depository or other financial institution that holds any Controlled Deposit Accounts or Controlled Securities Accounts of such Group Member to enter into, Control Agreements providing for (i) “full” cash dominion with respect to each non-disbursement deposit account maintained by such Group Member as of or after the date of this Agreement; provided, however, that each such account may be subject to “springing” cash dominion if and for so long as either (x) the Excess Availability is not less than $10,000,000 at any time during the immediately preceding 30 days and thereafter is not less than such amount or (y) the aggregate Revolving Credit Outstandings are not more than $3,000,000 (or not more than $250,00 at any time when no Default or Event of Default exists) at any time during the immediately preceding 30 days and thereafter are not more than such amount, (ii) “springing” cash dominion with respect to each disbursement deposit account maintained by such Group Member as of or after the date of this Agreement other than the Group Members’ payroll account (so long as such payroll account is used only for such purpose and the balance of funds at any time on deposit therein does not exceed the amount necessary to pay the Group Members’ current or reasonably anticipated payroll liabilities) and their withholding tax, customs and fiduciary accounts and (iii) “springing” dominion with respect to each securities, commodity or similar account maintained by such Group Member as of or after the date of this Agreement.  0;With respect to any deposit, securities, commodity or similar accounts subject to such “springing” Control Agreements, the Administrative Agent shall not deliver to the relevant depository or other financial institution a notice or other instruction which provides for exclusive control over such account by the Administrative Agent unless and until an Event of Default has occurred and is continuing.  Each Group Member shall close any deposit accounts it has with Branch Bank & Trust Company within 10 days after the date of this Agreement.

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(a)           The Administrative Agent shall not have any responsibility for, or bear any risk of loss of, any investment or income of any funds in any Cash Collateral Account.  From time to time after funds are deposited in any Cash Collateral Account, the Administrative Agent may apply funds then held in such Cash Collateral Account to the payment of Obligations in accordance with Section 2.12.  No Group Member and no Person claiming on behalf of or through any Group Member shall have any right to demand payment of any funds held in any Cash Collateral Account at any time prior to the termination of all Revolving Credit Commitments and the payment in full of all Obligations.

(b)           Group Members shall not permit cash or Cash Equivalents in an aggregate amount in excess of $1,000,000 (other than cash necessary for the Group Members to satisfy the current liabilities incurred by them in the ordinary course of their business and without acceleration of the satisfaction of such current liabilities) to accumulate and be maintained in any or all of the deposit, securities or commodity accounts of the Group Members; provided, however, that this covenant shall be suspended if and for so long as no Revolving Loans are outstanding.

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ARTICLE 8

NEGATIVE COVENANTS

As long as any Obligation or any Revolving Credit Commitment remains outstanding, each of Holdings and the Borrower (and, to the extent set forth in any other Loan Document, each other Loan Party) agrees with the Lenders and the Administrative Agent to comply with each of the following covenants:

Section 8.1     Indebtedness.  No Group Member shall, directly or indirectly, incur or otherwise remain liable with respect to or responsible for, any Indebtedness except for the following:

(a)           the Obligations;

(b)           Indebtedness existing on the date hereof and set forth on Schedule 8.1, together with any Permitted Refinancing of any Indebtedness permitted hereunder in reliance upon this clause (b);

(c)           Indebtedness consisting of Capitalized Lease Obligations (other than with respect to a lease entered into as part of a Sale and Leaseback Transaction) and purchase money Indebtedness, in each case incurred by any Group Member (other than Holdings) to finance the acquisition, repair, improvement or construction of fixed or capital assets of such Group Member, together with any Permitted Refinancing of any Indebtedness permitted hereunder in reliance upon this clause (c); provided, however, that (i) the aggregate outstanding principal amount of all such Indebtedness does n ot exceed $1,000,000 at any time and (ii) the principal amount of such Indebtedness does not exceed the lower of the cost or fair market value of the property so acquired or built or of such repairs or improvements financed, whether directly or through a Permitted Refinancing, with such Indebtedness (each measured at the time such acquisition, repair, improvement or construction is made);(d)           Capitalized Lease Obligations arising under Sale and Leaseback Transactions permitted hereunder in reliance upon Section 8.4(b)(ii);

(e)           intercompany loans owing to any Group Member and constituting Permitted Investments of such Group Member;

(f)           obligations under other Hedging Agreements entered into for the sole purpose of hedging in the normal course of business and consistent with industry practices;

(g)           Guaranty Obligations of any Group Member with respect to Indebtedness of any Group Member other than Holdings (other than Indebtedness permitted hereunder in reliance upon clause (b) or (c) above, for which Guaranty Obligations may be permitted to the extent set forth in such clauses);

(h)           and any unsecured Indebtedness of any Group Member; provided, however, that the aggregate outstanding principal amount of all such unsecured Indebtedness shall not exceed $2,000,000 at any time.

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Section 8.2    Liens.  No Group Member shall incur, maintain or otherwise suffer to exist any Lien upon or with respect to any of its property, whether now owned or hereafter acquired, or assign any right to receive income or profits, except for the following:

(a)           Liens created pursuant to any Loan Document;

(b)           Customary Permitted Liens of Group Members;

(c)           Liens existing on the date hereof and set forth on Schedule 8.2;

(d)           Liens on the property of the Borrower or any of its Subsidiaries securing Indebtedness permitted hereunder in reliance upon Section 8.1(c); provided, however, that (i) such Liens exist prior to the acquisition of, or attach substantially simultaneously with, or within 90 days after, the acquisition, repair, improvement or construction of, such property financed, whether directly or through a Permitted Refinancing, by such Indebtedness and (ii) such Liens do not extend to any property of any Group Member other than the property (and proceeds thereof) acquir ed or built, or the improvements or repairs, financed, whether directly or through a Permitted Refinancing, by such Indebtedness;

(e)           Liens on the property of the Borrower or any of its Subsidiaries securing the Permitted Refinancing of any Indebtedness secured by any Lien on such property permitted hereunder in reliance upon clause (c) or (d) above or this clause (e) without any change in the property subject to such Liens; and

(f)           Liens on any property of the Borrower or any of its Subsidiaries securing any of their Indebtedness or their other liabilities; provided, however, that the aggregate outstanding principal amount of all such Indebtedness and other liabilities shall not exceed $1,000,000 at any time.

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Section 8.3     Investments.  No Group Member shall make or maintain, directly or indirectly, any Investment except for the following:

(a)           Investments existing on the date hereof and set forth on Schedule 8.3;

(b)           Investments in cash and Cash Equivalents;

(c)            (i) endorsements for collection or deposit in the ordinary course of business consistent with past practice, (ii) extensions of trade credit (other than to Affiliates of the Borrower other than Perfumania) arising or acquired in the ordinary course of business and (iii) Investments received in settlements in the ordinary course of business of such extensions of trade credit;

(d)           [reserved];

(e)           Investments by (i) Holdings in the Borrower, (ii) any Loan Party (other than Holdings) in any other Loan Party (other than Holdings), (iii) any Group Member that is not a Loan Party in any Group Member (other than Holdings) or in any joint venture or (iv) any Loan Party (other than Holdings) in any Group Member that is not a Loan Party or in any joint venture; provided, however, that the aggregate outstanding amount of all Investments permitted pursuant to this clause (iv) shall not exceed $500,000 at any time; and provided, further, that any Investment consisting of loans or advances to any Loan Party pursuant to clause (iii) above shall be subordinated in full to the payment of the Obligations of such Loan Party on terms and conditions satisfactory to the Administrative Agent;

(f)           loans or advances to employees of the Borrower or any of its Subsidiaries to finance travel, entertainment and relocation expenses and other ordinary business purposes in the ordinary course of business as presently conducted; provided, however, that the aggregate outstanding principal amount of all loans and advances permitted pursuant to this clause (f) shall not exceed $500,000 at any time; and

(g)           any Investment by the Borrower or any of its Subsidiaries; provided, however, that the aggregate outstanding amount of all such Investments under this Section 8.3(g) shall not exceed $1,000,000 at any time.

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Section 8.4      Asset Sales.  No Group Member shall Sell any of its property (other than cash) or issue shares of its own Stock, except for the following:

(a)           In each case to the extent entered into in the ordinary course of business and made to a Person that is not an Affiliate of the Borrower (other than Perfumania), (i) Sales of Cash Equivalents, inventory or property that has become obsolete or worn out or Accounts or Inventory to the extent not Eligible Accounts or Eligible Inventory, respectively, and (ii) non-exclusive licenses of Intellectual Property;

(b)            (i) a true lease or sublease of real property not constituting Indebtedness and not entered into as part of a Sale and Leaseback Transaction and (ii) a Sale of property pursuant to a Sale and Leaseback Transaction; provided, however, that the aggregate fair market value (measured at the time of the applicable Sale) of all property covered by any outstanding Sale and Leaseback Transaction at any time shall not exceed $500,000;

(c)            (i) any Sale of any property (other than their own Stock or Stock Equivalents) by any Group Member (other than Holdings) to any other Group Member (other than Holdings) to the extent any resulting Investment constitutes a Permitted Investment, (ii) any Restricted Payment by any Group Member (other than Holdings) permitted pursuant to Section 8.5 and (iii) any distribution by Holdings of the proceeds of Restricted Payments from any other Group Member to the extent permitted in Section 8.5;

(d)            (i) any Sale or issuance by Holdings of its own Stock, (ii) any Sale or issuance by the Borrower of its own Stock to Holdings, (iii) any Sale or issuance by any Subsidiary of the Borrower of its own Stock to any Group Member (other than Holdings), provided, however, that the proportion of such Stock and of each class of such Stock (both on an outstanding and fully-diluted basis) held by the Loan Parties (other than Holdings), taken as a whole, does not change as a result of such Sale or issuance and (iv) to the extent necessary to satisfy any Requirement of Law in the jurisdiction of incorporation of any Subsidiary of the Borrower, a ny Sale or issuance by such Subsidiary of its own Stock constituting directors’ qualifying shares or nominal holdings; and

(e)           as long as no Default is continuing or would result therefrom, any Sale of property (other than as part of a Sale and Leaseback Transaction) of, or Sale or issuance of its own Stock by, any Group Member (other than Holdings) for fair market value payable in cash upon such sale; provided, however, that the aggregate consideration received during any Fiscal Year for all such Sales shall not exceed $1,000,000.

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Section 8.5    Restricted Payments.  No Group Member (other than Holdings) shall directly or indirectly, declare, order, pay, make or set apart any sum for any Restricted Payment except for the following (and Holdings shall not use the proceeds of any Restricted Payment made in reliance under clause (c) below other than as set forth in such clause (c)):

(a)           (i) Restricted Payments (A) by any Group Member (other than Holdings) that is a Loan Party to any Loan Party other than Holdings and (B) by any Group Member that is not a Loan Party to any Group Member other than Holdings and (ii) dividends and distributions by any Subsidiary of the Borrower that is not a Loan Party to any holder of its Stock, to the extent made to all such holders ratably according to their ownership interests in such Stock;

(b)           dividends and distributions declared and paid on the common Stock of any Group Member (other than Holdings) ratably to the holders of such common Stock and payable only in common Stock of such Group Member; and

(c)           cash dividends on the Stock of the Borrower to Holdings paid and declared solely for the purpose of funding the following:

(i)         payments by Holdings in respect of taxes owing by Holdings in respect of the other Group Members;

(ii)        ordinary operating expenses of Holdings; provided, however, that the amount of such cash dividends paid in any Fiscal Year shall not exceed $500,000 in the aggregate; and

(iii)       the redemption, purchase or other acquisition or retirement for value by Holdings of its common Stock (or Stock Equivalents with respect to its common Stock) (A) from any present or former employee, director or officer (or the assigns, estate, heirs or current or former spouses thereof) of any Group Member upon the death, disability or termination of employment of such employee, director or officer; provided, however, that if the Revolving Credit Outstandings were greater than zero dollars at any time during the 30 days immediately preceding the payment of any such cash dividend or are projected to be greater than zero dollars at any time during the 30 da ys immediately following the payment of any such cash dividend, the aggregate amount of such cash dividends paid in any Fiscal Year shall not exceed $500,000 in the aggregate or (B) from any other Person; provided, however, that the amount of such cash dividends paid in any Fiscal Year in reliance upon this clause (B) shall not exceed $1,000,000 in the aggregate;

provided, however, that no action that would otherwise be permitted hereunder in reliance upon this clause (c) (other than clause (i) or (ii) above) shall be permitted if (A) a Default is then continuing or would result therefrom or (B) such action is otherwise prohibited under any Loan Document or under the terms of any Indebtedness (other than the Obligations) of any Group Member.

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Section 8.6     Prepayment of Indebtedness.  No Group Member shall (x) prepay, redeem, purchase, defease or otherwise satisfy prior to the scheduled maturity thereof any Indebtedness, (y) set apart any property for such purpose, whether directly or indirectly and whether to a sinking fund, a similar fund or otherwise, or (z) make any payment in violation of any subordination terms of any Indebtedness; provided, however, that each Group Member may, to the extent otherwise permitted by the Loan Documents, do each of the following:

(a)           (i) prepay the Obligations or (ii) consummate a Permitted Refinancing; and

(b)           prepay, redeem, purchase, defease or otherwise satisfy prior to the scheduled maturity thereof (or set apart any property for such purpose) (A) in the case of any Group Member that is not a Loan Party, any Indebtedness owing by such Group Member to any other Group Member (other than Holdings) and (B) otherwise, any Indebtedness owing to any Loan Party (other than Holdings).

Section 8.7    Fundamental Changes.  No Group Member shall (a) merge, consolidate or amalgamate with any Person, (b) acquire all or substantially all of the Stock or Stock Equivalents of any Person or (c) acquire any brand or all or substantially all of the assets of any Person or all or substantially all of the assets constituting any line of business, division, branch, operating division or other unit operation of any Person, in each case except for the following:  (x) the merger, consolidation or amalgamation of any Subsidiary of the Borrower into any Loan Party and (y) the merger, consolidation or amalgamation of any Group Member (other than Holdings) for the sole purpose, and with the sole material effect, of changing its State of organization within the United States; provided, however, that (A) in the case of any merger, consolidation or amalgamation involving the Borrower, the Borrower shall be the surviving Person and (B) in the case of any merger, consolidation or amalgamation involving any other Loan Party, a Loan Party shall be the surviving corporation and all actions required to maintain the perfection of the Lien of the Administrative Agent on the Stock or property of such Loan Party shall have been made.

Section 8.8    Change in Nature of Business.  (a)  No Group Member (other than Holdings) shall carry on any business, operations or activities (whether directly, through a joint venture or otherwise) substantially different from those carried on by the Borrower and its Subsidiaries at the date hereof and business, operations and activities reasonably related thereto.

(a)           Holdings shall not engage in any business, operations or activity, or hold any property, other than (i) holding Stock and Stock Equivalents of the Borrower, (ii) issuing, selling and redeeming its own Stock and Stock Equivalents, (ii) paying taxes, (iii) holding directors’ and shareholders’ meetings, preparing corporate and similar records and other activities required to maintain its separate corporate or other legal structure, (iv) preparing reports to, and preparing and making notices to and filings with, Governmental Authorities and to its holders of Stock and Stock Equivalents, (v) receiving, and holding proceeds of, Restricted Payments from the Borrower and its Subsidiaries and distributing the proceeds thereof to the extent permitted in Section 8.5, (vi) negotiating and executing IP Licenses and similar contracts, and (vii) taking all other actions necessary or in connection with the consummation of the activities set forth in clauses (i) through (vi) above.

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Section 8.9    Transactions with Affiliates.  No Group Member shall, except as otherwise expressly permitted herein, enter into any other transaction directly or indirectly with, or for the benefit of, any Affiliate of the Borrower that is not a Loan Party (including Guaranty Obligations with respect to any obligation of any such Affiliate), except for (a) transactions in the ordinary course of business on a basis no less favorable to such Group Member as would be obtained in a comparable arm’s length transaction with a Person not an Affiliate of the Borrower, (b) Restricted Payments, the proceeds of which, if received by Holdings, are used as required by Section 8.5 and (c) reasonable salaries and other reasonable director or employee compensation to officers and directors of any Group Member.

Section 8.10   Third-Party Restrictions on Indebtedness, Liens, Investments or Restricted Payments.  No Group Member shall incur or otherwise suffer to exist or become effective or remain liable on or responsible for any Contractual Obligation limiting the ability of (a) any Subsidiary of the Borrower to make Restricted Payments to, or Investments in, or repay Indebtedness or otherwise Sell property to, any Group Member (other than Holdings) or (b)any Group Member to incur or suffer to exist any Lien upon any property of any Group Member, whether now owned or hereafter acquired, securing any of its Obligations (including any “equal and ratable” clause and any similar C ontractual Obligation requiring, when a Lien is granted on any property, another Lien to be granted on such property or any other property), except, for each of clauses (a) and (b) above, (x) pursuant to the Loan Documents and (y) limitations on Liens (other than those securing any Obligation) on any property whose acquisition, repair, improvement or construction is financed by purchase money Indebtedness, Capitalized Lease Obligations or Permitted Refinancings permitted hereunder in reliance upon Section 8.1(b) or (c) set forth in the Contractual Obligations governing such Indebtedness, Capitalized Lease Obligations or Permitted Refinancing or Guaranty Obligations with respect thereto.

Section 8.11   Modification of Certain Documents.  Except to the extent otherwise expressly permitted in this Agreement, no Group Member shall waive or otherwise modify any term of any Constituent Document of, or otherwise change the capital structure of, any Group Member (including the terms of any of their outstanding Stock or Stock Equivalents), in each case except for those modifications and waivers that (x) do not elect, or permit the election, to treat the Stock or Stock Equivalents of any limited liability company (or similar entity) as certificated and (y) do not materially affect the rights and privileges of any Group Member and do not materially affect the interests of any Secured Party under the Loan Documents or in the Collateral .

Section 8.12   Accounting Changes; Fiscal Year.  No Group Member shall change its (a) accounting treatment or reporting practices, except as required by GAAP or any Requirement of Law, or (b) its fiscal year or its method for determining fiscal quarters or fiscal months.

Section 8.13    Margin Regulations.  No Group Member shall use all or any portion of the proceeds of any credit extended hereunder to purchase or carry margin stock (within the meaning of Regulation U of the Federal Reserve Board) in contravention of Regulation U of the Federal Reserve Board.

Section 8.14   Compliance with ERISA.  No ERISA Affiliate shall cause or suffer to exist (a) any event that could result in the imposition of a Lien with respect to any Title IV Plan or Multiemployer Plan or (b) any otherERISA Event, that would, in the aggregate, have a Material Adverse Effect.  No Group Member shall cause or suffer to exist any event that could result in the imposition of a Lien with respect to any Benefit Plan.

Section 8.15    Hazardous Materials.  No Group Member shall cause or suffer to exist any Release of any Hazardous Material at, to or from any real property owned, leased, subleased or otherwise operated or occupied by any Group Member that would violate any Environmental Law, form the basis for any Environmental Liabilities or otherwise adversely affect the value or marketability of any real property (whether or not owned by any Group Member), other than such violations, Environmental Liabilities and effects that would not, in the aggregate, have a Material Adverse Effect.

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ARTICLE 9

EVENTS OF DEFAULT

Section 9.1     Definition.  Each of the following shall be an Event of Default:

(a)           the Borrower shall fail to pay (i) any principal of any Revolving Loan when the same becomes due and payable or (ii) any interest on any Revolving Loan, any fee under any Loan Document or any other Obligation (other than those set forth in clause (i) above) and, in the case of this clause (ii), such non-payment continues for a period of 3 Business Days after the due date therefor; or

(b)           any representation, warranty or certification made or deemed made by or on behalf of any Loan Party in any Loan Document or by or on behalf of any Loan Party (or any Responsible Officer thereof) in connection with any Loan Document (including in any document delivered in connection with any Loan Document) shall prove to have been incorrect in any material respect when made or deemed made; or

(c)           any Loan Party shall fail to comply with (i) any provision of Article V (Financial Covenants), Section 6.1(k) or (l) (Financial Statements), Section 6.2(a)(i) (Other Events), Section 7.1 (Maintenance of Corporate Existence), Section 7.9 (Application of Loan Proceeds) , Section 7.11 (Deposit Accounts; Securities Accounts; Cash Collateral Accounts; Maximum Cash and Cash Equivalents)or Article VIII (Negative Covenants), (ii) any provision of Section 6.1 (Financial Statements)(other than Section 6.1(k) or (l)) if, in the case of this clause (ii), such failure shall remain unremedied for 5 days (provided that such cure period shall not apply to more than three violations of such section in any period of 12 consecutive months), or (iii) any other provision of any Loan Document if, in the case of this clause (iii), such failure shall remain unremedied for 30 days after the earlier of (A) the date on which a Responsible Officer of the Borrower becomes aware of such failure and (B) the date on which no tice thereof shall have been given to the Borrower by the Administrative Agent or the Required Lenders; or

(d)            (i) any Group Member shall fail to make any payment when due (whether due because of scheduled maturity, required prepayment provisions, acceleration, demand or otherwise) on any Material Indebtedness, (ii) any other event shall occur or condition shall exist under any Contractual Obligation relating to any Material Indebtedness, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Material Indebtedness or (iii) any Material Indebtedness shall become or be declared to be due and payable, or be required to be prepaid, redeemed, defeased or repurchased (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or

(e)           (i) any Group Member shall generally not pay its debts as such debts become due, shall admit in writing its inability to pay its debts generally or shall make a general assignment for the benefit of creditors, (ii) any proceeding shall be instituted by or against any Group Member seeking to adjudicate it a bankrupt or insolvent or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, composition of it or its debts or any similar order, in each case under any Requirement of Law relating to bankruptcy, insolvency or reorganization or relief of debtors or seeking the entry of an order for relief or the appointment of a custodian, receiver, trustee, conservator, liquidating agent, liquidator, other similar official or other of ficial with similar powers, in each case for it or for any substantial part of its property and, in the case of any such proceedings instituted against (but not by or with the consent of) any Group Member, either such proceedings shall remain undismissed or unstayed for a period of 60 days or more or any action sought in such proceedings shall occur or (iii) any Group Member shall take any corporate or similar action or any other action to authorize any action described in clause (i) or (ii) above; or

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(f)           one or more judgments, orders or decrees (or other similar process) shall be rendered against any Group Member (i)(A) in the case of money judgments, orders and decrees, involving an aggregate amount (excluding amounts adequately covered by insurance payable to any Group Member, to the extent the relevant insurer has not denied coverage therefor) equal to or in excess of the Material Liability Amount or (B) otherwise, that would have, in the aggregate, a Material Adverse Effect and (ii)(A) enforcement proceedings shall have been commenced by any creditor upon any such judgment, order or decree or (B) such judgment, order or decree shall not have been vacated or discharged for a period of 30 consecutive days and there shall not be in effect (by reason of a pending a ppeal or otherwise) any stay of enforcement thereof; or

(g)           except pursuant to a valid, binding and enforceable termination or release permitted under the Loan Documents and executed by the Administrative Agent or as otherwise expressly permitted under any Loan Document, (i) any provision of any Loan Document shall, at any time after the delivery of such Loan Document, fail to be valid and binding on, or enforceable against, any Loan Party party thereto or (ii) any Loan Document purporting to grant a Lien to secure any Obligation shall, at any time after the delivery of such Loan Document, fail to create a valid and enforceable Lien on any Collateral purported to be covered thereby or such Lien shall fail or cease to be a perfected Lien with the priority required in the relevant Loan Document, or any Group Member shall s tate in writing that any of the events described in clause (i) or (ii) above shall have occurred; or

(h)           there shall occur any Change of Control.

Section 9.2    Remedies.  During the continuance of any Event of Default, the Administrative Agent may, and, at the request of the Required Lenders, shall, in each case by notice to the Borrower and in addition to any other right or remedy provided under any Loan Document or by any applicable Requirement of Law, do each of the following:  (a) declare all or any portion of the Revolving Credit Commitments terminated, whereupon the Revolving Credit Commitments shall immediately be reduced by such portion or, in the case of a termination in whole, shall terminate together with any obligation any Lender may have hereunder to make any Revolving Loan or (b) declare immediately due and payable all or part of any Obligation (including any accrued but unpaid interest thereon), whereupon the same shall become immediately due and payable, without presentment, demand, protest or further notice or other requirements of any kind, all of which are hereby expressly waived by Holdings and the Borrower (and, to the extent provided in any other Loan Document, other Loan Parties); provided, however, that, effective immediately upon the occurrence of the Events of Default specified in Section 9.1(e)(ii), (x) the Revolving Credit Commitment of each Lender to make Revolving Loans shall each automatically be terminated and (y) each Obligation (including in each case any accrued all accrued but unpaid interest thereon) shall automatically become and be due and payable, without presentment, demand, protest or further notice or other requirement of any kind, all of which are hereby expressly waived by Holdings and the Borrower (and, to the extent provided in any other Loan Document, any other Loan Party).

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ARTICLE 10

THE ADMINISTRATIVE AGENT

Section 10.1   Appointment and Duties.  (a)  Appointment of Administrative Agent.  Each Lender hereby appoints GE Capital (together with any successor Administrative Agent pursuant to Section 10.9) as the Administrative Agent hereunder and authorizes the Administrative Agent to (i) execute and deliver the Loan Documents and accept delivery thereof on its behalf from any Group Member, (ii) take such action on its behalf and to exercise all rights, powers and remedies and perform the duties as are expressly delegated to the Administrative Agent under such Loan Documents and (iii) exercise su ch powers as are reasonably incidental thereto.

(a)           Duties as Collateral and Disbursing Agent.  Without limiting the generality of clause (a) above, the Administrative Agent shall have the sole and exclusive right and authority (to the exclusion of the Lenders), and is hereby authorized, to (i) act as the disbursing and collecting agent for the Lenders with respect to all payments and collections arising in connection with the Loan Documents (including in any proceeding described in Section 9.1(e)(ii) or any other bankruptcy, insolvency or similar proceeding), and each Person making any payment in conn ection with any Loan Document to any Secured Party is hereby authorized to make such payment to the Administrative Agent, (ii) file and prove claims and file other documents necessary or desirable to allow the claims of the Secured Parties with respect to any Obligation in any proceeding described in Section 9.1(e)(ii) or any other bankruptcy, insolvency or similar proceeding (but not to vote, consent or otherwise act on behalf of such Secured Party), (iii) act as collateral agent for each Secured Party for purposes of the perfection of all Liens created by such agreements and all other purposes stated therein, (iv) manage, supervise and otherwise deal with the Collateral, (v) take such other action as is necessary or desirable to maintain the perfection and priority of the Liens created or purported to be created by the Loan Documents, (vi) except as may be otherwise specified in any Loan Document, exercise all remedies given to the Admin istrative Agent and the other Secured Parties with respect to the Collateral, whether under the Loan Documents, applicable Requirements of Law or otherwise and (vii) execute any amendment, consent or waiver under the Loan Documents on behalf of any Lender that has consented in writing to such amendment, consent or waiver; provided, however, that the Administrative Agent hereby appoints, authorizes and directs each Lender to act as collateral sub-agent for the Administrative Agent and the Lenders for purposes of the perfection of all Liens with respect to the Collateral, including any deposit account maintained by a Loan Party with, and cash and Cash Equivalents held by, such Lender, and may further authorize and direct the Lenders to take further actions as collateral sub-agents for purposes of enforcing such Liens or otherwise to transfer the Collateral subject thereto to the Adm inistrative Agent, and each Lender hereby agrees to take such further actions to the extent, and only to the extent, so authorized and directed.

(b)           Limited Duties.  Under the Loan Documents, the Administrative Agent (i) is acting solely on behalf of the Lenders (except to the limited extent provided in Section 2.14(b) with respect to the Register and in Section 10.11), with duties that are entirely administrative in nature, notwithstanding the use of the defined term “Administrative Agent”, the terms “agent”, “administrative agent” and “collateral agent” and similar terms in any Loan Document to refer to the Administrative Agent, which terms are use d for title purposes only, (ii) is not assuming any obligation under any Loan Document other than as expressly set forth therein or any role as agent, fiduciary or trustee of or for any Lender or any other Secured Party and (iii) shall have no implied functions, responsibilities, duties, obligations or other liabilities under any Loan Document, and each Lender hereby waives and agrees not to assert any claim against the Administrative Agent based on the roles, duties and legal relationships expressly disclaimed in clauses (i) through (iii) above.

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Section 10.2   Binding Effect.  Each Lender agrees that (i) any action taken by the Administrative Agent or the Required Lenders (or, if expressly required hereby, a greater proportion of the Lenders) in accordance with the provisions of the Loan Documents, (ii) any action taken by the Administrative Agent in reliance upon the instructions of Required Lenders (or, where so required, such greater proportion) and (iii) the exercise by the Administrative Agent or the Required Lenders (or, where so required, such greater proportion) of the powers set forth herein or therein, together with such other powers as are reasonably incidental thereto, shall be authorized and binding upon all of the Secured Parties.

Section 10.3   Use of Discretion.  (a)  No Action without Instructions.  The Administrative Agent shall not be required to exercise any discretion or take, or to omit to take, any action, including with respect to enforcement or collection, except any action it is required to take or omit to take (i) under any Loan Document or (ii) pursuant to instructions from the Required Lenders (or, where expressly required by the terms of this Agreement, a greater proportion of the Lenders).

(a)           Right Not to Follow Certain Instructions.  Notwithstanding clause (a) above, the Administrative Agent shall not be required to take, or to omit to take, any action (i) unless, upon demand, the Administrative Agent receives an indemnification satisfactory to it from the Lenders (or, to the extent applicable and acceptable to the Administrative Agent, any other Secured Party) against all Liabilities that, by reason of such action or omission, may be imposed on, incurred by or asserted against the Administrative Agent or any Related Person thereof or (ii) that is, in the opinion of the Administrative Agent or its counsel, contrary to any Loan Document or applicable Requirement of Law.

Section 10.4   Delegation of Rights and Duties.  The Administrative Agent may, upon any term or condition it specifies, delegate or exercise any of its rights, powers and remedies under, and delegate or perform any of its duties or any other action with respect to, any Loan Document by or through any trustee, co-agent, employee, attorney-in-fact and any other Person (including any Secured Party).  Any such Person shall benefit from this Article X to the extent provided by the Administrative Agent.

Section 10.5   Reliance and Liability.  (a)  The Administrative Agent may, without incurring any liability hereunder, (i) treat the payee of any Note as its holder until such Note has been assigned in accordance with Section 11.2(d), (ii) rely on the Register to the extent set forth in Section 2.14, (iii) consult with any of its Related Persons and, whether or not selected by it, any other advisors, accountants and other experts (including advisors to, and accountants and experts engaged by, any Loan Party) and (iv) rely and act upon any document and information (including those transmitted by Electronic Transmission) and any telephone message or conversation, in each case believed by it to be genuine and transmitted, signed or otherwise authenticated by the appropriate parties.

(a)           None of the Administrative Agent and its Related Persons shall be liable for any action taken or omitted to be taken by any of them under or in connection with any Loan Document, and each Lender, Holdings and the Borrower hereby waive and shall not assert (and each of Holdings and the Borrower shall cause each other Loan Party to waive and agree not to assert) any right, claim or cause of action based thereon, except to the extent of liabilities resulting primarily from the gross negligence or willful misconduct of the Administrative Agent or, as the case may be, such Related Person (each as determined in a final, non-appealable judgment by a court of competent jurisdiction) in connection with the duties expressly set forth herein.  Without limiting th e foregoing, the Administrative Agent:

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(i)           shall not be responsible or otherwise incur liability for any action or omission taken in reliance upon the instructions of the Required Lenders or for the actions or omissions of any of its Related Persons selected with reasonable care (other than employees, officers and directors of the Administrative Agent, when acting on behalf of the Administrative Agent);

(ii)           shall not be responsible to any Secured Party for the due execution, legality, validity, enforceability, effectiveness, genuineness, sufficiency or value of, or the attachment, perfection or priority of any Lien created or purported to be created under or in connection with, any Loan Document;

(iii)           makes no warranty or representation, and shall not be responsible, to any Secured Party for any statement, document, information, representation or warranty made or furnished by or on behalf of any Related Person or any Loan Party in connection with any Loan Document or any transaction contemplated therein or any other document or information with respect to any Loan Party, whether or not transmitted or (except for documents expressly required under any Loan Document to be transmitted to the Lenders) omitted to be transmitted by the Administrative Agent, including as to completeness, accuracy, scope or adequacy thereof, or for the scope, nature or results of any due diligence performed by the Administrative Agent in connection with the Loan Documents; and

(iv)           shall not have any duty to ascertain or to inquire as to the performance or observance of any provision of any Loan Document, whether any condition set forth in any Loan Document is satisfied or waived, as to the financial condition of any Loan Party or as to the existence or continuation or possible occurrence or continuation of any Default or Event of Default and shall not be deemed to have notice or knowledge of such occurrence or continuation unless it has received a notice from the Borrower or any Lender describing such Default or Event of Default clearly labeled “notice of default” (in which case the Administrative Agent shall promptly give notice of such receipt to all Lenders);

and, for each of the items set forth in clauses (i) through (iv) above, each Lender, Holdings and the Borrower hereby waives and agrees not to assert (and each of Holdings and the Borrower shall cause each other Loan Party to waive and agree not to assert) any right, claim or cause of action it might have against the Administrative Agent based thereon.

Section 10.6   Administrative Agent Individually.  The Administrative Agent and its Affiliates may make loans and other extensions of credit to, acquire Stock and Stock Equivalents of, engage in any kind of business with, any Loan Party or Affiliate thereof as though it were not acting as Administrative Agent and may receive separate fees and other payments therefor.  To the extent the Administrative Agent or any of its Affiliates makes any Loan or otherwise becomes a Lender hereunder, it shall have and may exercise the same rights and powers hereunder and shall be subject to the same obligations and liabilities as any other Lender and the terms “Lender” and “Required Lender” and any similar terms shall, exc ept where otherwise expressly provided in any Loan Document, include, without limitation, the Administrative Agent or such Affiliate, as the case may be, in its individual capacity as Lender, or as one of the Required Lenders.

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Section 10.7   Lender Credit Decision.  Each Lender acknowledges that it shall, independently and without reliance upon the Administrative Agent, any Lender or any of their Related Persons or upon any document (including the Disclosure Documents) solely or in part because such document was transmitted by the Administrative Agent or any of its Related Persons, conduct its own independent investigation of the financial condition and affairs of each Loan Party and make and continue to make its own credit decisions in connection with entering into, and taking or not taking any action under, any Loan Document or with respect to any transaction contemplated in any Loan Document, in each case based on such documents and information as it shall deem appropriate.  Except for documents expressly required by any Loan Document to be transmitted by the Administrative Agent to the Lenders, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of any Loan Party or any Affiliate of any Loan Party that may come in to the possession of the Administrative Agent or any of its Related Persons.

Section 10.8   Expenses; Indemnities.  (a)  Each Lender agrees to reimburse the Administrative Agent and each of its Related Persons (to the extent not reimbursed by any Loan Party) promptly upon demand for such Lender’s Pro Rata Share of any costs and expenses (including fees, charges and disbursements of financial, legal and other advisors and Other Taxes paid in the name of, or on behalf of, any Loan Party) that may be incurred by the Administrative Agent or any of its Related Persons in connection with the preparation, syndication, execution, delivery, administration, modification, consent, waiver or enforcement (whether through negotiations, through any work-out, bankruptcy, restructuring or other legal or other proceedi ng or otherwise) of, or legal advice in respect of its rights or responsibilities under, any Loan Document.

(a)           Each Lender further agrees to indemnify the Administrative Agent and each of its Related Persons (to the extent not reimbursed by any Loan Party), from and against such Lender’s aggregate Pro Rata Share of the Liabilities (including taxes, interests and penalties imposed for not properly withholding or backup withholding on payments made to on or for the account of any Lender) that may be imposed on, incurred by or asserted against the Administrative Agent or any of its Related Persons in any matter relating to or arising out of, in connection with or as a result of any Loan Documentor any other act, event or transaction related, contemplated in or attendant to any Loan Document, or, in each cas e, any action taken or omitted to be taken by the Administrative Agent or any of its Related Persons under or with respect to any Loan Document; provided, however, that no Lender shall be liable to the Administrative Agent or any of its Related Persons to the extent such liability has resulted primarily from the gross negligence or willful misconduct of the Administrative Agent or, as the case may be, such Related Person, as determined by a court of competent jurisdiction in a final non-appealable judgment or order.

Section 10.9   Resignation of Administrative Agent.  (a)  The Administrative Agent may resign at any time by delivering notice of such resignation to the Lenders and the Borrower, effective on the date set forth in such notice or, if not such date is set forth therein, upon the date such notice shall be effective.  If the Administrative Agent delivers any such notice, the Required Lenders shall have the right to appoint a successor Administrative Agent.  If, within 30 days after the retiring Administrative Agent having given notice of resignation, no successor Administrative Agent has been appointed by the Required Lenders that has accepted such appointment, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent from among the Lenders.  Each appointment under this clause (a) shall be subject to the prior consent of the Borrower, which may not be unreasonably withheld but shall not be required during the continuance of a Default.

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(a)           Effective immediately upon its resignation, (i) the retiring Administrative Agent shall be discharged from its duties and obligations under the Loan Documents, (ii) the Lenders shall assume and perform all of the duties of the Administrative Agent until a successor Administrative Agent shall have accepted a valid appointment hereunder, (iii) the retiring Administrative Agent and its Related Persons shall no longer have the benefit of any provision of any Loan Document other than with respect to any actions taken or omitted to be taken while such retiring Administrative Agent was, or because such Administrative Agent had been, validly acting as Administrative Agent under the Loan Documents and (iv) subject to its rights under Section 10.3, the retiring Administrative Agent shall take such action as may be reasonably necessary to assign to the successor Administrative Agent its rights as Administrative Agent under the Loan Documents.  Effective immediately upon its acceptance of a valid appointment as Administrative Agent, a successor Administrative Agent shall succeed to, and become vested with, all the rights, powers, privileges and duties of the retiring Administrative Agent under the Loan Documents.

Section 10.10  Release of Collateral or Guarantors.  Each Lender hereby consents to the release and hereby directs the Administrative Agent to release (or, in the case of clause (b)(ii) below, release or subordinate) the following:

(a)           any Subsidiary of the Borrower from its guaranty of any Obligation of any Loan Party if all of the Securities of such Subsidiary owned by any Group Member are Sold in a Sale permitted under the Loan Documents (including pursuant to a waiver or consent), to the extent that, after giving effect to such Sale, such Subsidiary would not be required to guaranty any Obligations pursuant to Section 7.10; and

(b)           any Lien held by the Administrative Agent for the benefit of the Secured Parties against (i) any Collateral that is Sold by a Loan Party in a Sale permitted by the Loan Documents (including pursuant to a valid waiver or consent), to the extent all Liens required to be granted in such Collateral pursuant to Section 7.10 after giving effect to such Sale have been granted, (ii) any property subject to a Lien permitted hereunder in reliance upon Section 8.2(d) or (e) and (iii) all of the Collateral and all Loan Parties, upon (A) termination of the Revolving Credit& #160; Commitments, (B) payment and satisfaction in full of all Revolving Loans and all other Obligations that the Administrative Agent has been notified in writing are then due and payable by the holder of such Obligation, (C) deposit of cash collateral with respect to all contingent Obligations, in amounts and on terms and conditions and with parties satisfactory to the Administrative Agent and each Indemnitee that is owed such Obligations and (D) to the extent requested by the Administrative Agent, receipt by the Secured Parties of liability releases from the Loan Parties each in form and substance acceptable to the Administrative Agent.

Each Lender hereby directs the Administrative Agent, and the Administrative Agent hereby agrees, upon receipt of reasonable advance notice from the Borrower, to execute and deliver or file such documents and to perform other actions reasonably necessary to release the guaranties and Liens when and as directed in this Section 10.10.

Section 10.11 Additional Secured Parties.  The benefit of the provisions of the Loan Documents directly relating to the Collateral or any Lien granted thereunder shall extend to and be available to any Secured Party that is not a Lender as long as, by accepting such benefits, such Secured Party agrees, as among the Administrative Agent and all other Secured Parties, that such Secured Party is bound by (and, if requested by the Administrative Agent, shall confirm such agreement in a writing in form and substance acceptable to the Administrative Agent) this Article X, Section 11.8 (Right of Setoff), Section 11.9 (Sharing of Payments) and Section 11.20 (Confidentiality) and the decisions and actions of the Administrative Agent and the Required Lenders (or, where expressly required by the terms of this Agreement, a greater proportion of the Lenders) to the same extent a Lender is bound; provided, however, that, notwithstanding the foregoing, (a) such Secured Party shall be bound by Section 10.8 only to the extent of Liabilities, costs and expenses with respect to or otherwise relating to the Coll ateral held for the benefit of such Secured Party, in which case the obligations of such Secured Party thereunder shall not be limited by any concept of Pro Rata Share or similar concept, (b) except as set forth specifically herein, each of the Administrative Agent and the Lenders shall be entitled to act at its sole discretion, without regard to the interest of such Secured Party, regardless of whether any Obligation to such Secured Party thereafter remains outstanding, is deprived of the benefit of the Collateral, becomes unsecured or is otherwise affected or put in jeopardy thereby, and without any duty or liability to such Secured Party or any such Obligation and (c) except as set forth specifically herein, such Secured Party shall not have any right to be notified of, consent to, direct, require or be heard with respect to, any action taken or omitted in respect of the Collateral or under any Loan Document.

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ARTICLE 11

MISCELLANEOUS

Section 11.1   Amendments, Waivers, Etc.  (a)  No amendment or waiver of any provision of any Loan Document (other than the Control Agreementsand the Secured Hedging Agreements) and no consent to any departure by any Loan Party therefrom shall be effective unless the same shall be in writing and signed (1) in the case of an amendment, consent or waiver to cure any ambiguity, omission, defect or inconsistency or granting a new Lien for the benefit of the Secured Parties or extending an existing Lien over additional property, by the Administrative Agent and the Borrower, (2) in the case of any other waiver or consent, by the Required Lenders (or by the Administrative Agent with the consent of the Required Lenders) and (3) in the case of any other amendment, by the Required Lenders (or by the Administrative Agent with the consent of the Required Lenders) and the Borrower; provided, however, that no amendment, consent or waiver described in clause (2) or (3) above shall, unless in writing and signed by each Lender directly affected thereby (or by the Administrative Agent with the consent of such Lender), in addition to any other Person the signature of which is otherwise required pursuant to any Loan Document, do any of the following:

(i)          waive any condition specified in Section 3.1, except any condition referring to any other provision of any Loan Document;

(ii)         increase the Revolving Credit Commitment of such Lender or subject such Lender to any additional obligation;

(iii)        reduce (including through release, forgiveness, assignment or otherwise) (A) the principal amount of, the interest rate on, or any obligation of the Borrower to repay (whether or not on a fixed date), any outstanding Revolving Loan owing to such Lender or (B) any fee or accrued interest payable to such Lender; provided, however, that this clause (iii) does not apply to (x) any change to any provision increasing any interest rate or fee during the continuance of an Event of Default or to any payment of any such increas e or (y) any modification to any financial covenant set forth in Article V or in any definition set forth therein or principally used therein;

(iv)       waive or postpone any scheduled maturity date or other scheduled date fixed for the payment, in whole or in part, of principal of or interest on any Revolving Loan or fee owing to such Lender or for the reduction of such Lender’s Revolving Credit Commitment; provided, however, that this clause (iv) does not apply to any change to mandatory prepayments, including those required under Section 2.8, or to the application of any payment, including as set forth in Section 2.12;

(v)        except as provided in Section 10.10, release all or substantially all of the Collateral or any Guarantor from its guaranty of any Obligation of the Borrower;

(vi)       reduce or increase the proportion of Lenders required for the Lenders (or any subset thereof) to take any action hereunder or change the definition of the terms “Required Lenders”, “Pro Rata Share” or “Pro Rata Outstandings”; or

(vii)      amend Section 10.10 (Release of Collateral or Guarantor), Section 11.9 (Sharing of Payments) or this Section 11.1;

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and provided, further, that (x) no amendment, waiver or consent shall affect the rights or duties under any Loan Document of, or any payment to, the Administrative Agent (or otherwise modify any provision of Article X or the application thereof) or any SPV that has been granted an option pursuant to Section 11.2(f) unless in writing and signed by the Administrative Agent or, as the case may be, such SPV in addition to any signature otherwise required and (y) the consent of the Borrower shall not be required to change any order of priority set forth in Section 2.12.  No amendment, modification or waiver of this Agreement or any Loan Document altering the ratable treatment of Obligations arising under Secured Hedging Agreement resulting in such Obligations being junior in right of payment to principal of the Revolving Loans or resulting in Obligations owing to any Secured Hedging Counterparty being unsecured (other than releases of Liens in accordance with the terms hereof), in each case in a manner adverse to any Secured Hedging Counterparty, shall be effective without the written consent of such Secured Hedging Counterparty or, in the case of a Secured Hedging Agreement provided or arranged by the Administrative Agent or an Affiliate thereof, the Administrative Agent.

(b)           Each waiver or consent under any Loan Document shall be effective only in the specific instance and for the specific purpose for which it was given.  No notice to or demand on any Loan Party shall entitle any Loan Party to any notice or demand in the same, similar or other circumstances.  No failure on the part of any Secured Party to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right.

Section 11.2   Assignments and Participations; Binding Effect.  (a)  Binding Effect.  This Agreement shall become effective when it shall have been executed by Holdings, the Borrower and the Administrative Agent and when the Administrative Agent shall have been notified by each Lender that such Lender has executed it.  Thereafter, it shall be binding upon and inure to the benefit of, but only to the benefit of, Holdings, the Borrower (in each case except for Article X), the Administrative Agent, each Lender and, to the extent provided in Section 10.11, each other Indemnitee and Secured Party and, in each case, their respective successors and permitted assigns.  Except as expressly provided in any Loan Document (including in Section 10.9), none of Holdings, the Borrower, or the Administrative Agent shall have the right to assign any rights or obligations hereunder or any interest herein.

(a)           Right to Assign.  Each Lender may sell, transfer, negotiate or assign all or a portion of its rights and obligations hereunder (including all or a portion of its Revolving Credit Commitment and its rights and obligations with respect to Revolving Loans) to (i) any existing Lender, (ii) any Affiliate or Approved Fund of any existing Lender or (iii) any other Person acceptable (which acceptance shall not be unreasonably withheld or delayed) to the Administrative Agent and, as long as no Event of Default is continuing, the Borrower; provided, however, that the agg regate outstanding principal amount (determined as of the effective date of the applicable Assignment) of the Revolving Loans and the Revolving Credit Commitments subject to any such Sale shall be in a minimum amount of $1,000,000, unless such Sale is made to an existing Lender or an Affiliate or Approved Fund of any existing Lender, is of the assignor’s (together with its Affiliates and Approved Funds) entire interest in the Revolving Credit Facility or is made with the prior consent of the Borrower and the Administrative Agent.

(b)           Procedure.  The parties to each Sale made in reliance on clause (b) above (other than those described in clause (e) or (f) below) shall execute and deliver to the Administrative Agent an Assignment via an electronic settlement system designated by the Administrative Agent (or if previously agreed with the Administrative Agent, via a manual execution and delivery of the assignment) evidencing such Sale, together with any existing Note subject to such Sale (or any affidavit of loss therefor acceptab le to the Administrative Agent), any tax forms required to be delivered pursuant to Section 2.17(f) and payment of an assignment fee in the amount of $3,500, provided that (1) if a Sale by a Lender is made to an Affiliate or an Approved Fund of such assigning Lender, then no assignment fee shall be due in connection with such Sale, and (2) if a Sale by a Lender is made to an assignee that is not an Affiliate or Approved Fund of such assignor Lender, and concurrently to one or more Affiliates or Approved Funds of such assignee, then only one assignment fee of $3,500 shall be due in connection with such Sale.  Upon receipt of all the foregoing, and conditioned upon such receipt and, if such assignment is made in accordance with Section 11.2(b)(iii), upon the Administrative Agent (and the Borrower, if applicable) consenting to such Assignment, from and after the effect ive date specified in such Assignment, the Administrative Agent shall record or cause to be recorded in the Register the information contained in such Assignment.

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(c)           Effectiveness.  Subject to the recording of an Assignment by the Administrative Agent in the Register pursuant to Section 2.14(b), (i) the assignee thereunder shall become a party hereto and, to the extent that rights and obligations under the Loan Documents have been assigned to such assignee pursuant to such Assignment, shall have the rights and obligations of a Lender, (ii) any applicable Note shall be transferred to such assignee through such entry and (iii) the assignor thereunder shall, to the extent that rights and obligations under this Agreement have been assigned by it pursuant to such Assignment, relinquish i ts rights (except for those surviving the termination of the Revolving Credit Commitments and the payment in full of the Obligations) and be released from its obligations under the Loan Documents, other than those relating to events or circumstances occurring prior to such assignment (and, in the case of an Assignment covering all or the remaining portion of an assigning Lender’s rights and obligations under the Loan Documents, such Lender shall cease to be a party hereto except that each Lender agrees to remain bound by Article X, Section 11.8 (Right of Setoff) and Section 11.9 (Sharing of Payments) to the extent provided in Section 10.11 (Additional Beneficiaries of Collateral)).

(d)           Grant of Security Interests.  In addition to the other rights provided in this Section 11.2, each Lender may grant a security interest in, or otherwise assign as collateral, any of its rights under this Agreement, whether now owned or hereafter acquired (including rights to payments of principal or interest on the Revolving Loans), to (A) any federal reserve bank (pursuant to Regulation A of the Federal Reserve Board), without notice to the Administrative Agent or (B) any holder of, or trustee for the benefit of the holders of, such Lender’s Securities by notice to the Administrative Agent; provided, however, that no such holder or trustee, whether because of such grant or assignment or any foreclosure thereon (unless such foreclosure is made through an assignment in accordance with clause (b) above), shall be entitled to any rights of such Lender hereunder and no such Lender shall be relieved of any of its obligations hereunder.

(e)           Participants and SPVs.  In addition to the other rights provided in this Section 11.2, each Lender may, (x) with notice to the Administrative Agent, grant to an SPV the option to make all or any part of any Revolving Loan that such Lender would otherwise be required to make hereunder (and the exercise of such option by such SPV and the making of Revolving Loans pursuant thereto shall satisfy the obligation of such Lender to make such Revolving Loans hereunder) and such SPV may assign to such Lender the right to receive payment with respect to any Obligation and (y) without notice to or consent from the Administrati ve Agent or the Borrower, sell participations to one or more Persons in or to all or a portion of its rights and obligations under the Loan Documents (including all its rights and obligations with respect to Revolving Loans); provided, however, that, whether as a result of any term of any Loan Document or of such grant or participation, (i) no such SPV or participant shall have a commitment, or be deemed to have made an offer to commit, to make Revolving Loans hereunder, and, except as provided in the applicable option agreement, none shall be liable for any obligation of such Lender hereunder, (ii) such Lender’s rights and obligations, and the rights and obligations of the Loan Parties and the Secured Parties towards such Lender, under any Loan Document shall remain unchanged and each other party hereto shall continue to deal solely with such Lender, which shall remain the holder of the Obligations in the Register, except that (A) each such participant and SPV shall be entitled to the benefit of Sections 2.16 (Breakage Costs; Increased Costs; Capital Requirements) and 2.17 (Taxes), but only to the extent such participant or SPV delivers the tax forms such Lender is required to collect pursuant to Section 2.17(f) and then only to the extent of any amount to which such Lender would be entitled in the absence of any such grant or participation and (B) each such SPV may receive other payments that would otherwise be made to such Lender with respect to Revolving Loans funded by such SPV to the extent provided in the applicable option agreement and set f orth in a notice provided to the Administrative Agent by such SPV and such Lender, provided, however, that in no case (including pursuant to clause (A) or (B) above) shall an SPV or participant have the right to enforce any of the terms of any Loan Document, and (iii) the consent of such SPV or participant shall not be required (either directly, as a restraint on such Lender’s ability to consent hereunder or otherwise) for any amendments, waivers or consents with respect to any Loan Document or to exercise or refrain from exercising any powers or rights such Lender may have under or in respect of the Loan Documents (including the right to enforce or direct enforcement of the Obligations), except for those described in clauses (iii) and (iv) of Section 11.1(a) with respect to amounts, or dates fixed for payment of amounts, to which such participant or SPV would otherwise be entitled and, in the case of participants, except for those described in Section 11.1(a)(v) (or amendments, consents and waivers with respect to Section 10.10 to release all or substantially all of the Collateral).  No party hereto shall institute (and each of Borrower and Holdings shall cause each other Loan Party not to institute) against any SPV grantee of an option pursuant to this clause (f) any bankruptcy, reorganization, insolvency, liquidation or similar proceed ing, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper of such SPV; provided, however, that each Lender having designated an SPV as such agrees to indemnify each Indemnitee against any Liability that may be incurred by, or asserted against, such Indemnitee as a result of failing to institute such proceeding (including a failure to get reimbursed by such SPV for any such Liability).  The agreement in the preceding sentence shall survive the termination of the Revolving Credit Commitments and the payment in full of the Obligations.

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Section 11.3   Costs and Expenses.  Any action taken by any Loan Party under or with respect to any Loan Document, even if required under any Loan Document or at the request of any Secured Party, shall be at the expense of such Loan Party, and no Secured Party shall be required under any Loan Document to reimburse any Loan Party or Group Member therefor except as expressly provided therein.  In addition, the Borrower agrees to pay or reimburse upon demand, except to the extent otherwise expressly provided in Section 6.1(n), 6.1(o) or 7.7, ( a) the Administrative Agent for all reasonable out-of-pocket costs and expenses incurred by it or any of its Related Persons in connection with the investigation, development, preparation, negotiation, syndication, execution, interpretation or administration of, any modification of any term of or termination of, any Loan Document, any commitment or proposal letter therefor, any other document prepared in connection therewith or the consummation and administration of any transaction contemplated therein (including periodic audits in connection therewith and environmental audits and assessments), in each case including the reasonable fees, charges and disbursements of legal counsel to the Administrative Agent or such Related Persons, fees, costs and expenses incurred in connection with Intralinks® or any other E-System and allocated to the Revolving Credit Facility by the Administrative Agent in its sole discretion and fees, ch arges and disbursements of the auditors, appraisers, printers and other of their Related Persons retained by or on behalf of any of them or any of their Related Persons, (b) the Administrative Agent for all reasonable costs and expenses incurred by it or any of its Related Persons in connection with internal audit reviews, field examinations and Collateral examinations (which shall be reimbursed, in addition to the out-of-pocket costs and expenses of such examiners, at the per diem rate per individual charged by the Administrative Agent for its examiners) and (c) each of the Administrative Agent, its Related Persons, and each Lender for all costs and expenses incurred in connection with (i) any refinancing or restructuring of the credit arrangements provided hereunder in the nature of a “work-out”, (ii) the enforcement or preservation of any right or remedy under any Loan Document, any Obligation, with respect to the Collateral or any other related right or remedy or (iii) the commencement, defen se, conduct of, intervention in, or the taking of any other action with respect to, any proceeding (including any bankruptcy or insolvency proceeding) related to any Group Member, Loan Document, or Obligation  (or the response to and preparation for any subpoena or request for document production relating thereto), including fees and disbursements of counsel (including allocated costs of internal counsel).

Section 11.4   Indemnities.  (a)  The Borrower agrees to indemnify, hold harmless and defend the Administrative Agent, each Lender, each Secured Hedging Counterparty, and each of their respective Related Persons (each such Person being an “Indemnitee”) from and against all Liabilities (including brokerage commissions, fees and other compensation) that may be imposed on, incurred by or asserted against any such Indemnitee in any matter relating to or arising out of, in connection with or as a result of (i) any Loan Document, any Disclosure Document, any Obligation (or the repayment thereof), the use or intended use of the proceeds of any Revolving Loan or a ny securities filing of, or with respect to, any Group Member, (ii) any commitment letter, proposal letter or term sheet with any Person or any Contractual Obligation, arrangement or understanding with any broker, finder or consultant, in each case entered into by or on behalf of any Group Member or any Affiliate thereof in connection with the foregoing and any Contractual Obligation entered into in connection with any E-Systems or other Electronic Transmissions, (iii) any actual or prospective investigation, litigation or other proceeding, whether or not brought by any such Indemnitee or any of its Related Persons, any holders of Securities or creditors (and including attorneys’ fees in any case), whether or not any such Indemnitee, Related Person, holder or creditor is a party thereto, and whether or not based on any securities or commercial law or regulation or any other Requirement of Law or theory thereof, including common law, equity, contract, tort or otherwise, or (iv) any other act, event or t ransaction related, contemplated in or attendant to any of the foregoing (collectively, the “Indemnified Matters”); provided, however, that the Borrower shall not have any liability under this Section 11.4 to any Indemnitee with respect to any Indemnified Matter, and no Indemnitee shall have any liability with respect to any Indemnified Matter other than (to the extent otherwise liable), to the extent such liability has resulted primarily from the gross negligence or willful misconduct of such Indemnitee, as determined by a court of competent jurisdiction in a final non-appealable judgment or order.  Furthermore, each of Holdings and the Borrower waives and agrees not to assert against any Indemnitee, and shall cause each othe r Loan Party to waive and not assert against any Indemnitee, any right of contribution with respect to any Liabilities that may be imposed on, incurred by or asserted against any Related Person.

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(a)           Without limiting the foregoing, “Indemnified Matters” includes all Environmental Liabilities, including those arising from, or otherwise involving, any property of any Related Person or any actual, alleged or prospective damage to property or natural resources or harm or injury alleged to have resulted from any Release of Hazardous Materials on, upon or into such property or natural resource or any property on or contiguous to any real property of any Related Person, whether or not, with respect to any such Environmental Liabilities, any Indemnitee is a mortgagee pursuant to any leasehold mortgage, a mortgagee in possession, the successor-in-interest to any Related Person or the owner, lessee or operator of any property of any Related Person through any foreclosure action, in each case except to the extent such Environmental Liabilities (i) are incurred solely following foreclosure by any Secured Party or following any Secured Party having become the successor-in-interest to any Loan Party and (ii) are attributable solely to acts of such Indemnitee.

Section 11.5   Survival.  Any indemnification or other protection provided to any Indemnitee pursuant to any Loan Document (including pursuant to Section 2.17 (Taxes), Section 2.16 (Breakage Costs; Increased Costs; Capital Requirements), Article X (The Administrative Agent), Section  ;11.3 (Costs and Expenses), Section 11.4 (Indemnities) or this Section 11.5) and all representations and warranties made in any Loan Document shall (A) survive the termination of the Revolving Credit Commitments and the payment in full of other Obligations and (B) inure to the benefit of any Person that at any time held a right thereunder (as an Indemnitee or otherwise) and, thereafter, its successors and permitted assigns.

Section 11.6   Limitation of Liability for Certain Damages.  In no event shall any Indemnitee be liable on any theory of liability for any special, indirect, consequential or punitive damages (including any loss of profits, business or anticipated savings).  Each of Holdings and the Borrower hereby waives, releases and agrees (and shall cause each other Loan Party to waive, release and agree) not to sue upon any such claim for any special, indirect, consequential or punitive damages, whether or not accrued and whether or not known or suspected to exist in its favor.

Section 11.7   Lender-Creditor Relationship.  The relationship between the Lenders and the Administrative Agent, on the one hand, and the Loan Parties, on the other hand, is solely that of lender and creditor.  No Secured Party has any fiduciary relationship or duty to any Loan Party arising out of or in connection with, and there is no agency, tenancy or joint venture relationship between the Secured Parties and the Loan Parties by virtue of, any Loan Document or any transaction contemplated therein.

Section 11.8   Right of Setoff.  Each of the Administrative Agent, each Lender, and each Affiliate (including each branch office thereof) of any of them is hereby authorized, without notice or demand (each of which is hereby waived by Holdings and the Borrower), at any time and from time to time during the continuance of any Event of Default and to the fullest extent permitted by applicable Requirements of Law, to set off and apply any and all deposits (whether general or special, time or demand, provisional or final) at any time held and other Indebtedness, claims or other obligations at any time owing by the Administrative Agent, such Lender, or any of their respective Affiliates to or for the credit or the account of Holdings or the Borro wer against any Obligation of any Loan Party now or hereafter existing, whether or not any demand was made under any Loan Document with respect to such Obligation and even though such Obligation may be unmatured.  Each of the Administrative Agent, each Lender agrees promptly to notify the Borrower and the Administrative Agent after any such setoff and application made by such Lender or its Affiliates; provided, however, that the failure to give such notice shall not affect the validity of such setoff and application.  The rights under this Section 11.8 are in addition to any other rights and remedies (including other rights of setoff) that the Administrative Agent, the Lenders and their respective Affiliates and other Secured Parties may have.

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Section 11.9   Sharing of Payments, Etc.  If any Lender, directly or through an Affiliate or branch office thereof, obtains any payment of any Obligation of any Loan Party (whether voluntary, involuntary or through the exercise of any right of setoff or the receipt of any Collateral or “proceeds” (as defined under the applicable UCC) of Collateral) other than pursuant to Sections 2.16 (Breakage Costs; Increased Costs; Capital Requirements), 2.17 (Taxes) and 2.18 (Substitution of Lenders) and such payment exceeds the amount such Lender would have been entitled to receive if all payments had gone to, and been distributed by, the Administrative Agent in accordance with the provisions of the Loan Documents, such Lender shall purchase for cash from other Secured Parties such participations in their Obligations as necessary for such Lender to share such excess payment with such Secured Parties to ensure such payment is applied as though it had been received by the Administrative Agent and applied in accordance with this Agreement (or, if such application would then be at the discretion of the Borrower, applied to repay the Obligations in accordance herewith); provided, however, that (a) if such payment is rescinded or otherwise recovered from such Lender in whole or in part, such purchase shall be rescinded and the purchase price therefor shall be returned to such Lender without interest and (b) such Lender shall, to the fullest extent permitted by applicable Requirements of Law, be able to exercise all its rights of payment (including the right of setoff) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation.

Section 11.10 Marshaling; Payments Set Aside.  No Secured Party shall be under any obligation to marshal any property in favor of any Loan Party or any other party or against or in payment of any Obligation.  To the extent that any Secured Party receives a payment from the Borrower, from the proceeds of the Collateral, from the exercise of its rights of setoff, any enforcement action or otherwise, and such payment is subsequently, in whole or in part, invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor, shall be re vived and continued in full force and effect as if such payment had not occurred.

Section 11.11  Notices.  (a)  Addresses.  All notices, demands, requests, directions and other communications required or expressly authorized to be made by this Agreement shall, whether or not specified to be in writing but unless otherwise expressly specified to be given by any other means, be given in writing and (i) addressed to (A) if to Holdings or the Borrower, to Parlux Fragrances, Inc., 5900 North Andrews Avenue, Suite 500, Ft. Lauderdale, Florida 33309, Attention:  Raymond J. Balsys, Tel:  954-316-9008, Fax:  954-491-1187, with copy to Akerman Senterfitt, One Southeast Third Avenue, Miami, Florida 33131, Attention: 
60;Jonathan Awner, Esq., Tel:  305-982-5615, Fax:  305-374-5095, (B) if to the Administrative Agent, to General Electric Capital Corporation, 10 Riverside  Drive, Danbury, Connecticut 06810, Attention:  Parlux Account Manager, Tel:  203-749-6880, Fax:  203-749-4307, with copy to Kilpatrick Stockton LLP, 1100 Peachtree Street, Suite 2800, Atlanta, Georgia 30309, Attention: Hilary P. Jordan, Esq., Tel: 404-815-6362, Fax: 404-541-3256 and (C) otherwise to the party to be notified at its address specified opposite its name on Schedule II or on the signature page of any applicable Assignment, (ii) posted to Intralinks® (to the extent such system is available and set up by or at the direction of the Administrative Agent prior to posting) in an appropriate location by uploading such notice, demand, reques t, direction or other communication to www.intralinks.com, faxing it to 866-545-6600 with an appropriate bar-coded fax coversheet or using such other means of posting to Intralinks® as may be available and reasonably acceptable to the Administrative Agent prior to such posting, (iii) posted to any other E-System set up by or at the direction of the Administrative Agent in an appropriate location or (iv) addressed to such other address as shall be notified in writing (A) in the case of the Borrower and the Administrative Agent, to the other parties hereto and (B) in the case of all other parties, to the Borrower and the Administrative Agent.  Transmission by electronic mail (including E-Fax, even if transmitted to the fax numbers set forth in clause (i) above) shall not be sufficient or effective to transmit any such notice under this clause (a) unless such transmission is an available means to post to any E-System.

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(a)           Effectiveness.  All communications described in clause (a) above and all other notices, demands, requests and other communications made in connection with this Agreement shall be effective and be deemed to have been received (i) if delivered by hand, upon personal delivery, (ii) if delivered by overnight courier service, one Business Day after delivery to such courier service, (iii) if delivered by mail, when deposited in the mails, (iv) if delivered by facsimile (other than to post to an E-System pursuant to clause (a)(ii) or (a)(iii) above), upon sender’s receipt of confirmation of proper transmission, and (v) if delivered by posting to any E-System, on the later of the date of such posting in an appropriate location and the date access to such posting is given to the recipient thereof in accordance with the standard procedures applicable to such E-System; provided, however, that no communications to the Administrative Agent pursuant to Article II or Article X shall be effective until received by the Administrative Agent.

Section 11.12 Electronic Transmissions.  (a)  Authorization.  Subject to the provisions of Section 11.11(a), each of the Administrative Agent, the Borrower, the Lenders, and each of their Related Persons is authorized (but not required) to transmit, post or otherwise make or communicate, in its sole discretion, Electronic Transmissions in connection with any Loan Document and the transactions contemplated therein.  Each of Holdings, the Borrower and each Secured Party hereby acknowledges and agrees, and each of Holdings and the Borrower shall cause each other Group Member to acknowledge an d agree, that the use of Electronic Transmissions is not necessarily secure and that there are risks associated with such use, including risks of interception, disclosure and abuse and each indicates it assumes and accepts such risks by hereby authorizing the transmission of Electronic Transmissions.

(a)           Signatures.  Subject to the provisions of Section 11.11(a), (i)(A) no posting to any E-System shall be denied legal effect merely because it is made electronically, (B) each E-Signature on any such posting shall be deemed sufficient to satisfy any requirement for a “signature” and (C) each such posting shall be deemed sufficient to satisfy any requirement for a “writing”, in each case including pursuant to any Loan Document, any applicable provision of any UCC, the federal Uniform Electronic Transactions Act, the Electronic Signatures in Global and National Commerce Act and any substant ive or procedural Requirement of Law governing such subject matter, (ii) each such posting that is not readily capable of bearing either a signature or a reproduction of a signature may be signed, and shall be deemed signed, by attaching to, or logically associating with such posting, an E-Signature, upon which each Secured Party and Loan Party may rely and assume the authenticity thereof, (iii) each such posting containing a signature, a reproduction of a signature or an E-Signature shall, for all intents and purposes, have the same effect and weight as a signed paper original and (iv) each party hereto or beneficiary hereto agrees not to contest the validity or enforceability of any posting on any E-System or E-Signature on any such posting under the provisions of any applicable Requirement of Law requiring certain documents to be in writing or signed; provided, however, that no thing herein shall limit such party’s or beneficiary’s right to contest whether any posting to any E-System or E-Signature has been altered after transmission.

(b)           Separate Agreements.  All uses of an E-System shall be governed by and subject to, in addition to Section 11.11 and this Section 11.12, separate terms and conditions posted or referenced in such E-System and related Contractual Obligations executed by Secured Parties and Group Members in connection with the use of such E-System.

(c)           Limitation of Liability.  All E-Systems and Electronic Transmissions shall be provided “as is” and “as available”.  None of Administrative Agent or any of its Related Persons warrants the accuracy, adequacy or completeness of any E-Systems or Electronic Transmission, and each disclaims all liability for errors or omissions therein.  No Warranty of any kind is made by the Administrative Agent or any of its Related Persons in connection with any E-Systems or Electronic Communication, including any warranty of merchantability, fitness for a particular purpose, non-infringement of third-party rights or freedom from viruses or other code defects.  Each of Holdings, the Borrower and each Secured Party agrees (and each of Holdings and the Borrower shall cause each other Loan Party to agree) that the Administrative Agent has no responsibility for maintaining or providing any equipment, software, services or any testing required in connection with any Electronic Transmission or otherwise required for any E-System.

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Section 11.13    Governing Law.  THIS AGREEMENT, EACH OTHER LOAN DOCUMENT THAT DOES NOT EXPRESSLY SET FORTH ITS APPLICABLE LAW, AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO AND THERETO SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

Section 11.14    Jurisdiction.  (a)  Submission to Jurisdiction.  ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO ANY LOAN DOCUMENT SHALL BE BROUGHT EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF HOLDINGS AND THE BORROWER (AND, TO THE EXTENT SET FORTH IN ANY OTHER LOAN DOCUMENT, EACH OTHER LOAN PARTY) HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS; PROVIDED THAT NOTHING IN THIS AGREEMENT SHA LL LIMIT THE RIGHT OF ADMINISTRATIVE AGENT TO COMMENCE ANY PROCEEDING IN THE FEDERAL OR STATE COURTS OF ANY OTHER JURISDICTION TO THE EXTENT ADMINISTRATIVE AGENT DETERMINES THAT SUCH ACTION IS NECESSARY OR APPROPRIATE TO EXERCISE ITS RIGHTS OR REMEDIES UNDER THE LOAN DOCUMENTS.  EACH OF THE PARTIES HERETO (AND, TO THE EXTENT SET FORTH IN ANY OTHER LOAN DOCUMENT, EACH OTHER LOAN PARTY) HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, THAT ANY OF THEM MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH JURISDICTIONS.

(a)           Service of Process.  EACH OF HOLDINGS AND BORROWER (AND, TO THE EXTENT SET FORTH IN ANY OTHER LOAN DOCUMENT, EACH OTHER LOAN PARTY) HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF ANY AND ALL LEGAL PROCESS, SUMMONS, NOTICES AND OTHER DOCUMENTS AND OTHER SERVICE OF PROCESS OF ANY KIND AND CONSENTS TO SUCH SERVICE IN ANY SUIT, ACTION OR PROCEEDING BROUGHT IN THE UNITED STATES OF AMERICA WITH RESPECT TO OR OTHERWISE ARISING OUT OF OR IN CONNECTION WITH ANY LOAN DOCUMENT BY ANY MEANS PERMITTED BY APPLICABLE REQUIREMENTS OF LAW, INCLUDING BY THE MAILING THEREOF (BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID) TO THE ADDRESS OF BORROWER SPECIFIED IN SECTION 11.11 (AND SHALL BE EFFECTIVE WHEN SUCH MAILING SHALL BE EFFECTIVE, AS PROVIDED THEREIN).  EACH OF HOLDINGS AND THE BORROWER (AND, TO THE EXTENT SET FORTH IN ANY OTHER LOAN DOCUMENT, EACH OTHER LOAN PARTY) AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.

(b)           Non-Exclusive Jurisdiction.  NOTHING CONTAINED IN THIS SECTION 11.14 SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE REQUIREMENTS OF LAW OR COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY LOAN PARTY IN ANY OTHER JURISDICTION.

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Section 11.15     Waiver of Jury Trial.  EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING WITH RESPECT TO, OR DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH, ANY LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED THEREIN OR RELATED THERETO (WHETHER FOUNDED IN CONTRACT, TORT OR ANY OTHER THEORY).  EACH PARTY HERETO (A) CERTIFIES THAT NO OTHER PARTY AND NO RELATED PERSON OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THE LOAN DOCUMENTS, AS APPLICABLE, BY THE MUTUAL WAI VERS AND CERTIFICATIONS IN THIS SECTION 11.15.

Section 11.16     Severability.  Any provision of any Loan Document being held illegal, invalid or unenforceable in any jurisdiction shall not affect any part of such provision not held illegal, invalid or unenforceable, any other provision of any Loan Document or any part of such provision in any other jurisdiction.

Section 11.17      Execution in Counterparts.  This Agreement may be executed in any number of counterparts and by different parties in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.  Signature pages may be detached from multiple separate counterparts and attached to a single counterpart.  Delivery of an executed signature page of this Agreement by facsimile transmission or Electronic Transmission shall be as effective as delivery of a manually executed counterpart hereof.

Section 11.18      Entire Agreement.  The Loan Documents embody the entire agreement of the parties and supersede all prior agreements and understandings relating to the subject matter thereof and any prior letter of interest, commitment letter (including the Commitment Letter), fee letter, confidentiality and similar agreements involving any Loan Party and any of the Administrative Agent, any Lender or any of their respective Affiliates relating to a financing of substantially similar form, purpose or effect.  In the event of any conflict between the terms of this Agreement and any other Loan Document, the terms of this Agreement shall govern (unless such terms of such other Loan Documents are necessary to comply with ap plicable Requirements of Law, in which case such terms shall govern to the extent necessary to comply therewith).

Section 11.19      Use of Name.  Each of Holdings and the Borrower agrees, and shall cause each other Loan Party to agree, that it shall not, and none of its Affiliates shall, issue any press release or other public disclosure (other than any document filed with any Governmental Authority relating to a public offering of the Securities of any Loan Party) using the name, logo or otherwise referring to GE Capital or of any of its Affiliates, the Loan Documents or any transaction contemplated therein to which the Secured Parties are party without at least 2 Business Days’ prior notice to GE Capital and without the prior consent of GE Capital except to the extent required to do so under applicable Requirements of Law and the n, only after consulting with GE Capital prior thereto.

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Section 11.20      Non-Public Information; Confidentiality.  (a)  Each Lender acknowledges and agrees that it may receive material non-public information hereunder concerning the Loan Parties and their Affiliates and Securities and agrees to use such information in compliance with all relevant policies, procedures and Contractual Obligations and applicable Requirements of Laws (including United States federal and state security laws and regulations).

(a)           Each Lender and the Administrative Agent agrees to use all reasonable efforts to maintain, in accordance with its customary practices, the confidentiality of information obtained by it pursuant to any Loan Document and designated in writing by any Loan Party as confidential, except that such information may be disclosed (i) with the Borrower’s consent, (ii) to Related Persons of such Lender or the Administrative Agent, as the case may be, that are advised of the confidential nature of such information and are instructed to keep such information confidential, (iii) to the extent such information presently is or hereafter becomes available to such Lender or the Administrative Agent, as the case may be, on a non-confidential basis from a source other than any Loan Party, (iv) to the extent disclosure is required by applicable Requirements of Law or other legal process or requested or demanded by any Governmental Authority, (v) to the extent necessary or customary for inclusion in league table measurements or in any tombstone or other advertising materials (and the Loan Parties consent to the publication of such tombstone or other advertising materials by the Administrative Agent, any Lender or any of their Related Persons), (vi) to the National Association of Insurance Commissioners or any similar organization, any examiner or any nationally recognized rating agency or otherwise to the extent consisting of general portfolio information that does not identify borrowers, (vii) to current or prospective assignees, SPVs grantees of any option described in Section 11.2(f) or participants, direct or contractual counterparties to any Hedging Agreement permitted hereunder and to their respective Related Persons, in each case to the extent such assignees, participants, counterparties or Related Persons agree to be bound by provisions substantially similar to the provisions of this Section 11.20 and (viii) in connection with the exercise of any remedy under any Loan Document.  In the event of any conflict between the terms of this Section 11.20 and those of any other Contractual Obligation entered into with any Loan Party (whether or not a Loan Document), the terms of this Section 11.20 shall govern.

Section 11.21      Patriot Act Notice.  Each Lender subject to the USA Patriot Act of 2001 (31 U.S.C. 5318 et seq.) hereby notifies the Borrower that, pursuant to Section 326 thereof, it is required to obtain, verify and record information that identifies the Borrower, including the name and address of the Borrower and other information allowing such Lender to identify the Borrower in accordance with such act.

[SIGNATURE PAGES FOLLOW]

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85

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.

PARLUX LTD., as Borrower
By:	/s/ Raymond J. Balsys
	Raymond J. Balsys
	CFO

PARLUX FRAGRANCES, INC., as Guarantor
By:	/s/ Raymond J. Balsys
	Raymond J. Balsys
	CFO

CREDIT AGREEMENT

PARLUX LTD.

SIGNATURE PAGE

86

GENERAL ELECTRIC CAPITAL CORPORATION, as Administrative Agent and Lender
By:	/s/ Donald Cavanagh
	Donald Cavanagh
	Duly Authorized Signatory

CREDIT AGREEMENT

PARLUX LTD.

SIGNATURE PAGE

87

Exhibit A to

Credit Agreement

Form of Assignment

This ASSIGNMENT, dated as of the Effective Date, is entered into between the Assignor and the Assignee (each as defined below).

The parties hereto hereby agree as follows:

Borrower:	Parlux Ltd., a New York corporation (the “Borrower”)
Administrative Agent:	General Electric Capital Corporation, as administrative agent and collateral agent for the Lenders (in such capacity and together with its successors and permitted assigns, the “Administrative Agent”)
Credit Agreement:	Credit Agreement, dated as of June 25, 2010 among the Borrower, Parlux Fragrances, a Delaware corporation, as Guarantor, the Lenders party thereto and the Administrative Agent (as the same may be amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”; capitalized terms used herein without definition are used as defined in the Credit Agreement)
Trade Date:	_________, 20__
Effective Date:	_________, 20__

Facility Assigned	Aggregate amount of Revolving Credit Commitments or principal amount of Revolving Loans for all Lenders	Amount of Revolving Credit Commitment or principal amount of  Revolving Loans Assigned	Percentage Assigned
Revolving Credit Facility	$____________	$____________	__._________%

[The Remainder of this  Page Was Intentionally Left Blank]

A-1

1.   Assignment.  Assignor hereby sells and assigns to Assignee, and Assignee hereby purchases and assumes from Assignor, Assignor’s rights and obligations in its capacity as Lender under the Credit Agreement (including Liabilities owing to or by Assignor thereunder) and the other Loan Documents, in each case to the extent related to the amounts identified above (the “Assigned Interest”).

2.   Representations, Warranties and Covenants of Assignors.  Assignor  (a) represents and warrants to Assignee and the Administrative Agent that (i) it has full power and authority, and has taken all actions necessary for it, to execute and deliver this Assignment and to consummate the transactions contemplated hereby and (ii) it is the legal and beneficial owner of its Assigned Interest and that such Assigned Interest is free and clear of any Lien and other adverse claims, and (iii) by executing, signing and delivering this Assignment via ClearPar® or any other electronic settlement system designated by the Administrative Agent, the Person signing, executing and delivering this Assignment on behalf of the Assignor is an authorized sig ner for the Assignor and is authorized to execute, sign and deliver this Agreement, (b) makes no other representation or warranty and assumes no responsibility, including with respect to the aggregate amount of the Revolving Credit Facility, the percentage of the Revolving Credit Facility represented by the amounts assigned, any statements, representations and warranties made in or in connection with any Loan Document or any other document or information furnished pursuant thereto, the execution, legality, validity, enforceability or genuineness of any Loan Document or any document or information provided in connection therewith and the existence, nature or value of any Collateral, (c) assumes no responsibility (and makes no representation or warranty) with respect to the financial condition of any Group Member or Loan Party or the performance or nonperformance by any Loan Party of any obligation under any Loan Document or any document provided in connection therewith and (d) attaches any Notes held by it ev idencing at least in part the Assigned Interest of such Assignor (or, if applicable, an affidavit of loss or similar affidavit therefor) and requests that the Administrative Agent exchange such Notes for new Notes in accordance with Section 2.14(e) of the Credit Agreement.

3.   Representations, Warranties and Covenants of Assignees.  Assignee (a) represents and warrants to Assignor and the Administrative Agent that (i) it has full power and authority, and has taken all actions necessary for Assignee, to execute and deliver this Assignment and to consummate the transactions contemplated hereby, (ii) to the extent indicated above, is an Affiliate or an Approved Fund of the Lender set forth above and (iii) it is sophisticated with respect to decisions to acquire assets of the type represented by the Assigned Interest assigned to it hereunder and either such Assignee or the Person exercising discretion in making the decision for such assignment is experienced in acquiring assets of such type, (iv) by executing, signing and delivering this Assignment via ClearPar® or any other electronic settlement system designated by the Administrative Agent, the Person signing, executing and delivering this Assignment on behalf of the Assignor is an authorized signer for the Assignor and is authorized to execute, sign and deliver this Agreement, (b) appoints and authorizes the Administrative Agent to take such action as administrative agent and collateral agent on its behalf and to exercise such powers under the Loan Documents as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto, (c) shall perform in accordance with their terms all obligations that, by the terms of the Loan Documents, are required to be performed by it as a Lender, (d) confirms it has received such documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and shall continue to make its own credit decisions in taking or not taking any action under any Loan Document independently and without reliance upon any Secured Party and based on such documents and information as it shall deem appropriate at the time, (e) acknowledges and agrees that, as a Lender, it may receive material non-public information and confidential information concerning the Loan Parties and their Affiliates and Securities and agrees to use such information in accordance with Section 11.20 of the Credit Agreement, (f) specifies as its applicable lending offices (and addresses for notices) the offices at the addresses set forth beneath its name on the signature pages hereof, (g) shall pay to the Administrative Agent an assignment fee in the amount of $3,500 to the extent such fee is required to be paid under Section 11.2(c) of the Credit Agreement and (h) to the extent required pursuant to Section 2.17(f) of the Credit Agreement, attaches two completed originals of Forms W-8ECI, W-8BEN or W-9.

A-2

4.   Determination of Effective Date; Register.  Following the due execution and delivery of this Assignment by Assignor, Assignee and, to the extent required by Section 11.2(b) of the Credit Agreement, the Borrower, this Assignment (including its attachments) will be delivered to the Administrative Agent for its acceptance and recording in the Register.  The effective date of this Assignment (the “Effective Date”) shall be the later of (i) the acceptance of this Assignment by the Administrative Agent and (ii) the recording of this Assignment in the Register.  The Administrative Agent shall i nsert the Effective Date when known in the space provided therefor at the beginning of this Assignment.

5.   Effect.  As of the Effective Date, (a) Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment, have the rights and obligations of a Lender under the Credit Agreement and (b) Assignor shall, to the extent provided in this Assignment, relinquish its rights (except those surviving the termination of the Commitments and payment in full of the Obligations) and be released from its obligations under the Loan Documents other than those obligations relating to events and circumstances occurring prior to the Effective Date.

Distribution of Payments.  On and after the Effective Date, the Administrative Agent shall make all payments under the Loan Documents in respect of each Assigned Interest (a) in the case of amounts accrued to but excluding the Effective Date, to Assignor and (b) otherwise, to the Assignee.

6.   Miscellaneous.  This Assignment is a Loan Document and, as such, is subject to certain provisions of the Credit Agreement, including Sections 1.5 (Interpretation), 11.14(a) (Submission to Jurisdiction) and 11.15 (Waiver of Jury Trial) thereof.  On and after the Effective Date, this Assignment shall be binding upon, and inure to the benefit of, the Assign ors, Assignees, the Administrative Agent and their Related Persons and their successors and assigns.  This Assignment shall be governed by, and be construed and interpreted in accordance with, the law of the State of New York.  This Assignment may be executed in any number of counterparts and by different parties in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.  Signature pages may be detached from multiple separate counterparts and attached to a single counterpart.  Delivery of an executed signature page of this Assignment by facsimile transmission or Electronic Transmission shall be as effective as delivery of a manually executed counterpart of this Assignment.

[Signature Pages Follow]

A-3

IN WITNESS WHEREOF, the parties hereto have caused this Assignment to be executed by their respective officers thereunto duly authorized, as of the date first above written.

[NAME OF ASSIGNOR] as Assignor
By:
	Name :
	Title :

[NAME OF ASSIGNOR] as Assignee
By:
	Name :
	Title :

Lending Office for Eurodollar Rate Loans

[Insert Address (including contact name, fax number and e-mail address)]

Lending Office (and address for notices) for any other purpose:

[Insert Address (including contact name, fax number and e-mail address)]

A-4

ACCEPTED and AGREED this__ day of ______ _____:

GENERAL ELECTRIC CAPITAL CORPORATION as Administrative Agent
By:
	Name :
	Title :

PARLUX LTD1
By:
	Name :
	Title :

___________________________

  1 Include only if required pursuant to Section 11.2(b) of the Credit Agreement.

A-5

Exhibit B

to

Credit Agreement

Form of Revolving Loan Note

Lender:  [NAME OF LENDER]

Principal Amount:  $_______ June 25, 2010

FOR VALUE RECEIVED, the undersigned, PARLUX LTD., a New York corporation (the “Borrower”), hereby promises to pay to the order of the Lender set forth above (the “Lender”) the Principal Amount set forth above, or, if less, the aggregate unpaid principal amount of all Revolving Loans (as defined in the Credit Agreement referred to below) made by the Lender to the Borrower, payable at such times and in such amounts as are specified in the Credit Agreement.

The Borrower promises to pay interest on the unpaid principal amount of the Revolving Loans from the date made until such principal amount is paid in full, payable at such times and at such interest rates as are specified in the Credit Agreement.  Demand, diligence, presentment, protest and notice of non-payment and protest are hereby waived by the Borrower.

Both principal and interest are payable in Dollars to General Electric Capital Corporation, as Administrative Agent, and immediately available funds.

This Note is one of the Notes referred to in, and is entitled to the benefits of, the Credit Agreement, dated as of June 25, 2010 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), among the Borrower, Parlux Fragrances, Inc., as Guarantor, the Lenders party thereto and General Electric Capital Corporation, as administrative agent and collateral agent for the Lenders.  Capitalized terms used herein without definition are used as defined in the Credit Agreement.

The Credit Agreement, among other things, (a) provides for the making of Revolving Loans by the Lender to the Borrower in an aggregate amount not to exceed at any time outstanding the Principal Amount set forth above, the indebtedness of the Borrower resulting from such Revolving Loans being evidenced by this Note and (b) contains provisions for acceleration of the maturity of the unpaid principal amount of this Note upon the happening of certain stated events and also for prepayments on account of the principal hereof prior to the maturity hereof upon the terms and conditions specified therein.

This Note is a Loan Document, is entitled to the benefits of the Loan Documents and is subject to certain provisions of the Credit Agreement, including Sections 1.5 (Interpretation), 11.14(a) (Submission to Jurisdiction) and 11.15 (Waiver of Jury Trial) thereof.

This Note is a registered obligation, transferable only upon notation in the Register, and no assignment hereof shall be effective until recorded therein.

THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

[Signature Pages Follow]

B-1

IN WITNESS WHEREOF, the Borrower has caused this Note to be executed and delivered by its duly authorized officer as of the day and year and at the place set forth above.

PARLUX LTD.
By:
	Name :
	Title :

B-2

Exhibit C

to

Credit Agreement

Form of Notice of Borrowing

GENERAL ELECTRIC CAPITAL CORPORATION

as Administrative Agent under the

Credit Agreement referred to below

_________ __, 20__

Attention:

Re: Parlux Ltd. (the “Borrower”)

Reference is made to the Credit Agreement, dated as of June 25, 2010 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), among the Borrower, Parlux Fragrances, Inc., as Guarantor, the Lenders party thereto and General Electric Capital Corporation, as administrative agent and collateral agent for such Lenders.  Capitalized terms used herein without definition are used as defined in the Credit Agreement.

The Borrower hereby gives you irrevocable notice, pursuant to Section 2.2 of the Credit Agreement of its request of a Borrowing (the “Proposed Borrowing”) under the Credit Agreement and, in that connection, sets forth the following information:

A.    The date of the Proposed Borrowing is __________, 20__(the “Funding Date”); and

B.    The aggregate principal amount of Revolving Loans is $_________, of which $________ consists of Base Rate Loans and $________ consists of Eurodollar Rate Loans having an initial Interest Period of ______ months.

The undersigned hereby certifies that the following statements are true on the date hereof, both before and after giving effect to the Proposed Borrowing and any other Revolving Loan to be made or before the Funding Date: the representations and warranties set forth in Article IV of the Credit Agreement and elsewhere in the Loan Documents are true and correct [in all material respects]2 [as though made on and as of such Funding Date],3 except to the extent such representations and warranties expressly relate to an earlier date, i n which case such representations and warranties were true and correct as of such date;

(i)    no Default is continuing; and

(ii)   the aggregate Revolving Credit Outstandings do not exceed the Maximum Revolving Loan Balance.

________________________________

2 Insert for any Proposed Borrowing after the Closing Date. 

3 Delete for Borrowings on the Closing Date.

C-1

PARLUX LTD.
By:
	Name :
	Title :

C-2

Exhibit D

Form of Borrowing Base Certificate

PARLUX LTD.

Date: ____________, 20___

This Certificate is given by Parlux Ltd. (“Borrower”) pursuant to Section 6.1(k) of that certain Credit Agreement dated as of June 25, 2010, among Borrower, Parlux Fragrances, Inc., as Guarantor, the Lenders from time to time party thereto and General Electric Capital Corporation, as agent for the Lenders and other Secured Parties (as such agreement may have been amended, restated, supplemented or otherwise modified from time to time the “Credit Agreement”).  Capitalized terms used herein without definition shall have the meanings set forth in the Credit Agreement.

The undersigned is duly authorized to execute and deliver this Borrowing Base Certificate on behalf of Borrower.  By executing this Certificate such officer of Borrower hereby certifies to Agent and Lenders on behalf of Borrower and without personal liability that:

(a) Attached hereto as Schedule 1 is a calculation of the Borrowing Base as of the above date; and

(b) Based on such schedule, the Borrowing Base as of the above date is $_____.

IN WITNESS WHEREOF, Borrower has caused this Borrowing Base Certificate to be executed by its Responsible Officer onthis __ day of _____, 20__.

PARLUX LTD

By:

Name 

Title 

D-1

Schedule 1

Borrowing Base Calculation

[To be provided]

D-2

Exhibit E

TO

CREDIT AGREEMENT

Form of Notice of Conversion or Continuation

GENERAL ELECTRIC CAPITAL CORPORATION

as Administrative Agent under the

Credit Agreement referred to below

_________ __, 20__

Attention:

Re: Parlux Ltd. (the “Borrower”)

Reference is made to the Credit Agreement, dated as of June 25, 2010 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), among the Borrower, Parlux Fragrances, Inc., as Guarantor, the Lenders  party thereto and General Electric Capital Corporation, as administrative agent and collateral agent for the Lenders.  Capitalized terms used herein and not otherwise defined herein are used herein as defined in the Credit Agreement.

The Borrower hereby gives you irrevocable notice, pursuant to Section 2.10 of the Credit Agreement of its request for the following: a continuation, on ________, 2010, as Eurodollar Rate Loans having an Interest Period of ___ months of Revolving Loans in an aggregate outstanding principal amount of $____________ having an Interest Period ending on the proposed date for such continuation; a conversion, on ________, 2010, to Eurodollar Rate Loans having an Interest Period of ___ months of Revolving Loans in an aggregate outstanding principal amount of $_________; and a conversion, on ________, 2010, to Base Rate Loans of Revolving Loans in an aggregate outstanding principal amount of $_________.

In connection herewith, the undersigned hereby certifies that no Default is continuing on the date hereof, both before and after giving effect to any Revolving Loan to be made on or before any date for any proposed conversion or continuation set forth above.

PARLUX LTD.
By:
	Name :
	Title :

E-1

Exhibit F

TO

CREDIT AGREEMENT

Form of Compliance Certificate

__________, 2010

This certificate is delivered pursuant to Section 6.1(d)of, and in connection with the consummation of the transactions contemplated in, the Credit Agreement, dated as of June 25, 2010 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), among  PARLUX LTD. (the “Borrower”), Parlux Fragrances, Inc., as Guarantor, the Lenders party thereto and General Electric Capital Corporation, as administrative agent and collateral agent for the Lenders (the “Administrative Agent”).  Capitalized terms used herein and not otherwise defined herein are used herein as defined in the Credit Agreement.

The undersigned, a duly authorized Responsible Officer of the Borrower having the name and title set forth below under his signature, hereby certifies, on behalf of the Borrower for the benefit of the Secured Parties and pursuant to Section 6.1 of the Credit Agreement, that such Responsible Officer of the Borrower is familiar with the Credit Agreement and that, in accordance with each of the following sections of the Credit Agreement, each of the following is true as of the date hereof, both before and after giving effect to any Revolving Loan to be made on or about the date hereof:

1.   In accordance with Section 6.1[(a)/(b)/(c)] of the Credit Agreement, attached hereto as Annex A are the Financial Statements for the [fiscal month/Fiscal Quarter/Fiscal Year] ended _________, 20__ required to be delivered pursuant to Section 6.1[(a)/(b)/(c)] of the Credit Agreement.  Such Financial Statements fairly present in all material respects the Consolidated financial position, results of operations and cash flow of Holdings as at the dates indicated therein and for the periods indicated therein in accord ance with GAAP [(subject to the absence of footnote disclosure and normal year-end audit adjustments)]4 [without qualification as to the scope of the audit or as to going concern and without any other similar qualification, together with the certificate from the Group Members’ Accountants with respect to such Consolidated Financial Statements required to be delivered pursuant to Section 6.1(c) of the Credit Agreement.  The examination by the Borrower’s Accountants in connection with such Financial Statements has been made in accordance with the standards of the United States' Public Company accounting Oversight Board (or any successor entity).]5

2.   In accordance with Section 6.1(d) of the Credit Agreement, attached hereto as Annex Bare the calculations used to determine the Consolidated Leverage Ratio, to determine compliance with each financial covenant contained in Article V of the Credit Agreement [that are tested on a quarterly basis]6.

3.   In accordance with Section 6.1(d) of the Credit Agreement, no Default is continuing as of the date hereof[, except as provided for on Annex C attached hereto, with respect to each of which the Borrower proposes to take the actions set forth on Annex C].

________________________________

4 Insert language in brackets only for monthly and quarterly reports. 

5 Insert language in brackets only for annual certifications.

6 Insert bracketed language only for quarterly certifications.

F-1

4.   In accordance with Section 6.1(e) of the Credit Agreement, (i) the Corporate Chart attached hereto as Annex D-1 is correct and complete as of the date hereof, (ii) all documents (including updated schedules as to locations of Collateral and acquisition of Intellectual Property or real property) required to be delivered pursuant to the Loan Documents by any Loan Party in the preceding Fiscal Quarter have been delivered thereunder (or such delivery requirement was otherwise duly waived or extended) and (iii) complete and correct copies of all documents modifying any term of any Constituent Document of any Group Member or any Subsidiary or joint venture thereof on or prior to the date hereof have been delivered to the Administrative Agent (or are attached hereto as Annex D-2).

5.   In accordance with Section 6.1(g) of the Credit Agreement, attached hereto as Annex E is a discussion and analysis of the financial condition and results of operations of the Group Members for the portion of the Fiscal Year elapsed on or prior to the date hereof discussing the reasons for any significant variations from the Projections for such period and the figures for the corresponding period in the previous Fiscal Year.

[Signature Page Follows]

F-2

6.           In accordance with Section 6.1(h) of the Credit Agreement, attached hereto as Annex F is a correct and complete summary of the outstanding balances of all intercompany Indebtedness as of the last day of the Fiscal Quarter covered by the Financial Statements attached hereto as Annex A.

[7.           In accordance with Sections 6.1(i) and (j) of the Credit Agreement, attached hereto as Annexes F and G are complete and correct (i) copies of each management letter, audit report or similar letter or report received by any Group Member from any independent registered certified public accountant (including the Group Members’ Accountants) in connection with such Financial Statements or any audit thereof and (ii) a summary of all material insurance coverage maintained as of the date th ereof by any Group Member].7

In Witness Whereof, the undersigned has executed this certificate on behalf of the Borrower as of the date first written above.

Name :

Title :

  ____________________________

7 Insert bracketed language only for annual reports.

F-3

Annex A

to

Compliance Certificate of ___________________________

Dated _________, 20__

financial statements

F-4

AnnexB

to

Compliance Certificate of __________________________

Dated _________, 20__

financial calculations

F-5

Annex C

to

Compliance Certificate of _____________________________

Dated _________, 20__

continuing defaults

F-6

Annex D-1

to

Compliance Certificate of ______________________

Dated _________, 20__

corporate chart

F-7

Annex D-2

to

Compliance Certificate of __________________________

Dated _________, 20__

modifications to constituent documents

F-8

Annex E

to

Compliance Certificate of ____________________________

Dated _________, 20__

management discussion and analysis

F-9

Annex F

to

compliance Certificate OF _______________________

DATED _________, 20__

[intercompany indebtedness][management letters]

F-10

Annex G

to

Compliance Certificate of _____________________________

Dated _________, 20__

summary of material insurance coverage

F-11

SCHEDULE 1.1

to

CREDIT AGREEMENT

Certain Percentage

The percentage specified in clause (a) of the definition of "Change of Control" in the within and foregoing Credit Agreement shall be 35% in the case of any group formed by two or more persons (as such term is used in such definition) if each such person beneficially owns more than 10% of Holdings’ Stock as of the date of the Credit Agreement for purposes of Sections 13(d) and 14(d)(2) of the United States Securities Exchange Act.

SCHEDULE 4.3

to

CREDIT AGREEMENT

Ownership of Group Members

Parlux Fragrances, Inc. Organizational Chart

(as of June 21, 2010)

SCHEDULE 4.8

to

CREDIT AGREEMENT

Taxes

The IRS is currently conducting an audit of Parlux Fragrances, Inc.'s tax returns from 2007, 2008 and 2009, which audit was triggered by a refund from the carry-back of Net Operating Losses in fiscal 2009.

SCHEDULE 4.12

to

CREDIT AGREEMENT

Labor Matters

None.

SCHEDULE 4.13

to

CREDIT AGREEMENT

Environmental Matters

None.

SCHEDULE 4.16

to

CREDIT AGREEMENT

Title; Real Property

1.           Lease for property at 5900 North Andrews Avenue, Fort Lauderdale, Broward County, Florida, 33309 (as more particularly described in the related Landlord Agreement); and

2.           Lease for property at 1000 Riverside Drive (formerly Industrial Avenue), Keasbey, NJ 08832 (as more particularly described in the related Landlord Agreement).

SCHEDULE 8.1

to

CREDIT AGREEMENT

Indebtedness

None.

SCHEDULE 8.2

to

CREDIT AGREEMENT

Liens

1.           Equipment Lease (1986-A, Schedule 2) between Wells Fargo Equipment Finance, Inc., as lessor, and Parlux Fragrances, Inc., as lessee.

2.           Equipment Lease (#D45841) between IBM Credit LLC., as lessor, and Parlux Fragrances, Inc., as lessee.

SCHEDULE 8.3

to

CREDIT AGREEMENT

Investments

None.

EX-10.94

EXHIBIT 10.94

Execution Copy

GUARANTY AND SECURITY AGREEMENT

Dated as of June 25, 2010

among

PARLUX LTD.

and

Each Grantor

From Time to Time Party Hereto

and

GENERAL ELECTRIC CAPITAL CORPORATION,

as Administrative Agent and Collateral Agent

TABLE OF CONTENTS

		Page
ARTICLE 1	DEFINED TERMS	1
Section 1.1	Definitions		1
Section 1.2	Certain Other Terms		4
ARTICLE II	GUARANTY		4
Section 2.1	Guaranty		4
Section 2.2	Limitation of Guaranty		4
Section 2.3	Contribution		5
Section 2.4	Authorization; Other Agreements		5
Section 2.5	Guaranty Absolute and Unconditional		5
Section 2.6	Waivers		5
Section 2.7	Reliance		5
ARTICLE III	GRANT OF SECURITY INTEREST		7
Section 3.1	Collateral		7
Section 3.2	Grant of Security Interest in Collateral		8
ARTICLE IV	REPRESENTATIONS AND WARRANTIES		8
Section 4.1	Title; No Other Liens		8
Section 4.2	Perfection and Priority		9
Section 4.3	Jurisdiction of Organization; Chief Executive Office		9
Section 4.4	Locations of Inventory, Equipment and Books and Records		9
Section 4.5	Pledged Collateral		9
Section 4.6	Instruments and Tangible Chattel Paper Formerly Accounts		9
Section 4.7	Intellectual Property		10
Section 4.8	Commercial Tort Claims		10
Section 4.9	Specific Collateral		10
Section 4.10	Enforcement		10
Section 4.11	Representations and Warranties of the Credit Agreement		10
ARTICLE V	COVENANTS		11
Section 5.1	Maintenance of Perfected Security Interest; Further Documentation and Consents		11
Section 5.2	Changes in Locations, Name, Etc		11
Section 5.3	Pledged Collateral		12
Section 5.4	Accounts		12
Section 5.5	Commodity Contracts		13

i

		Page
Section 5.6	Delivery of Instruments and Tangible Chattel Paper and Control of Investment Property, Letter-of-Credit Rights and Electronic Chattel Paper	12
Section 5.7	Intellectual Property		13
Section 5.8	Notices		14
Section 5.9	Notice of Commercial Tort Claims		14
Section 5.10	Compliance with Credit Agreement		15
ARTICLE VI	REMEDIAL PROVISIONS		15
Section 6.1	Code and Other Remedies		15
Section 6.2	Accounts and Payments in Respect of General Intangibles		17
Section 6.3	Pledged Collateral		18
Section 6.4	Proceeds to be Turned over to and Held by Administrative Agent		19
Section 6.5	Registration Rights		19
Section 6.6	Deficiency		20
ARTICLE VII	THE ADMINISTRATIVE AGENT		20
Section 7.1	Administrative Agent’s Appointment as Attorney-in-Fact		22
Section 7.2	Authorization to File Financing Statements		22
Section 7.3	Authority of Administrative Agent		22
Section 7.4	Duty; Obligations and Liabilities		22
ARTICLE VIII	MISCELLANEOUS		22
Section 8.1	Reinstatement		23
Section 8.2	Release of Collateral		23
Section 8.3	Independent Obligations		23
Section 8.4	No Waiver by Course of Conduct		23
Section 8.5	Amendments in Writing		23
Section 8.6	Additional Grantors; Additional Pledged Collateral		24
Section 8.7	Notices		24
Section 8.8	Successors and Assigns		24
Section 8.9	Counterparts		24
Section 8.10	Severability		24
Section 8.11	Governing Law		24
Section 8.12	Waiver of Jury Trial		25

ii

TABLE OF CONTENTS

ANNEXES AND SCHEDULES

Annex 1	Form of Pledge Amendment
Annex 2	Form of Joinder Agreement
Annex 3	Form of Intellectual Property Security Agreement
Schedule 1	Commercial Tort Claims
Schedule 2	Filings
Schedule 3	Jurisdiction of Organization; Chief Executive Office
Schedule 4	Location of Inventory and Equipment
Schedule 5	Pledged Collateral
chedule 6	Intellectual Property

iii

THIS GUARANTY AND SECURITY AGREEMENT, dated as of June 25, 2010, by PARLUX LTD., a New York corporation (the “Borrower”) and each of the other entities listed on the signature pages hereof or that becomes a party hereto pursuant to Section 8.6 (together with the Borrower, the “Grantors”), in favor of GENERAL ELECTRIC CAPITAL CORPORATION(“GE Capital”), as administrative agent and collateral agent (in such capacity, together with its successors and permitted assigns, the “Administrative Agent”) for the Lenders and each other Secured Party (each as defined in the Credit Agreement referred to below).

W I T N E S S E T H:

WHEREAS, pursuant to the Credit Agreement dated as of June 25, 2010 (as the same may be modified from time to time, the “Credit Agreement”) among the Borrower, Holdings, the Lenders from time to time party thereto and GE Capital, as Administrative Agent, the Lenders have severally agreed to make extensions of credit to the Borrower upon the terms and subject to the conditions set forth therein;

WHEREAS, each Grantor (other than the Borrower) has agreed to guaranty the Obligations (as defined in the Credit Agreement) of the Borrower;

WHEREAS, each Grantor will derive substantial direct and indirect benefits from the making of the extensions of credit under the Credit Agreement; and

WHEREAS, it is a condition precedent to the obligation of the Lenders to make their respective extensions of credit to the Borrower under the Credit Agreement that the Grantors shall have executed and delivered this Agreement to the Administrative Agent;

NOW, THEREFORE, in consideration of the premises and to induce the Lenders and the Administrative Agent to enter into the Credit Agreement and to induce the Lenders to make their respective extensions of credit to the Borrower thereunder, each Grantor hereby agrees with the Administrative Agent as follows:

ARTICLE I

DEFINED TERMS

Section 1.1      Definitions.  (a) Capital terms used herein without definition are used as defined in the Credit Agreement.

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF PARLUX FRAGRANCES, INC.

Name of Subsidiary	Jurisdiction of Organization
Parlux, Ltd.	New York
Parlux S.A.	France

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements No. 333-95657 and No. 333-148383 on Forms S-8 of Parlux Fragrances, Inc. (the “Company”), of our report dated June 29, 2010, relating to the consolidated financial statements and financial statement schedule of the Company, and of our report on internal control over financial reporting dated June 29, 2010, appearing in this Annual Report on Form 10-K of the Company for the year ended March 31, 2010.

/s/ MarcumRachlin, a division of Marcum LLP

Miami, Florida

June 29, 2010

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, Frederick E. Purches, certify that:

1.

I have reviewed this quarterly report on Form 10-K 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 officer 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: June 29, 2010

/s/ Frederick E. Purches

Frederick E. Purches,

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-K 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 officer 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:  June 29, 2010

/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-K for the period ending March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Frederick E. Purches, Chief Executive Officer of the Company, hereby 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, as amended; 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/ Frederick E. Purches
	Frederick E. Purches,
	Chairman and Chief Executive Officer

June 29, 2010

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-K for the period ending March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Raymond J. Balsys, Chief Financial Officer of the Company, hereby 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, as amended; 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/ Raymond J. Balsys
	Raymond J. Balsys, Chief Financial Officer

 June 29, 2010