Parlux Fragrances 10Q 2007 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

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FORM 10-Q

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(Mark One)

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

For the quarterly period ended: DECEMBER 31, 2006

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

For the transition period from________ to________

^{______________}

PARLUX FRAGRANCES, INC.

(Exact name of registrant as specified in its charter)

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DELAWARE	0-15491	22-2562955
(State or other jurisdiction of incorporation or organization)	(Commission file number)	(IRS employer identification no.)

3725 S.W. 30th Avenue, Ft. Lauderdale, FL 33312

(Address of principal executive offices) (Zip code)

954-316-9008

Registrant’s telephone number, including area code

_______________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ Noý

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

Large accelerated filer¨ Accelerated filerý Non-accelerated filer¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Noý

APPLICABLE ONLY TO CORPORATE ISSUERS:Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class	Outstanding at April 13, 2007
[Common Stock, $0.01 par value per share]	18,069,912 shares

PART I. – FINANCIAL INFORMATION

Item 1.

Financial Statements

See pages 19 to 37.

Item 2.

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

Certain statements within this Form 10-Q, which are not historical in nature, including those that contain the words, “anticipate”; “believe”; “plan”; “estimate”; “expect”; “should”; “intend”; and other similar expressions, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements are based on current expectations regarding important risk factors. Investors are cautioned that forward-looking statements involve such risks and uncertainties, which may affect our business and prospects, including economic, competitive, governmental, technological and other factors included in our filings with the Securities and Exchange Commission, including the Risk Factors included in our Annual Report on Form 10-K, as filed with the SEC on July 24, 2006. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. We do not undertake any obligation to update the information herein, which speaks only as of this date.

On May 17, 2006, we announced a two-for-one stock split of common stock in the form of a dividend, for shareholders of record on May 31, 2006 (the “Stock Split”). The Stock Split was effected on June 16, 2006 and did not include shares held in treasury. All discussions concerning common stock, earnings per share, and outstanding shares throughout this Quarterly Report as well as comparable share information, have been adjusted to reflect the Stock Split. In connection with the Stock Split, we modified outstanding warrants. See Note B to the accompanying condensed consolidated financial statements for further discussion of the effect of the modification of warrants in connection with the Stock Split and the related share-based compensation expense recorded during the quarter ended June 30, 2006.

Recent Developments

Nasdaq Communications

On November 16, 2006, we received a Nasdaq Staff Determination notice from the Nasdaq Stock Market Listing Qualifications Department (the “Department”) that the Company’s failure to timely file its Quarterly Report on Form 10-Q for the period ended September 30, 2006 violated Nasdaq Marketplace Rule 4310(c)(14). As a result, Parlux’s common stock was subject to delisting from The Nasdaq National Market at the opening of business on November 8, 2006, unless we requested a hearing in accordance with Nasdaq Marketplace Rules. We requested such hearing before the Nasdaq Listing Qualifications Panel (the “Panel”) to review the Staff Determination, which automatically deferred the delisting of our common stock pending the Panel’s review and determination. The hearing was held on February 1, 2007. On February 14, 2007, we received a similar letter from the Department due to the fa ilure to timely file our Quarterly Report on Form 10-Q for the period ended December 31, 2006.

On February 28, 2007, the Department notified us that the Panel determined to continue listing of Parlux’s common stock on The Nasdaq National Market, subject to the Company filing its Forms 10-Q for the quarters ended September 30, 2006 and December 31, 2006 on or before March 31, 2007.

The filing of our reports on Form 10-Q for the fiscal quarters ended September 30, 2006 (the ”September Report) and December 31, 2006 (the “December Report) had been delayed pending the completion of an independent investigation by special counsel and independent forensic accountants engaged by Parlux's Audit Committee. The investigation was focused on, and was the result of, allegations made in a Consolidated Amended Class Action Complaint filed on November 8, 2006, including, among others, that Parlux improperly recognized revenue on sales to related parties and failed to comply with SEC disclosure rules. Based on the findings of the investigation, it was determined that there was no merit to the allegations. See Part II, Item 1 – Legal Proceedings, for further discussion of the Amended Cass Action, which has recently been dismissed.

Parlux requested a review by the Nasdaq Listing and Hearing Review Council (the “Council”) of the Panel's decision to impose the March 31, 2007 deadline, and as to other aspects of the Panel's decision. Parlux also requested that the Panel modify its decision and extend its deadline for filing the December Report until April 16, 2007. We filed our September Report on March 30, 2007, and, on April 9, 2007, the Panel agreed to extend the

deadline for filing our December Report until April 16, 2007. There can be no assurance that Parlux can achieve full compliance with all requirements of The Nasdaq Stock Market. However, with the filing of this December Report, we believe the Company should be considered compliant and current with all of its filings and will retain its listing on Nasdaq.

Nussdorf Solicitation

On February 6, 2007, the Company entered into a Settlement Agreement with Mr. Glenn H. Nussdorf, a major shareholder of the Company, and Mr. Ilia Lekach, a major shareholder and the Company’s former Chairman and Chief Executive Officer. See Note Q to the accompanying condensed consolidated financial statements for further discussion.

Perry Ellis Fragrance Brand

On August 16, 2006, we entered into a letter of intent to sell our Perry Ellis fragrance rights to Victory International (USA) LLC (“Victory”) for a total of up to $140 million: $120 million for the fragrance rights, payable in sixty monthly installments of $2 million, without interest, and up to $20 million for inventory due at closing. The letter of intent was subject to the execution of a definitive agreement and the approvals associated therewith, including approval by the licensor, Perry Ellis International (“PEI”). On October 9, 2006, PEI informed us that they would not consent to the assignment of the rights. Victory had paid a deposit of $1 million to us in connection with the letter of intent, which was refunded during October 2006.

On December 6, 2006, we entered into an agreement to sell the Perry Ellis fragrance rights, including inventory, molds and other intangible assets related thereto, to PEI, at a price of approximately $63 million, subject to final inventory valuations. The closing took place shortly thereafter. See Note P to the accompanying condensed consolidated financial statements for further discussion.

On March 2, 2007, the Company and certain executives were named as defendants in an action filed by Victory in connection with the above. See Note L to the accompanying condensed consolidated financial statements for further discussion.

Acquisition Proposal

On June 14, 2006, our Board of Directors received an unsolicited letter from our then Chairman and CEO, Mr. Ilia Lekach, representing PF Acquisition of Florida LLC (“PFA”), pertaining to the possible acquisition of all of the outstanding common stock of the Company at a proposed price of $29.00 ($14.50 after the Stock Split) per share in cash (the “Proposal”), representing a premium of 55% over the closing price of our common stock on June 13, 2006. The Proposal was subject to financial and other contingencies and was referred to the Special Committee of Independent Directors of the Parlux Board of Directors (the “Committee”). On June 20, 2006, the Committee, through their counsel, sent a response to the Proposal, which indicated that the Committee did not believe it was prudent for the Company to move forward to consider the Proposal due to the contingencies therein and requested removal of s uch, as well as a deposit to cover the Company’s expenses that may have been required to evaluate the Proposal.

On July 12, 2006, the Committee received a letter from PFA stating that, due to corporate developments occurring with respect to the potential acquisition of certain of the Company’s brands, Mr. Lekach was withdrawing the Proposal.

Litigation

On June 21, 2006, we were served with a shareholder’s class action complaint (the “Class Action”) filed in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida by Glen Hutton, purporting to act on behalf of himself and other public stockholders of the Company, and 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.

detriment of the public shareholders, all in breach of defendants’ fiduciary duties. The Class Action alleged that the Proposal was solely designed to ensure that the Company’s management completed the Proposal despite the fact that the consideration called for in the Proposal was unfair to the public shareholders and the Company’s public shareholders had not been provided with all material information concerning the Proposal necessary for them to make an informed decision. Counsel for the plaintiffs has informed Company counsel that plaintiff does not intend to pursue this litigation further. It is anticipated that this matter will be voluntarily dismissed by the plaintiff.

During August and September 2006, five new identical class actions were filed against the Company, Ilia Lekach and Frank Buttacavoli (together the “Second Class Action”).

Essentially the Second Class Action alleged that the defendants made knowingly false statements about the revenues and profitability of the Company beginning on February 8, 2006. It also contained allegations regarding the sale of Company shares by Messrs. Lekach and Buttacavoli as motive for the false statements. These factual allegations give rise to one count for violations of Section 10(b)(5) of the 1934 Securities Exchange Act and one count for violations of Section 20(a) of that Act.

The Company and the other named defendants retained Florida securities counsel and on September 26, 2006, the defendants moved to dismiss the Second Class Action.

At a hearing on October 23, 2006, the judge consolidated the five cases. At the plaintiffs’ request, the lead plaintiff was provided the opportunity to file a Consolidated Amended Complaint (the “Amended Class Action”), which was filed on November 8, 2006. The Amended Class Action included the allegations in the Second Class Action as well as new allegations, among them, that the Company improperly recognized revenues on sales to related parties during the three-month period ended September 30, 2005, and failed to comply with certain SEC disclosure rules surrounding “Management’s Discussion and Analysis of Financial Condition and Results of Operation”. On December 1, 2006, the Company and the other named defendants filed a motion to dismiss the Amended Class Action.

On February 14, 2007, the United States District Court for the Southern District of Florida entered an order granting the motion of the defendants, including Parlux, to dismiss the Amended Class Action. The Court held that the allegations in the Amended Class Action failed to meet the pleading requirements applicable to the case. This dismissal was without prejudice to the filing of another amended complaint by the plaintiffs, however, the plaintiffs did not file another amended complaint within the time period set by the Court. As a result, the plaintiffs now are unable to file another amended complaint and the Court’s Order of Dismissal is final.

The Derivative Action names the identical defendants as the Class Action and also relates to the Proposal. The Derivative Action seeks to remedy the alleged breaches of fiduciary duties, waste of corporate assets, and other violations of law and seeks injunctive relief from the Court appointing a receiver or other truly neutral third party to conduct and/or oversee any negotiations regarding the terms of the Proposal, or any alternative transaction, on behalf of the Company and its public shareholders, and to report to the Court and plaintiff’s counsel regarding the same. The Derivative Action alleges that the unlawful plan to attempt to buy out the public shareholders of Parlux without having proper financing in place, and for inadequate consideration, violates applicable law by directly breaching and/or aiding the other defendants’ breaches of their fiduciary duties of loyalty, candor, due care, independence, good faith and fair dealing, causing the co mplete 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 Company counsel on August 17, 2006.

The Amended Complaint continues to name the then Board of Directors as defendants along with the Company, as a nominal defendant. The Amended Complaint is largely a collection of claims previously asserted in a 2003 derivative action, which the plaintiffs in that action, when provided with additional information, elected not to pursue. It adds to those claims, assertions regarding a 2003 buy-out effort and the recently abandoned buy-out effort of PFA. It also contains allegations regarding the prospect that the Company's stock might be delisted because of a delay in meeting SEC filing requirements. It relies in large measure on a bevy of media articles rather than facts known to the plaintiffs. Glen Hutton, the plaintiff in the now abandoned Class Action, is included as an additional plaintiff.

The Company and the other defendants have 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 the alleged violations of securities laws included in the Second Class Action, 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 days to respond, and a response was filed on March 29, 2007. Based on the allegations in the Second Amended Complaint and the information collected in the earlier litigation and presently known to the Company, we believe that the Second Amended Complaint is without merit.

Other

During August and September 2006, we sold all of our ownership interest in E Com Ventures, Inc., the parent company of Perfumania, Inc. We can not predict the impact, if any, that the sale of these shares will have on our future relationship with Perfumania. See Note F to the accompanying condensed consolidated financial statements for further discussion.

On September 6, 2006, we entered into an exclusive agreement with GLMAC, an unrelated third party, to assist in the sale of certain of our non-core product lines. The agreement was for a period of six months; on February 26, 2007, we informed GLMAC, with required notice, of our intent not to renew the agreement.

Critical Accounting Policies and Estimates

In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company has included in its Annual Report on Form 10-K for the year ended March 31, 2006 a discussion of the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has not made any changes in these critical accounting policies, nor has it made any material change in any of the critical accounting estimates underlying these accounting policies, since the Form 10-K filing, discussed above, other than as described below and as it relates to the determination of the fair value of the warrant modification and corresponding tax benefits discussed in Note B to the accompanying condensed consolidated financial statements.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), Share-Based Payment,(SFAS 123(R)). SFAS No. 123(R) requires companies to expense the estimated fair value of stock options and similar equity instruments issued to employees. There were no unvested options or warrants outstanding at March 31, 2006, and as such, the result of adopting SFAS No. 123(R) on April 1, 2006, did not have an effect on our results of operations or financial position. See Note B to the accompanying condensed consolidated financial statements for further discussion of the effect of the modification of outstanding warrants in connection with the Stock Split and the related share-based compensation expense recorded for the current nine-month period.

In June 2006, the FASB issued Interpretation No. 48 (“FIN48”),Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.FIN48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006 requiring adoption by us during the quarter ending June 30, 2007. We are currently evaluatingFIN48 and have not yet determined the impact, if any, its adoption will have on our consolidated financial position, results of operations, cash flows and disclosures.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measures (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently reviewing the provisions of SFAS No. 157 to determine the impact, if any, for the Company.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB No. 115 ("SFAS No. 159"). SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for the Company's fiscal year ending March 31, 2009. We are currently assessing the impact, if any, of this statement on our consolidated financial statements.

Significant Trends

Over the last few years, a significant number of new prestige fragrance products have been introduced on a worldwide basis. The beauty industry in general is highly competitive and consumer preferences change rapidly. The initial appeal of these new fragrances, launched for the most part in U.S. department stores, has fueled the growth of our industry. Department stores continue to lose sales to the mass market as a product matures. To counter the effect of lower department store sales, companies are required to introduce new products more quickly, which requires additional spending for development, 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 dramatically, either positively or negatively, based on a single event. We believe this pattern will continue. If one or mo re of our new product introductions were to be unsuccessful or delayed, or the appeal of the celebrity were to diminish, it could result in a reduction in profitability and operating cash flows.

In addition, certain U.S. department store retailers have consolidated operations resulting in the closing of retail doors as well as implementing various inventory control initiatives. We expect that these store closings and the inventory control initiatives will continue to affect our sales to this distribution channel in the short term.

We record sales, cost of sales, and other direct expenses in three 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 the Company as having a related party relationship as defined in SFAS 57, “Related Party Disclosure”. See Note F to the accompanying condensed consolidated financial statements for additional information regarding related parties. 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. However, GUESS? has informed us that GUESS? fragrance products are being resold in unauthorized channels of distribution. See Note J to the accompanying condensed consolidated financial statements for further discussion.

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

Results of Operations

On November 28, 2006, our Board of Directors approved the sale of the Perry Ellis fragrance brand license back to PEI. A definitive agreement was signed on December 6, 2006. See Note P to the accompanying condensed financial statements for further discussion.

The results presented in the accompanying condensed consolidated statements of operations for the three and nine months ended December 31, 2006 and 2005 include activity relating to the Perry Ellis brand as discontinued operations. For comparison purposes, prior period financial information in future filings will be restated accordingly. Our discussions below for the three and nine months ended December 31, 2006 and 2005 exclude Perry Ellis activities, which are addressed separately in the discussion of discontinued operations.

The Company does business with fragrance distributors owned/operated by individuals related to the Company’s former Chairman/CEO, who continues to own more than 10% of the Company’s outstanding common stock. These sales are included as related party sales in the accompanying condensed consolidated statements of operations and are closely monitored by the Company’s Audit Committee and Board of Directors. For the quarter ended September 30, 2006, the Company identified and classified additional international distributors as related parties. These distributors had not previously been classified as such. Transactions with these distributors are now included as related party sales for the three and nine months ended December 31, 2006 and comparable period results, when applicable, will be restated. See Note O to the accompanying condensed consolidated financial statements for further discussion. Future sales to these parties may not occur at the same levels, which could have a material adverse effect on our operating results if new customers or existing customers do not replace such sales.

Our gross margins may not be comparable to other entities that include all of the costs related to their distribution network in costs of goods sold, since we allocate a portion of these distribution costs to costs of goods sold and include the remaining unallocated amounts as selling and distribution expenses. Selling and distribution expenses for the nine months ended December 31, 2006 and 2005 include approximately $4,417,000 and $2,621,000, respectively ($2,182,000 and $1,009,000 during the three months ended December 31, 2006 and 2005), 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 expenses is allocated to inventory in accordance with generally accepted accounting principles.

Comparison of the three-month period ended December 31, 2006 with the three-month period ended December 31, 2005.

During the quarter ended December 31, 2006, net sales increased 15% to $43,416,309 as compared to $37,808,090 for the same period for the prior year. The net increase is mainly attributable to the launch of GUESS? Gold for Women in September 2006, and the continued international rollout of GUESS? women’s fragrance which originally shipped domestically during September 2005 and GUESS? men’s fragrance which commenced shipping domestically in March 2006, resulting in a $9,121,649 increase in gross sales of GUESS? brand products to $16,739,404 compared to $7,617,755 for the same period in the prior year. This increase was partially offset by a $2,086,293 decrease in gross sales for the entire Paris Hilton fragrance brand during the current quarter (excluding $31,704 and $362,471 in Paris Hilton brand watch and handbags sales, respectively) to $25,651,704 as compared to $27,737,997 for the same period in the prior year. Th e new Paris Hilton “Heiress” for Women fragrance did not commence shipping until mid-October 2006. Net sales to unrelated customers, which represent 68% of our total net sales for the quarter, increased 7% to $29,738,731 compared to $27,715,231 for the same period in the prior year, mainly as a result of the GUESS? brand sales discussed above, offset by the reduction in Paris Hilton brand fragrance sales. Net sales to the U.S. department store sector increased 26% from $12,423,018 to $15,597,977, while net sales to international distributors and wholesalers decreased 8% from $15,292,213 to $14,140,754. The increase in net sales to U.S. department store customers was primarily attributable to a $3,882,042 increase in gross sales of GUESS? brand products. The decrease in international net sales was mainly attributable to decreases of $1,662,851 in Paris Hilton fragrance sales, $436,913 in gross sales of Maria Sharapova brand products and $304,005 in gross sales of Ocean Pacific brand products. The de crease was partially offset by a $1,638,753 increase in gross sales of GUESS? products, which continued its international rollout. Sales to related parties (See Note F to the accompanying condensed consolidated financial statements for further discussion of related parties) increased 36% to $13,677,578 compared to $10,092,859 for the same period in the prior year, mainly as a result of a $3,600,854 increase in sales of GUESS? brand products.

Our overall cost of goods sold increased as a percentage of net sales to 58% for the quarter ended December 31, 2006, compared to 43% for the comparable prior year period. Cost of goods sold as a percentage of net sales to unrelated customers and related parties approximated 61% and 53%, respectively, for the current period, as compared to 43% for both unrelated customers and related parties for the same period in the prior year. The current year quarter includes a higher percentage of sales of GUESS? products which sales, for the most part, have a lower margin than sales of our other products. In addition, the current year quarter also includes a higher percentage of value sets sold to both unrelated customers and related parties, which include multiple products and have a higher cost of goods compared to basic stock items.

Total operating expenses increased by 38% compared to the same period in the prior year from $19,026,092 to $26,312,768, increasing as a percentage of net sales from 50% to 61%. However, certain individual components of our operating expenses experienced more significant changes. Advertising and promotional expenses increased 31% to $16,018,065, compared to $12,266,480 in the prior year period, increasing as a percentage of net sales from 32% to 37%. The current year period includes increased promotional costs in connection with the continued roll out of GUESS? fragrances for women and men on a worldwide basis and additional spending in the U.S. department stores to support the launches of Heiress and GUESS? Gold for women. We anticipate that promotional spending for the Paris Hilton and GUESS? brands will continue at these levels during periods which contain new product launches. Selling and distribution costs increased 58% to $3,874,413 compared to $2,452,9 02 in the prior year period, increasing as a percentage of net sales from 6% to 9%. The increase was mainly attributable to approximately $355,000 and $325,000 in inventory relocation costs to, and rent for, our new distribution center in New Jersey, respectively, coupled with an increase in headcount and travel expenses to support domestic sales. Royalties increased by 36% in the current period, increasing as a percentage of sales from 6% to 7%, based upon the license requirements for the sales mix, and minimum royalties for certain brands. We anticipate that this percentage will decrease to 6% over time as additional sales of non-fragrance products increase and minimum royalties on such licenses are absorbed. General and administrative expenses increased 69% compared to prior year, from $1,680,681 to $2,833,276, increasing as a percentage of sales from 4% to 7%. The increase was mainly attributable to increases in legal and professional fees of approximately $452,000 and $302,000, respectively, in connecti on with various litigation (See Note L to the accompanying condensed consolidated financial statements for further discussion) and the Sarbanes-Oxley Act of 2002 remediation and maintenance. Depreciation and amortization increased 39% from $481,156 to $668,203 due to approximately $2,761,000 of new equipment and leasehold improvements at our New Jersey facility being placed in service in September 2006, offset by certain equipment becoming fully depreciated. As a result of the above factors, we incurred an operating loss from continuing operations for the current period of $(8,218,192), compared to operating income from continuing operations of $2,639,166 for the same period in the prior year.

Net interest expense was $590,902 in the current period as compared to $199,429 for the same period in the prior year, as our line of credit was used to finance increases in receivables and inventory.

Loss from continuing operations before taxes for the current period was $(8,811,542) compared to income of $2,458,078 in the same period for the prior year. The tax provision for continuing operations for the periods reflects an estimated effective rate of 38%. As a result, we incurred a loss from continuing operations of $(5,463,157) for the current period compared to net income of $1,524,009in the comparable period of the prior year.

Income from discontinued operations, which includes a pretax gain of $34,277,316 in the current period from the sale of our Perry Ellis fragrance brand (see Note P to the accompanying condensed consolidated financial statements for further discussion) net of the tax effect, was $23,402,021 and $4,472,080 for the three months ended December 31, 2006 and 2005, respectively. As a result we earned net income of $17,938,864 and $5,996,089 for the current and prior comparable periods, respectively.

Comparison of the nine-month period ended December 31, 2006 with the nine-month period ended December 31, 2005.

During the nine months ended December 31, 2006, net sales increased 36% to $98,785,112 as compared to $72,374,428 for the same period for the prior year. The increase is mainly attributable to the launch of GUESS? Gold for Women in September 2006 and the continued international rollout of GUESS? women’s fragrance, which originally shipped domestically during September 2005, and GUESS? men’s fragrance which commenced shipping domestically in March 2006, which provided $42,634,670 in gross sales compared to $14,117,370 for the same period in the prior year, partially offset by a $2,133,983 reduction in gross sales of Ocean Pacific (“OP”) brand products since no new products were introduced during the current period pending strategic direction from OP’s new owner. Warnaco, who acquired the OP brand during 2005, recently sold the brand to Iconics Brand Group, Inc.

Net sales to unrelated customers, which represent 66% of our total net sales for the nine-month period, increased 30% to $65,377,336 compared to $50,138,487 for the same period in the prior year, mainly as a result of the GUESS? brand sales discussed above, offset by the reduction in OP brand sales. Net sales to the U.S. department store sector increased 18% from $23,351,456 to $27,561,716, while net sales to international distributors increased 41% from $26,787,031 to $37,815,620. The increase in sales to U.S. department stores was mainly attributable to a

$5,364,595 increase in gross sales of GUESS? products, partially offset by a reduction of $884,457 in gross sales of Paris Hilton brand products. The increase in sales to international distributors was mainly attributable to an increase of $11,870,243 in gross sales of GUESS? products. Sales to related parties (See Note F to the condensed consolidated financial statements for further discussion of related parties) increased 50% to $33,407,776 compared to $22,235,941 for the same period in the prior year, mainly as a result of an increase of $11,282,462 in GUESS? brand gross sales offset by an decrease of $592,896 in Paris Hilton brand gross sales.

Our overall cost of goods sold increased as a percentage of net sales to 55% for the current nine months ended December 31, 2006, compared to 42% for the comparable prior year period. Cost of goods sold as a percentage of net sales to unrelated customers and related parties approximated 57% and 52%, respectively, for the current period, as compared to 41% and 44%, respectively, for the same period in the prior year. The current year period includes a higher percentage of sales to international distributors reflecting the continued rollout of Paris Hilton and GUESS? products to international markets, which sales have a lower margin than sales of these products to U.S. department store customers. In addition, the current year also includes a higher percentage of value sets sold to both unrelated customers and related parties, which include multiple products and have a higher cost of goods compared to basic stock items.

Total operating expenses increased by 70% compared to the same period in the prior year from $43,457,434 to $73,668,482, increasing as a percentage of net sales from 60% to 75%. However, certain individual components of our operating expenses experienced more significant changes. Advertising and promotional expenses increased 24% to $32,115,580, compared to $25,992,527 in the prior year period, decreasing as a percentage of net sales from 36% to 33%. The current year period amount includes promotional costs in connection with the continued roll out of GUESS? and Paris Hilton fragrances for women and men on a worldwide basis and the launch of the GUESS? Gold for women fragrance mainly in U.S. department stores, respectively. During January and February 2006, we committed to certain spending levels in the U. S. department store channel based on projected sales. However, due to the consolidations and inventory controls measur es discussed above, sales to this channel were substantially less than originally anticipated and certain promotional activities during this period, which were committed to in advance, could not be cancelled. We anticipate that promotional spending for the Paris Hilton and GUESS? brands will continue at these levels during periods which contain new product launches. Selling and distribution costs increased 40% to $9,577,421compared to $6,853,251 in the prior year period, increasing as a percentage of net sales from 9% to 10%. The increase was mainly attributable to approximately $542,000 and $355,000 in additional costs for temporary warehouse storage space, and freight charges for relocation of inventory to our new distribution center in New Jersey, respectively, as well as approximately $612,000 for rent of the New Jersey distribution center, to handle the increased order flow and inventory requirements. Royalties increased by 75%in the current period, increasing as a percentage of net sale s from 6% to 7%, based upon the license requirements for the current sales mix, and minimum royalties for certain brands. We anticipate that this percentage will decrease to 6% over time as additional sales of non-fragrance products increase and minimum royalties on such licenses are absorbed. General and administrative expenses increased 36% compared to prior year, from $5,100,423 to $6,931,656, remaining relatively constant at 7% of net sales. The increase was mainly attributable to increases in legal and professional fees of approximately $702,000 and $634,000, respectively, in connection with various litigation (see Note L to the accompanying condensed consolidated financial statements for further discussion) and the Sarbanes-Oxley Act of 2002 remediation and maintenance, coupled with increases in property insurance costs and personnel additions in package development, quality assurance and production planning. Depreciation and amortization increased 18% from $1,413,181 to$1,670,251 due to approx imately $2,761,000 of new equipment and leasehold improvements at our New Jersey facility being placed in service in September 2006, offset by certain equipment becoming fully depreciated. The current period includes a non-cash, share-based compensation charge in the amount of $16,201,950, relating to fully vested warrants issued during the period from 1999 through 2002, which were modified in connection with the Stock Split (See Note B to the accompanying condensed consolidated financial statements for further discussion). The current year period also includes a gain from the sale of the Sunrise Facility in the amount of $494,465 (See Note M to the accompanying condensed consolidated financial statements for further discussion). As a result of the above factors, we incurred an operating loss from continuing operations for the current period of $(29,049,432), compared to an operating loss of $(1,160,904) for the same period in the prior year.

Net interest expense increased to $2,125,124 in the current period compared to $232,165 for the same period in the prior year, as we used our line of credit to finance higher receivables and inventory to support sales growth. The current year period includes a gain from the sale of our investment in ECMV in the amount of $1,774,624. (See Note F for further discussion).

Loss from continuing operations before taxes for the current period was $(29,388,049) compared to a loss of $(1,374,728) in the same period for the prior year. Our tax provision for the prior year period reflects an estimated effective rate of 38%. The effective rate in the current period of 24% results from (1) a limitation on the estimated deferred tax benefit that is expected to result from the share-based compensation charge related to the warrant modification, and, (2) the $1,083,823 loss for income tax purposes resulting from the sale of the ECMV shares due to a difference in basis (See Note I to the accompanying condensed consolidated financial statements for further discussion). The benefit from the share-based compensation charge will be limited by the maximum allowable annual compensation deduction for corporate officers under Section 162 (m) of the Internal Revenue Code. Consequently, the benefit recorded in the current period reflects management’s best estimate at the present time based upon assumptions regarding the timing and market value of the Company’s common stock upon exercise of the warrants and the amount and nature of other forms of compensation to be paid to the holders of the warrants using the method in which cash compensation (salary and bonus) of the related individuals takes priority over the share-based compensation in determining the annual limitation. Actual tax benefits realized may be greater or less than the amounts recorded, and such differences may be material. The Company will adjust this deferred tax asset as additional information becomes available, with adjustments reflected in the Company’s income tax (benefit) provision for the period in which the adjustments are identified. As a result, we incurred a net loss from continuing operations of $(22,233,088) for the current period compared to net loss of $(852,331) in the comparable period of the prior year.

Income from discontinued operations, which includes a pretax gain of $34,277,316 in the current period from the sale of our Perry Ellis fragrance brand (see Note P to the accompanying condensed consolidated financial statements for further discussion), net of the tax effect, was $29,700,305 and $15,099,914 for the nine months ended December 31, 2006 and 2005, respectively. As a result we earned net income of $7,467,217 and $14,247,583 for the current and prior comparable periods, respectively.

Liquidity and Capital Resources

Working capital increased to $102,105,847 as of December 31, 2006, compared to $82,872,508 at March 31, 2006. The increase was mainly attributable to the current period’s net income, excluding the effect of the non-cash compensation charge, offset by the approximate $2.7 million in fixed asset additions financed by capital leases (of which approximately $870,000 have current maturities), and the reduction in investment in affiliate as a result of the sale of the shares of E Com Ventures, Inc. for less than the March 31, 2006 carrying value.

During the nine months ended December 31, 2006, net cash used in operating activities was $36,495,303 compared to $3,110,570 during the prior year comparable period. The increase was mainly attributable to a decrease in trade accounts payable, with proceeds from the sale of the Perry Ellis fragrance brand, and an increase in inventory to support the increased sales anticipated for the Paris Hilton and GUESS? brands. The increase was partially offset by an increase in accrued expenses and income taxes payable and a lesser increase in trade receivables.

Net cash provided by investing activities increased to $79,874,778 in the current period from a use of $23,684,483 in the prior year period, due to a change in restricted cash pending transfer to our lender and the net proceeds from the sales of the Perry Ellis brand, the Sunrise Facility and our investment in affiliate. This was partially offset by the increased purchase of equipment and leasehold improvements.

Net cash used in financing activities increased to $30,773,213 compared to net cash provided by financial activities of $14,461,467 in the prior year comparable period. The decrease was attributable to the pay down of our line of credit utilizing the proceeds from the sale of the Perry Ellis brand and the repayment of the $12,868,808 balance of the mortgage concurrently with the sale of the Sunrise Facility. In the prior year period, we had $3,877,795 of treasury stock purchases compared with $2,499,424 in the current period.

As of December 31, 2006 and 2005, our ratios of the number of days sales in accounts receivable and number of days cost of sales in inventory, on an annualized basis, were as follows:


	December 31,
	2006		2005
Trade accounts receivable⁽¹⁾:
Unrelated⁽²⁾		97		79
Related:
Perfumania, Inc.		152		140
Other related		63		51
Total		92		81
Inventories		395		319

———————

(1)

Accounts receivable balances and the number of days sales in accounts receivable do not exclude Perry Ellis activity since such activity is not brand specific.

(2)

Calculated on gross trade receivables excluding allowances for doubtful accounts, sales returns and advertising allowances of approximately $8,253,000 and $6,421,000 in 2006 and 2005, respectively.

The increase in the number of days sales from 2005 to 2006 for unrelated customers was mainly attributable to the increase in sales to international distributors whose terms, for the most part, range from 60 to 90 days, compared to between 30 and 60 days for U.S. department store customers. In addition, a portion of certain international distributors’ trade receivable balances were past due as of December 31, 2006. We have subsequently received substantial payment from these customers. Based on current circumstances, we anticipate the number of days for the unrelated customer group will range between 80 and 90 days during fiscal 2008. The number of days sales in trade receivables from Perfumania, Inc. (“Perfumania”) continue to exceed those of unrelated customers, due mainly to their seasonal cash flow (See Note F to the accompanying condensed consolidated financial statements for further discussion of our relationship with Per fumania). The number of days outstanding has improved as of March 31, 2007. The number of days sales in trade receivables from other related parties continue to be less than their 60 or 90 day payment terms.

The lead time for certain of our raw materials and components inventory (up to 120 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, we frequently produce a six to nine-month supply to ensure adequate inventories if the new products exceed our forecasted expectations. We believe that the gross margins on our products outweigh the additional carrying costs. However, if future sales do not reach forecasted levels, it could result in excess inventories and may require us to decrease prices to reduce inventory levels.

Due to the significant number of new product launches anticipated during the last half of fiscal year 2007, the number of days sales in inventory has increased. We anticipate that this trend will improve through the next two quarters, as new products launch.

As of March 31, 2004, we had repurchased, under all phases of our common stock buy-back program, a total of 10,180,855 shares at a cost of $29,226,300. On August 6, 2004, our Board of Directors (the “Board”) approved the repurchase of an additional 1,000,000 shares of our common stock, subject to certain limitations, including approval from our lender, which was subsequently received, for up to $8,000,000, on August 16, 2004. As of March 31, 2006, we had repurchased, in the open market, 384,102 shares at a cost of $5,302,560, including 217,272 shares at a cost of $3,877,795 during the period April 1, 2005 through March 31, 2006. During December 2006, we purchased, in the open market, an additional 422,000 shares at a cost of $2,499,424, effectively completing share repurchases approved under this authorization.

On January 4, 2007, our Board approved the repurchase of an additional 10,000,000 shares, subject to certain limitations, including approval from our lender if we had amounts outstanding under our line of credit. The August 6, 2004 repurchase plan was effectively terminated with approximately $198,000 remaining. As of April 13, 2007, we had repurchased, in the open market, 360,420 shares at a cost of $2,403,799.

On July 20, 2001, we entered into a Loan and Security Agreement (the “Loan Agreement”) with GMAC Commercial Credit LLC (“GMACCC”). On January 4, 2005, the Loan Agreement was extended through July 20, 2006. Under the Loan Agreement, we were able to borrow, depending upon the availability of a borrowing base, on

a revolving basis, up to $20,000,000 at an interest rate of LIBOR plus 2.75% or the Bank of New York’s prime rate, at our option.

On January 10, 2006, the Loan Agreement was amended, increasing the credit line to $30,000,000, with an additional $5,000,000 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 $35,000,000. On September 13, 2006, the Loan Agreement was further amended, temporarily increasing the credit line to $40,000,000 until December 13, 2006, at which time the maximum loan amount reverted back to $35,000,000.

At December 31, 2006, based on the borrowing base at that date, available borrowing under the credit line amounted to $35,000,000, none of which was utilized. Restricted cash represents collections of trade accounts receivable deposited with our bank and pending transfer to GMACCC. As of March 31, 2006, $7,966,720 was on deposit with our bank pending transfer. There was no restricted cash as of December 31, 2006, since we had no amounts outstanding under our line of credit. The proceeds from the Perry Ellis transaction were used to reduce amounts outstanding under our line of credit.

Substantially all of our assets, other than those recently financed under a capital lease with Provident Equipment Leasing (See Note E to the accompanying condensed consolidated financial statements for further discussion), collateralize our credit line borrowing. The 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 GMACCC. The Loan Agreement also contains certain financial covenants relating to net worth, interest coverage and other financial ratios, which we were in compliance with as of December 31, 2006.

On December 29, 2005, we obtained a $12,750,000 mortgage loan from GE Finance Business Property Corporation for the Sunrise Facility (See Note E to the condensed consolidated financial statements for further discussion). This mortgage was repaid on June 21, 2006, concurrently with the sale of the property.

As previously discussed, we sold the Perry Ellis fragrance brand during December 2006. This brand represented approximately 26% of our total gross sales during the nine months ended December 31, 2006. We are currently reviewing alternatives to reduce operating expenses, to levels that are more in line with our current requirements. The actions being considered include reductions in advertising expenses and personnel as well as subleasing the warehouse and storage portion of our Ft. Lauderdale Florida location, or moving from this location to office space in South Florida. Management believes that funds from operations and our existing financing will be sufficient to meet our current operating needs. However, if we were to continue incurring operating losses, or were to expand operations through acquisitions, new licensing arrangements or both, we may need to obtain additional financing. There is no assurance that we could obtain such financin g or what the terms of such financing, if available, would be.

Off-Balance Sheet Arrangements

As of December 31, 2006, we did not have any “off-balance sheet” arrangements as that term is defined in Regulation S-K item 303(a) 4, nor do we have any material commitments for capital.

Item 3.

Quantitative and Qualitative Disclosures About Market Risks

During the quarter ended December 31, 2006, there have been no material changes in the information relating to the Company’s market risks as of March 31, 2006, as set forth in Item 7A of the Company’s Annual Report on Form 10-K for the year ended March 31, 2006.

Item 4.

Controls and Procedures

Parlux Fragrances, Inc.’s interim Chief Executive Officer (its principal executive officer) and Chief Financial Officer (its principal financial officer) have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934), as of the end of the period covered by this report, based on the evaluation required by paragraph (b) of Rule 13a-15 under the Securities Act of 1934. They concluded that, as of such date, material weaknesses existed in our internal controls over financial reporting, and consequently, the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report.

In light of the material weaknesses described below, in preparing our financial statements at and for the quarter ended December 31, 2006, we performed additional procedures in an attempt to ensure that such financial statements were fairly presented in all material respects in accordance with generally accepted accounting principles. Notwithstanding the material weaknesses described below, management believes that the condensed consolidated financial statements included in this Form 10-Q fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows for the periods and dates presented.

Lack of sufficient resources in our accounting and finance organization. The Company did not maintain a sufficient complement of personnel to maintain an appropriate accounting and financial reporting structure to support the activities of the Company. As of December 31, 2006, the Company had an insufficient number of personnel with clearly delineated and fully documented responsibilities in order to timely prepare and file its quarterly financial statements and Quarterly Report on Form 10-Q. In addition, the Company’s Chief Financial Officer was responsible for preparing or compiling certain critical portions of the quarterly and annual financial information and is often responsible for performing the final review of this information. These represent a material weakness in design of internal controls over financial reporting. Due to the potential pervasive effect on the financial statements and disclosures and the absence of other mitigating controls , there is a more than remote likelihood that a material misstatement of the interim and annual financial statements could occur and not be prevented or detected. This material weakness has also contributed to the material weaknesses in Nos. 2 and 3 below.

Lack of sufficient resources to provide for suitable segregation of duties. Specifically, in connection with the lack of sufficient accounting and finance resources described in material weakness No. 1 above, certain financial and accounting personnel had incompatible duties that permitted creation, review, processing and potential management override of certain financial data without independent review and authorization affecting inventory, accounts payable and accounts receivable. The increase in the Company’s administrative staffing has not been commensurate with the rapid growth in the volume of business transactions. These represent a material weakness in design of internal controls over financial reporting. Due to the potential pervasive effect on the financial statements and disclosures and the absence of other mitigating controls, there is a more than remote likelihood that a material misstatement of the interim and annual financial statements could occur and not be prevented or detected.

Inadequate access controls with regard to computer master file information. Specifically, certain of the Company’s personnel in accounts payable, accounts receivable and inventory had access and could make changes to master files without approval. The internal controls were not adequately designed. Due to the potential pervasive effect on the financial statements and disclosures and the absence of other mitigating controls there is a more than remote likelihood that a material misstatement of the interim and annual financial statements could occur and not be prevented or detected.

Inadequate controls over the processing of certain credits to accounts receivable. The Company receives charge-backs from its U.S. department store customers for a variety of items. Certain charge-backs relating to demonstration costs, although supported by store sell-through information, were recorded by accounts receivable personnel without additional approval. The internal controls were not adequately designed or operating in a manner to effectively support the requirements of the sales and expenditure cycles. This material weakness is the result of aggregate deficiencies in internal control activities and could result in a material misstatement of trade receivables and advertising and promotional cost that would not be prevented or detected.

Inadequate controls over the processing of certain expenses, most notably, advertising and promotional expenses. Costs relating to the advertisement and promotion of the Company’s products are a significant cost of operations. The internal controls were not adequately designed or operating in a manner to establish specific controls to ensure that all advertising and promotional expenses were approved and processed on a timely basis. This material weakness is the result of aggregate deficiencies in internal control activities and could result in a material misstatement of accounts payable, accrued expenses and advertising and promotional cost that would not be prevented or detected.

Inadequate controls over the processing of adjustments to accounts payable. The internal controls over accounts payable, including vendor rebates, were not adequately designed or operating in a manner to effectively support the expenditure cycle. Certain adjustments were processed without proper approval, or the Company’s procedures did not specifically document the approvals that would be required. This material weakness is the result of aggregate deficiencies in internal control activities and could result in a material

misstatement of accounts payable, accrued expenses and operating expenditures that would not be prevented or detected.

Changes In Internal Control Over Financial Reporting – Management’s Remediation Of The Material Weaknesses.

Our management has discussed the material weaknesses described above and other deficiencies with our Audit Committee. In an effort to remediate the identified material weaknesses and other deficiencies, we continue to implement a number of changes to our internal control over financial reporting including the following:

The Company hired an experienced financial individual as Vice President of Finance to assume certain of the responsibilities previously performed by the Chief Financial Officer. In addition, commencing with the preparation of the Company’s March 31, 2006 financial statements, management developed an Audit Committee review file which is provided to the Chair of the Audit Committee prior to the finalization of the Company’s Annual and Quarterly Reports on Forms 10-K and 10-Q, and includes memoranda and supporting documentation for all significant areas where estimates and potential management override exist.

The Company has hired additional employees in finance and accounting, and has restricted certain responsibilities within accounts payable, accounts receivable and inventory in order to segregate incompatible functions.

The Company has implemented procedures whereby computer generated reports are being prepared, on a daily basis, listing all changes to the accounts payable and accounts receivable master files. These reports are being reviewed by the Vice President of Finance.

The Company has implemented procedures whereby all charge-backs for demonstration costs must be approved by the Vice President of Domestic Sales.

The Company has enhanced its procedure documentation in the accounts payable area and is in the process of implementing procedures whereby a listing of budgeted advertising will be reviewed as part of the month end closing process to determine that billings for such services have been received or accrued during that reporting period.

The Company is in the process of documenting specific procedures for processing adjustments to accounts payable, which will include all potential credits thereto.

The Company was not able to assess, during the quarter ended December 31, 2006, that the aforementioned improvements in internal controls eliminated the material weaknesses previously identified.

PART II. – OTHER INFORMATION

Item 1.

Legal Proceedings

The Class 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 was a director of the Company at that date. The Class Action related to the proposal (previously disclosed in the Company’s June 14, 2006 Form 8-K) from PF Acquisition of Florida LLC (“PFA”), which was owned by Ilia Lekach, to acquire all of the outstanding shares of common stock of the Company for $29.00 ($14.50 after the Stock Split) per share in cash (the “Proposal”). The Class Action sought equitable relief for inadequate and unfair consideration, without full disclosure of all material information, to the detriment of the public shareholders, all in breach of defendants’ fiduciary duties. The Class Action alleged that the Proposal was solely designed to ensure that the Comp any’s management completed the Proposal despite the fact that the consideration called for in the Proposal was unfair to the public shareholders and the Company’s public shareholders had not been provided with all material information concerning the Proposal necessary for them to make an informed decision. Counsel for the plaintiffs has informed Company counsel that plaintiff does not intend to pursue this litigation further. It is anticipated that this matter will be voluntarily dismissed by the plaintiff.

During August and September 2006, five new identical class actions were filed against the Company, Ilia Lekach and Frank Buttacavoli (together the “Second Class Action”).

The Company and the other named defendants retained Florida securities counsel and on September 26, 2006, the defendants moved to dismiss the Second Class Action.

The Proposal was subject to financial and other contingencies, and was referred to the Special Committee of Independent Directors of the Parlux Board of Directors (the “Committee”). On June 20, 2006, the Committee, through their counsel, sent a response to the Proposal, which indicated that the Committee did not believe it was prudent for the Company to move forward to consider the Proposal due to the contingencies therein, and requested removal of such as well as a deposit to cover the Company’s expenses that may have been required to evaluate the Proposal.

The Derivative Action names the identical defendants as the Class Action and relates to the Proposal. The Derivative Action seeks to remedy the alleged breaches of fiduciary duties, waste of corporate assets, and other violations of law and seeks injunctive relief from the Court appointing a receiver or other truly neutral third party to conduct and/or oversee any negotiations regarding the terms of the Proposal, or any alternative transaction, on behalf of the Company and its public shareholders, and to report to the Court and plaintiff’s counsel regarding the same. The Derivative Action alleges that the unlawful plan to attempt to buy out the public shareholders of the Company without having proper financing in place, and for inadequate consideration, violates applicable law by directly breaching and/or aiding the other defendants’ breaches of their fiduciary duties of loyalty, candor, due care, independence, good faith and f air 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 Company counsel on August 17, 2006.

The Amended Complaint continues to name the then Board of Directors as defendants along with the Company, as a nominal defendant. The Amended Complaint is largely a collection of claims previously asserted in a 2003 derivative action, which the plaintiffs in that action, when provided with additional information, simply elected not to pursue. It adds to those claims, assertions regarding a 2003 buy-out effort and the recently abandoned buy-out effort of PF Acquisition of Florida. It also contains allegations regarding the prospect that the Company's stock might be delisted because of a delay in meeting SEC filing requirements. It relies in large measure on a bevy of media articles rather than facts known to the plaintiffs. Glen Hutton, the plaintiff in the now abandoned class action, is included as an additional plaintiff.

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 the alleged violations of securities laws included in the Second Class Action, 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 days to respond, and a response was filed on March 29, 2007. Based on the allegations in the Second Amended Complaint and the information collected in the earlier litigation and presently known to the Company, it is believed that the Second Amended Complaint is without merit.

On February 6, 2007, the Company entered into a Settlement Agreement with Mr. Glenn H. Nussdorf, a major shareholder of the Company, and Mr. Ilia Lekach, a major shareholder and the Company’s former Chairman and Chief Executive Officer at the time. See Note P to the accompanying condensed consolidated financial statements for further discussion.

On March 2, 2007, the Company, Ilia Lekach and Frank Buttacavoli were named as defendants, along with Perry Ellis International, Inc. and its Chairman and CEO, George Feldenkreis, Rene Garcia, Quality King Distributors, Inc., E Com Ventures, Perfumania, Model Reorg, Inc., Glenn Nussdorf, DFA Holdings, Inc., Duty Free Americas, Inc. Falic Fashion Group, LLC, Simon Falic and Jerome Falic. This action by plaintiff Victory International (“Victory”) relates to Perry Ellis International’s failure to consent to the assignment by the Company of its contractual license to the Perry Ellis brand of perfumes. The Plaintiff is alleging that Perry Ellis International unreasonably withheld its consent and, instead, conspired with a variety of people to prevent Victory from obtaining this license. No direct allegations are made against the Company. The allegations against Messrs. Lekach and Buttacavoli relate to the recent attempt by Glenn Nussdorf to replace all of the directors of the Company with his nominees. The First Amended Complaint alleges that Mr. Nussdorf and certain affiliates are among the alleged co-conspirators with Perry Ellis International to prevent Victory from obtaining the license. It is the Company’s intention, as well as that of Mr. Lekach and Mr. Buttacavoli, to seek dismissal from this case on the basis that the complaint fails to state a cause of action against any of them.

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

Item 1A.

Risk Factors

Reference is made to the Risk Factors set forth in our Form 10-K for the year ended March 31, 2006. The following Risk Factors are in addition to that disclosure:

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

During the year ended March 31, 2006, licensed Paris Hilton and GUESS? brand products generated approximately $76 million and $22 million, respectively, in gross sales. Following the disposition of our license for the Perry Ellis brand of fragrances, the Paris Hilton and GUESS? brands of fragrances accounted for approximately 50% and 42%, respectively, of our gross sales during the nine months ended December 31, 2006, and are expected to account for most of our gross sales in the year ending March 31, 2008. If Paris Hilton's appeal as a celebrity were to diminish, or GUESS? would not approve our international distributors (see Note J to the accompanying condensed consolidated financial statements for further discussion) it could result in a material reduction in our sales of products licensed by them, adversely affecting our results of operations and operating cash flows. That risk is magnified as these product lines have become our primary source of revenue.

We have not remediated material weaknesses in our internal control over financing reporting.

We continue to have material weaknesses and significant deficiencies in our internal control over financing reporting. We have hired additional personnel and are attempting to address these weaknesses and deficiencies, but until these are resolved, there is a greater risk of material error with respect to our financial reporting. In addition, costs of compliance with Sarbanes-Oxley and to remediate these material weaknesses may materially impact our results of operations.

We are subject to significant litigation.

We are a party to significant litigations, including as described in Part II, Item 1 of this Form 10-Q. The Company intends to vigorously defend these and other pending lawsuits, but the ultimate outcome of such cases can never be predicted with certainty, and the costs and distraction to management of defending such cases could impact our results of operations.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following chart outlines the Company’s repurchases of its common stock during the quarter ended December 31, 2006, all of which were purchased on the open market.

Issuer Purchases of Equity Securities


Period	(a) Total Number of Shares Purchased⁽¹⁾	(b) Average Price Paid per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs⁽²⁾
Month #1 10/01/2006 10/31/2006	—	—	—	$2,697,000
Month #2 11/01/2006 11/30/2006	—	—	—	$2,697,000
12/01/2006 12/31/2006	422,000	$5.92	422,000	$ —

———————

(1)

Purchased in accordance with the Company’s common stock buy-back program announced on August 6, 2004. See page 11of “Liquidity And Capital Resources” for further discussion. On January 4, 2007, our Board approved the repurchase of an additional 10,000,000 shares, subject to certain limitations, including approval

from our lender if we had amounts outstanding under our line of credit. The August 6, 2004 repurchase plan was effectively terminated with approximately $198,000 remaining. As of April 13, 2007, we had repurchased, in the open market, 360,420 shares at a cost of $2,403,799. There is no expiration date for the January 2007 repurchase program, nor has lender approval been requested.

(2)

Represents the remaining amount approved by the Company’s lender for repurchase of common stock. On August 16, 2004, the Company received approval to repurchase up to $8 million in share value, of which $7,801,984 has been completed.

Item 4.

Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting on October 13, 2006. The following is a summary of the proposals and corresponding votes.

Nomination and Election of Directors

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


Nominee	For	Withheld
Ilia Lekach	12,055,161	4,921,581
Frank A.Buttacavoli	11,528,106	5,448,636
Glenn Gopman	12,325,282	4,651,460
Esther Egozi Choukroun	12,656,559	4,320,183
David Stone	12,698,100	4,278,642
Jaya Kader Zebede	12,709,652	4,267,090
Isaac Lekach	8,896,261	8,080,481

With respect to Proposal #2, the appointment of Deloitte & Touche LLP as our independent registered public accounting firm, was approved as follows:


For	Against	Abstain
14,707,760	2,169,196	99,786

Item 6.

Exhibits

(a)

Exhibits:


Exhibit #		Description
10.84		Agreement dated December 6, 2006 between the Company and Perry Ellis International, Inc.
31.1		Certification of Interim 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 Interim Chief Executive Officer Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer Pursuant to §906 of the Sarbanes-Oxley Act of 2002.

PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


ASSETS	December 31, 2006			March 31, 2006
CURRENT ASSETS:
Cash and cash equivalents	$	12,656,028		$	49,822
Certificate of deposit		—			1,026,534
Restricted cash		—			7,966,720
Trade receivables, net of allowance for doubtful accounts, sales returns and advertising allowances of approximately $8,253,000 and $3,988,000, respectively		20,228,811			21,492,956
Trade receivables from related parties		16,548,395			15,534,959
Receivable from sale of fragrance brand		5,035,694			—
Inventories		78,500,545			69,443,085
Prepaid expenses and other current assets, net		19,610,310			17,507,785
Property held for sale		—			14,018,238
Investment in affiliate		—			6,900,343
TOTAL CURRENT ASSETS		152,579,783			153,940,442
Equipment and leasehold improvements, net		4,428,194			898,490
Trademarks and licenses, net		5,378,869			12,119,681
Deferred tax asset		1,058,034			—
Other		285,761			333,546
TOTAL ASSETS	$	163,730,641		$	167,292,159
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings, current portion	$	869,757		$	19,081,787
Mortgage payable on property held for sale		—			12,661,124
Accounts payable		34,482,536			35,560,969
Income taxes payable		12,382,850			2,484,190
Accrued expenses		2,738,793			1,279,864
TOTAL CURRENT LIABILITIES		50,473,936			71,067,934
Borrowings, less current portion		1,683,825			—
Deferred tax liability		116,069			2,510,303
TOTAL LIABILITIES		52,273,830			73,578,237
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2006 and March 31, 2006		—			—
Common stock, $0.01 par value, 30,000,000 shares authorized, 29,417,289 and 28,471,289 shares issued at December 31, 2006 and March 31, 2006, respectively		294,173			284,713
Additional paid-in capital		97,986,982			80,878,952
Retained earnings		50,566,243			43,099,026
Accumulated other comprehensive (loss) income		(362,303	)		3,980,091
		148,485,095			128,242,782
Less 10,986,957 and 10,564,957 shares of common stock in treasury, at cost, at December 31, 2006 and March 31, 2006, respectively		(37,028,284	)		(34,528,860	)
TOTAL STOCKHOLDERS' EQUITY		111,456,811			93,713,922
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	163,730,641		$	167,292,159

See notes to condensed consolidated financial statements.

PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended December 31,						Nine Months Ended December 31,
	2006			2005			2006			2005
Net sales:
Unrelated customers, including licensing fees of $18,750 and $56,250 for the three and nine months ended December 31, 2006 and 2005, respectively	$	29,738,731		$	27,715,231		$	65,377,336		$	50,138,487
Related parties		13,677,578			10,092,859			33,407,776			22,235,941
		43,416,309			37,808,090			98,785,112			72,374,428
Cost of goods sold:
Unrelated customers		18,078,930			11,801,532			37,216,966			20,349,402
Related parties		7,242,803			4,341,300			17,443,561			9,728,496
		25,321,733			16,142,832			54,660,527			30,077,898
Gross margin		18,094,576			21,665,258			44,124,585			42,296,530
Operating expenses:
Advertising and promotional		16,018,065			12,266,480			32,115,580			25,992,527
Selling and distribution		3,874,413			2,452,902			9,577,421			6,853,251
Royalties		2,918,811			2,144,873			7,171,624			4,098,052
General and administrative		2,833,276			1,680,681			6,931,656			5,100,423
Depreciation and amortization		668,203			481,156			1,670,251			1,413,181
Share-based compensation expense		—			—			16,201,950			—
Total operating expenses		26,312,768			19,026,092			73,668,482			43,457,434
Gain on sale of property held for sale		—			—			494,465			—
Operating (loss) income		(8,218,192	)		2,639,166			(29,049,432	)		(1,160,904	)
Interest income		27,287			24,367			44,558			89,449
Interest expense and bank charges		(618,189	)		(223,796	)		(2,169,682	)		(321,614	)
Gain on sale of investment in affiliate		—			—			1,774,624			—
Foreign exchange (loss) gain		(2,448	)		18,341			11,883			18,341
(Loss) income from continuing operations before income taxes		(8,811,542	)		2,458,078			(29,388,049	)		(1,374,728	)
Income tax benefit (provision)		3,348,385			(934,069	)		7,154,961			522,397
Net (loss) income from continuing operations		(5,463,157	)		1,524,009			(22,233,088	)		(852,331	)
Discontinued operations (Note P):
Income from operations of Perry Ellis fragrance brand, including a gain of $34,277,316 on sale of the brand in 2006		37,745,195			7,213,033			47,903,718			24,354,700
Income tax provision related to Perry Ellis brand		(14,343,174	)		(2,740,953	)		(18,203,413	)		(9,254,786	)
Income from discontinued operations		23,402,021			4,472,080			29,700,305			15,099,914
Net income	$	17,938,864		$	5,996,089		$	7,467,217		$	14,247,583
Income (loss) per common share:
Basic:
Continuing operations	$	(0.30	)	$	0.09		$	(1.23	)	$	(0.05	)
Discontinued operations	$	1.28		$	0.25		$	1.64		$	0.84
Total	$	0.98		$	0.34		$	0.41		$	0.79
Diluted:
Continuing operations	$	(0.30	)	$	0.07		$	(1.23	)	$	(0.05	)
Discontinued operations	$	1.28		$	0.21		$	1.64		$	0.84
Total	$	0.98		$	0.28		$	0.41		$	0.79

See notes to condensed consolidated financial statements.

PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

NINE MONTHS ENDED DECEMBER 31, 2006

(Unaudited)


	COMMON STOCK				ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS		ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME			TREASURY STOCK					TOTAL
	NUMBER ISSUED		PAR VALUE		ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS		ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME			NUMBER OF SHARES		COST			TOTAL

BALANCE at April 1, 2006		28,471,289	$	284,713	$	80,878,952	$	43,099,026	$	3,980,091			10,564,957	$	(34,528,860	)	$	93,713,922

Comprehensive loss:
Net Income		—		—		—		7,467,217		—					—			7,467,217
Reversal of unrealized holding gain due to sale of investment in affiliate, net of tax benefit of $909,482										(4,342,338	)							(4,342,338	)
Foreign currency translation adjustment		—		—		—		—		(56	)				—			(56	)
Total comprehensive loss																		3,124,823
Issuance of common stock upon exercise of warrants		946,000		9,460		906,080												915,540

Share-based compensation as a result of modification of warrants in connection with stock split						16,201,950												16,201,950
Purchase of treasury stock, at cost													422,000		(2,499,424	)		(2,499,424	)
BALANCE at December 31, 2006		28,417,289	$	294,173	$	97,986,982	$	50,566,243	$	(362,303	)		10,986,957	$	(37,028,284	)	$	111,456,811

See notes to condensed consolidated financial statements.

PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	NineMonths Ended December 31,
	2006			2005
Cash flows from operating activities:
Net income	$	7,467,217		$	14,247,583
Adjustments to reconcile net income to net cash used in operating activities:
Share-based compensation expense		16,201,950			—
Gain on sale of property held for sale		(494,465	)		—
Gain on sale of Perry Ellis fragrance brand		(34,277,316	)		—
Gain on sale of investment in affiliate		(1,774,624	)
Depreciation and amortization		1,670,251			1,413,181
Provision for doubtful accounts		440,000			135,000
Write-downs of prepaid promotional supplies and inventories		1,255,000			540,000
Deferred income tax benefit		(1,058,034	)		—
Changes in assets and liabilities net of effect of sale of Perry Ellis fragrance brand:
Decrease (increase) in trade receivables - customers		824,145			(10,032,282	)
Increase in trade receivables - related parties		(1,013,436	)		(6,537,904	)
Increase in inventories		(29,199,666	)		(20,606,844	)
Increase in prepaid expenses and other current assets		(4,329,525	)		(5,091,865	)
Decrease in other non-current assets		47,786			26,406
(Decrease) increase in accounts payable		(2,102,433	)		18,260,992
Increase in accrued expenses and income taxes payable		9,847,847			4,535,163
Total adjustments		(43,962,520	)		(17,358,153	)
Net cash used in operating activities		(36,495,303	)		(3,110,570	)
Cash flows from investing activities:
Proceeds from sale of Perry Ellis fragrance brand		57,500,000			—
Redemption of certificate of deposit		1,026,534			—
Net decrease (increase) in restricted cash		7,966,720			(8,231,881	)
Purchases of equipment and leasehold improvements		(4,314,671	)		(311,868	)
Purchases of trademarks		(239,655	)		(105,872	)
Net proceeds from the sale of property held for sale		14,512,703			—
Purchase of property held for sale		—			(14,018,237	)
Purchase of certificate of deposit, pledged		—			(1,016,625	)
Net proceeds from the sale of investment in affiliate		3,423,147			—
Net cash provided by (used in) investing activities		79,874,778			(23,684,483	)
Cash flows (used in) provided by financing activities:
(Repayments) proceeds - line of credit with GMACCC, net		(19,081,787	)		5,568,449
Proceeds - capital leases with Provident Equipment Leasing, net		2,761,266			—
Repayment - mortgage payable on property held for sale		(12,868,808	)		—
Proceeds – mortgage payable on property held for sale		—			12,750,000
Purchases of treasury stock		(2,499,424	)		(3,877,795	)
Proceeds from issuance of common stock, net		915,540			20,813
Net cash (used in) provided by financing activities		(30,773,213	)		14,461,467
Effect of exchange rate changes on cash		(56	)		(559	)
Net increase (decrease) in cash and cash equivalents		12,606,206			(12,334,145	)
Cash and cash equivalents, beginning of period		49,822			12,368,904
Cash and cash equivalents, end of period	$	12,656,028		$	34,759

See notes to condensed consolidated financial statements.

PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Basis of Presentation

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

On May 17, 2006, the Company announced a two-for-one stock split of common stock in the form of a dividend, for shareholders of record on May 31, 2006 (the “Stock Split”). The Stock Split was effected on June 16, 2006 and did not include shares held in treasury. The par value of the common stock remains at $0.01 per share. All references to share and per share amounts in the accompanying condensed consolidated financial statements and the notes thereto have been adjusted to reflect the Stock Split. Previously awarded stock options and warrants have been retroactively adjusted to reflect the modification as a result of the Stock Split.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to those rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information presented not misleading. The financial information presented herein, which is not necessarily indicative of results to be expected for the current fiscal year, reflects all adjustments (consisting only of normal recurring accruals), which, in the opinion of management, are necessary for a fair presentation of the interim unaudited condensed consolidated financial statements. It is suggested that these condens ed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2006, as filed with the SEC on July 24, 2006.

On December 6, 2006, we entered into an agreement to sell the Perry Ellis fragrance rights, including inventory, molds and other intangible assets related thereto, to Perry Ellis International, Inc. All activity relating to the Perry Ellis brand has been classified as discontinued operations for all periods presented.The Condensed Consolidated Statement of Cash Flows for the nine months ended December 31, 2006 does not separately report the cash flows of the discontinued operations and the Condensed Consolidated Balance Sheet and Statement of Cash Flows for prior periods have not been recast. Interest expense was not allocated to the discontinued operations and, therefore, all of the Company’s interest expense is included within continuing operations. See Note P for further discussion.

Share-Based Compensation

The Company has two stock option plans which provide for equity-based awards to its employees other than its directors and officers (collectively, the "Plans"). Under the Plans, the Company has reserved approximately 1,000,000 shares of common stock, of which 368,274 options have been granted and 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 previously issued 3,440,000 warrants to certain officers, employees, consultants and directors, 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. Prior to the April 1, 2006 adoption of Statement of Financial Accounting Standards ("SFAS") No. 123R "Share Based Payment&qu ot; ("SFAS 123R"), the Company accounted for share-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, because the stock option price equaled the market price on the date of grant, no compensation expense was recognized by the Company for share-based compensation. As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), share-based compensation was included as a pro forma disclosure in the notes to the consolidated financial statements. SFAS No. 123R revises SFAS No. 123 and supersedes APB 25.

Effective April 1, 2006, the beginning of the Company's first quarter of fiscal 2007, the Company became subject to the fair value recognition provisions of SFAS No. 123R and implemented the Standard, using the modified-prospective transition method. Under this transition method, share based compensation expense is required

to be recognized in the consolidated financial statements for stock options and warrants which are granted, modified or vested subsequent to April 1, 2006. As of March 31, 2006, all options and warrants were fully vested, and as such, the result of adopting SFAS No. 123R on April 1, 2006, did not have an effect on the Company’s results of operations or financial position. The compensation expense recognized will include the estimated expense for stock options granted on and subsequent to April 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. Results for prior periods have not been restated, as provided for under the modified-prospective method.

Concurrent with the Stock Split, the Company 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, the Company was required to record share-based compensation in the amount of $16,201,950, reflecting the change in the warrants’ fair value immediately before and after the Stock Split. This non-cash charge has been included in operating expenses for the nine months ended December 31, 2006. The Company has also recorded a deferred tax benefit of $1,058,034 as a result of the charge, which reduces income tax expense for the period. See Note I for further discussion of this tax benefit.

The fair value of the warrants at the date of the modification was estimated using a Black-Scholes option pricing model with the following assumptions:


Average expected life (years)	5
Expected volatility	65	%
Risk-free interest rates	6	%
Dividend yield	0	%

The expected life of the warrants represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the remaining contractual terms and expectations of future behavior. The expected volatility is estimated using the historical volatility of the Company's stock. The risk-free interest rate is 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.

The following is a summary of stock option and warrant activity during the nine months ended December 31, 2006:


	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding as of March 31, 2006		3,440,000	$	1.09		5.26	$	48,030,575
Granted		—		—		—		—
Exercised		946,000	$	0.97		4.87		6,940,830
Forfeited		—		—		—		—
Outstanding as of December 31, 2006		2,494,000	$	1.13		4.37	$	11,069,905
Exercisable as of December 31, 2006		2,494,000	$	1.13		4.37	$	11,069,905

All warrants outstanding as of March 31, 2006 were fully vested. Upon exercise of the warrants, the Company issues previously authorized but unissued common stock to the warrant holders. During the three and nine months ended December 31, 2006, the Company did not recognize any share-based compensation expense in the condensed consolidated financial statements relating to stock option or warrant grants other than amounts recognized in connection with the modification of the outstanding warrants as described above.

The following table shows the effect on net income and net income per common share for the three and nine month periods ended December 31, 2005 had compensation cost been recognized based upon the estimated fair value on the grant date of stock options in accordance with SFAS No 123, as amended by SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure".


	For the Three Months Ended December 31, 2005		For the Nine Months Ended December 31, 2005
Net income, as reported	$	5,996,089	$	14,247,583

Add: Share-based employee compensation expense included in net income, net of related tax effects		—		—
Deduct: Total share-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		43,586		130,757
Pro forma net income	$	5,952,503	$	14,116,826
Basic net income per share:
As reported	$	0.34	$	0.79
Proforma	$	0.33	$	0.79
Diluted net income per share:
As reported	$	0.28	$	0.79
Proforma	$	0.28	$	0.79

The fair value for these stock options and warrants was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions:


Average expected life (years)	5
Expected volatility	70	%
Risk-free interest rates	3	%
Dividend yield	0	%

The expected life of the options and warrants represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future behavior. The expected volatility is estimated using the historical volatility of the Company's stock. The risk-free interest rate is 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.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market. The components of inventories are as follows:


	December 31, 2006		March 31, 2006
Finished products	$	49,300,657	$	41,016,214
Components and packaging material		25,311,578		22,313,145
Raw material		3,888,309		6,113,726
	$	78,500,545	$	69,443,085

The cost of inventories includes product costs and handling charges, including an allocation of the Company’s applicable overhead in the approximate amount of $3,850,000 and $2,688,000 at December 31, 2006 and March 31, 2006, respectively. Included in inventory at December 31, 2006, was finished products in the amount of $1,214,693 in watches and $161,350 in handbags ($2,021,616 for watches at March 31, 2006), and $26,691 of components and packing materials for watches ($198,315 at March 31, 2006). See Note K for further discussion.

Trademarks and Licenses

Trademarks and licenses are attributable to the following brands:


	December 31, 2006			March 31, 2006			Estimated Life (in years)
XOXO	$	5,800,000		$	5,800,000		5
Fred Hayman Beverly Hills (“FHBH”)		2,820,361			2,820,361		10
Paris Hilton		459,016			219,361		5
Others		216,546			329,106		5-25
		9,295,923			9,168,828
Less – accumulated amortization		(3,917,054	)		(2,937,397	)
Subtotal of amortizable intangibles		5,378,869			6,231,431
Perry Ellis		—			5,888,250
	$	5,378,869		$	12,119,681

On August 16, 2006, the Company entered into a letter of intent to sell its Perry Ellis fragrance rights to Victory International (USA) LLC (“Victory”) for a total of up to $140 million: $120 million for the fragrance rights, payable in sixty equal monthly installments of $2 million, without interest, and up to $20 million for inventory due at closing. The letter of intent was subject to the execution of a definitive agreement and the approvals associated therewith, including the approval by the licensor, Perry Ellis International (“PEI”). On October 9, 2006, the Company was informed by PEI, that they would not consent to the assignment of our rights. Victory had paid a deposit of $1 million to us in connection with the letter of intent, which was refunded during October 2006.

On December 6, 2006, the Company entered into an agreement to sell the Perry Ellis fragrance rights, including inventory, molds and other intangible assets related thereto, to PEI, at a price of approximately $63 million, subject to final inventory valuations. The closing took place shortly thereafter. See Note P to the accompanying condensed consolidated financial statements for further discussion.

Borrowings

The composition of borrowings is as follows:


	December 31, 2006		March 31, 2006
Revolving credit facility payable to GMAC Commercial Credit LLC, interest at LIBOR plus 2.75% or prime minus .25% (8.50% at December 31, 2006) at the Company’s option.	$	—	$	19,081,787
Capital leases payable to Provident Equipment Leasing, collateralized by certain equipment and leasehold improvements, payable in equal quarterly installments of $257,046, including interest, through July 2009.		2,553,582		—
		2,553,582		19,081,787
Less: long-term portion		1,683,825		—
Borrowings, current portion	$	869,757	$	19,081,787

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

On January 10, 2006, the Loan Agreement was amended, increasing the loan amount to $30,000,000 with an additional $5,000,000 available at the Company’s option. In addition, the maturity was extended through July 20, 2008, and the interest rate was reduced to 0.25% below the prime rate. During May 2006, the Company exercised its option and increased the line of credit to $35,000,000.

On September 13, 2006, the Loan Agreement was further amended, temporarily increasing the loan amount to $40,000,000 until December 13, 2006, at which time the maximum loan amount reverted back to $35,000,000.

At December 31, 2006, based on the borrowing base at that date, available borrowing under the credit line amounted to $35,000,000, none of which was utilized. Restricted cash represents collections of trade accounts receivable deposited with our bank and pending transfer to GMACCC. As of March 31, 2006, $7,966,720 was on deposit with our bank pending transfer. There was no restricted cash as of December 31, 2006, since no amounts were outstanding under our line of credit.

Substantially all of the assets of the Company, excluding the New Jersey warehouse equipment discussed below, collateralize the credit line borrowing. The 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 GMACCC. The Loan Agreement also contains certain financial covenants relating to net worth, interest coverage and other financial ratios, which the Company was in compliance with at December 31, 2006.

On August 16, 2004, GMACCC approved a continuation of the Company’s common stock buyback program not to exceed $8,000,000.

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

On December 29, 2005, the Company entered into a fifteen year conventional mortgage loan with GE Commercial Finance Business Property Corporation in the amount of $12,750,000 in connection with the Sunrise Facility acquisition. The mortgage was payable in equal monthly installments of $106,698, including interest at 5.87%. The mortgage was repaid in connection with the June 21, 2006 sale of the property. See Note M for further discussion of the Sunrise Facility.

Management believes that funds from operations and its existing financing will be sufficient to meet the Company’s current operating needs. We anticipate positive cash flow during the upcoming holiday season and we are currently discussing a permanent increase in our line of credit. However, there is no assurance that cash flow will be positive or that we will obtain such financing or what the terms of such financing, if available, would be.

Related Party Transactions

The Company had net sales of $7,279,013 and $5,368,982 during the nine-month periods ended December 31, 2006 and 2005 ($1,996,771 and $1,952,720 during the three months ended December 31, 2006 and 2005), respectively, to Perfumania, Inc. (“Perfumania”), a wholly-owned subsidiary of E Com Ventures, Inc. (“ECMV”), a company in which the Company’s former Chairman and Chief Executive Officer had an ownership interest and held identical management positions until February 2004. These amounts exclude sales of Perry Ellis brand products in the amount of $5,512,469 and $13,150,734 during the nine-month periods ended December 31, 2006 and 2005 ($958,370 and $4,550,612 during the three months ended December 31,2006 and 2005), respectively. Sales of Perry Ellis brand products are reported as part of discontinued operations in the accompanying condensed consolidated statements of operations. Perfumania is one of the Compa ny’s largest customers, and transactions with them are closely monitored by the Company’s Audit Committee and Board of Directors. Perfumania offers the Company the opportunity to distribute its products in approximately 260 retail outlets and its terms with Perfumania take into consideration the companies’ over 15 year relationship. 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.

While the Company’s invoice terms to Perfumania are stated as net ninety days, for over ten years the Board of Directors has granted longer payment terms, taking into consideration the factors discussed above. The Board of Directors evaluates the credit risk involved and imposes a specific dollar limit, which is determined based on Perfumania’s reported results and comparable store sales performance. Management monitors the account activity to ensure compliance with the Board limit. Net trade accounts receivable owed by Perfumania to the Company totaled$7,083,813and $8,506,303 at December 31, 2006 and March 31, 2006, respectively ($9,501,812at December 31, 2005). Amounts due from Perfumania are non-interest bearing and are paid in accordance with the terms established by the Board of Directors.

ECMV’s financial statements included in its Annual Report on Form 10-K for the year ended January 28, 2006, reflect a net income of $14.2 million compared to an income of $3.2 million in the prior year.Its Quarterly Report on Form 10-Q for the thirty-nine weeks ended October 28, 2006 reflects a net loss of $3.23 million compared to a loss of $3.40 million in the prior year comparable period.Management continues to evaluate its credit risk and assess the collectibility of the Perfumania receivables. The Company holds discussions with Perfumania on a periodic basis regarding their anticipated payments. Management believes that Perfumania will reduce their trade receivable balance and the number of days outstanding by March 31, 2007. Based on management’s evaluation, no allowances have been recorded as of March 31 or December 31, 2006. Management will continue to ev aluate Perfumania’s financial condition on an ongoing basis and consider the possible alternatives and effects, if any, on the Company.

The Company owned 378,101 shares of ECMV common stock, which was an available-for-sale security and was reflected as an “investment in affiliate” in the accompanying March 31, 2006 condensed consolidated balance sheet. As of March 31, 2006, the fair market value of the investment was $6,900,343 or $18.25 per share, based on the quoted market price of the shares. The Company’s adjusted cost basis (after a non-cash charge to earnings during fiscal 2002 of $2,858,447, which was reported as an other-than-temporary decline in the value of the investment) for the shares was $1,648,523 or $4.36 per share. During August and September 2006, the Company sold all of the shares in the open market for $3,423,147. Accordingly, the Company has recorded a gain on sale of $1,774,624 in the accompanying statements of operations for the nine months ended December 31, 2006. See Note I for discussion of the income tax effect of the sale. In addition, as a result of the sale, the Company reversed $4,342,338 of previously recorded unrealized gains on the investment net of taxes, which had been recorded as a component of stockholders’ equity as of March 31, 2006.

ECMV’s majority shareholders acquired an approximate 12.2% ownership interest in the Company (See Note Q for further discussion) during August and September 2006, and accordingly, transactions with Perfumania will continue to be presented as related party transactions.

In addition to Perfumania, the Company enters into transactions with fragrance distributors affiliated to and/or owned/operated by individuals related to the Company’s former Chairman/CEO. These sales are presented as related party sales in the accompanying condensed consolidated statements of operations and are closely monitored by the Company’s Audit Committee and Board of Directors. During the quarter ended September 30, 2006, the Company identified, and has classified, additional distributors as related parties. These distributors had not previously been classified as such. Transactions with these distributors are included with related party sales for the three and nine months ended December 31, 2006. The amounts for the periods ended December 31, 2005, and at March 31, 2006, have been restated. See Note O to the accompanying condensed consolidated financial statements for further discussion. During the nine months ended December& nbsp;31, 2006 and 2005, the Company had net sales to these related parties of $26,128,763 and $16,859,697 ($11,680,807 and $8,140,139 during the three months ended December 31, 2006 and 2005), respectively. These amounts exclude sales of Perry Ellis brands to other related parties of $15,027,792 and $18,367,774 for the nine months ended December 31, 2006 and 2005 ($5,936,742 and $6,002,067 for the quarters ended December 31, 2006 and 2005), respectively. Sales of Perry Ellis brand products are reported as part of discontinued operations in the accompanying condensed consolidated statements of operations and accordingly, related party sales (including those to Perfumania) are reported net of the Perry Ellis brand activity. As of December 31 and March 31, 2006, trade receivables from related parties include $9,464,582 and $7,028,656, respectively, from these customers, which were current in accordance with their sixty or ninety day terms. The Company also reimbursed these related party distributors for ad vertising and promotional expenses totaling approximately $1,801,000 and $1,845,000 for the nine months ended December 31, 2006 and 2005 ($734,000 and $1,481,000 during the three months ended December 31, 2006 and 2005), respectively.

During the nine months ended December 31, 2006 and 2005, the Company purchased $1,160,420 and $845,663 ($386,807 and $386,807 during the three months ended December 31, 2006 and 2005), respectively, in television advertising on the “Adrenalina” show, which is broadcast in various U.S. markets and Latin American countries. The Company’s former Chairman/CEO has a controlling ownership interest in a company, which has the production rights to the show and publishes certain magazines. During the nine months ended December 31, 2006, the Company also purchased $21,875 ($4,075 during the three months ended December 31, 2006) of advertising space in these magazines.

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, retroactively restated for the Stock Split:


	Three Months Ended December 31,
	2006			2005
(Loss) income from continuing operations	$	(5,463,157	)		1,524,009
Income from discontinued operations		23,402,021			4,472,080
Net income	$	17,938,864		$	5,996,089
Weighted average number of shares issued		28,945,550			28,458,528
Weighted average number of treasury shares		(10,674,805	)		(10,564,957	)
Weighted average number of shares outstanding used in basic earnings per share calculation		18,270,745			17,893,571
Basic net (loss) income per common share – continuing operations	$	(0.30		$	0.09
Basic net income per common share – discontinuing operations	$	1.28		$	0.25
Weighted average number of shares outstanding used in basic earnings per share calculation		18,270,745			17,893,571
Effect of dilutive securities:
Stock options and warrants		—			3,184,848
Weighted average number of shares outstanding used in diluted earnings per share calculation		18,270,745			21,078,419
Diluted net (loss) income per common share – continuing operations	$	(0.30	)	$	0.07
Diluted net income per common share – discontinuing operations⁽¹⁾	$	1.28		$	0.21


	Nine Months Ended December 31,
	2006			2005
Loss from continuing operations	$	(22,233,088	)	$	(852,331	)
Income from discontinued operations		29,700,305			15,099,914
Net income	$	7,467,217		$	14,247,583
Weighted average number of shares issued		28,736,860			28,452,096
Weighted average number of treasury shares		(10,601,706	)		(10,544,938	)
Weighted average number of shares outstanding used in basic and fully diluted earnings per share calculation		18,135,154			17,907,158
Basic and fully diluted net loss per common share – continuing operations⁽¹⁾	$	(1.23	)	$	(0.05	)
Basic and fully diluted net income per common share – discontinued operations⁽¹⁾	$	1.64		$	0.84

———————

(1)

In accordance with paragraph 15 of FAS 128,Earnings Per Share, 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 three and nine month periods ended December 31, 2006, and the nine months ended December 31, 2005, as we incurred a loss from continuing operations for those periods.

Cash Flow Information

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


	Nine Months ended December 31,
	2006		2005
Cash paid for:
Interest	$	2,231,902	$	321,614
Income taxes	$	2,634,259	$	4,770,387

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

Nine months ended December 31, 2006:

The consideration received from the sale of the Perry Ellis fragrance brand and assets related thereto, includes an account receivable of $5,035,694, pending final inventory valuations.

Change in unrealized holding gain of $4,342,338 on the investment in affiliate, net of deferred taxes.

Nine months ended December 31, 2005:

Change in unrealized holding gain of $656,383 on the investment in affiliate, net of deferred taxes.

Income Taxes

The tax provision for the three-month periods ended December 31, 2006 and 2005, and the nine-month period ended December 31, 2005, reflect an estimated tax rate of 38%.

The tax provision for the nine-month period ended December 31, 2006 reflects an estimated effective rate of 24%. The lower rate in the current year results from the following:

Difference in basis of the ECMV shares sold during the current period as such sale resulted in a capital loss of $1,083,823 for income tax purposes, for which the Company was able to offset with capital gains, as well as a portion of the gain in connection with the sale of the Perry Ellis fragrance brand (See Notes M and P, respectively, for further discussion). As discussed in Note F, the Company had previously recorded a non-cash charge during fiscal 2002, reducing the basis of the shares for financial statement purposes.

A limitation on the estimated tax benefit that is expected to result from the share-based compensation charge related to the warrant modification. Such benefit will be limited by the maximum allowable annual compensation deduction for corporate officers under Section 162 (m) of the Internal Revenue Code. Consequently, the benefit recorded in the current period reflects management’s best estimate at the present time based upon assumptions regarding the timing and market value of the Company’s common stock upon exercise of the warrants and the amount and nature of other forms of compensation to be paid to the holders of the warrants using the method in which the cash compensation (salary and bonus) of the related individuals takes priority over the share-based compensation in determining the annual limitation. Actual tax benefits realized may be greater or less than the amounts recorded, and such differences may be material. The Company will adjust this deferr ed tax asset as additional information becomes available, with adjustments reflected in the Company’s income tax (benefit) provision for the period in which the adjustments are identified.

License and Distribution Agreements

As of December 31, 2006, the Company held exclusive worldwide licenses to manufacture and distribute fragrance and other related products for Paris Hilton, Ocean Pacific (“OP”), GUESS?, Maria Sharapova, Andy Roddick and babyGUND. During December 2006, the Company sold its Perry Ellis licensing rights to Perry Ellis International, its Licensor. See Note P for further discussion.

Under each of these arrangements, the Company must pay royalties at various rates based on net sales, and spend minimum amounts for advertising based on sales volume. The agreements expire on various dates and are subject to renewal. Except as discussed below, the Company believes that it is presently in compliance with all material obligations under the above agreements.

The Company received a complaint from GUESS?, Inc. (“GUESS?”) alleging that GUESS? fragrance products were being sold in unauthorized retail channels. Although the Company did not sell such products directly to these channels, it still represents a violation of the Company’s license agreement with GUESS?. The Company is currently negotiating a settlement with GUESS? which will, among other items, require GUESS?’s reapproval of all international distributors selling GUESS? fragrance products, payment of liquidating damages still to be determined as well as requiring the Company to strictly monitor distribution channels. Any further violations surrounding unapproved distribution could result in termination of the license agreement. During the quarter ended March 31, 2007, the Company stopped shipments to international distributors. GUESS? has already approved certain international distributors and the Company has commenced s hipments to these approved distributors. The Company continues to submit approval requests for additional international distributors in accordance with procedures outlined in the license agreement.

Segment Information and Concentration of Revenue Sources

Prior to the quarter ended December 31, 2005, the Company operated in one industry segment as a manufacturer and distributor of prestige fragrances and beauty related products. During December 2005 and March 2006, the Company commenced sales of watches and handbags, respectively, both of which are under license agreements with Paris Hilton Entertainment, Inc. Revenues from the sale of watches and handbags during the nine month period ended December 31, 2006 totaled $736,142 and $1,285,604, respectively ($31,704 and $362,471, respectively, during the three months ended December 31, 2006). Included in inventories and prepaid promotional supplies at December 31, 2006, is approximately $1,306,000 and $182,000 relating to watches and handbags, respectively ($2,220,000 for watches at March 31, 2006). The Company anticipates preparing full segment disclosure as these operations become more significant.

During the three and nine months ended December 31, 2006 and 2005, the following brands have accounted for 10% or more of the Company’s gross sales from continuing operations:


	Three Months Ended December 31,		Nine Months Ended December 31,
	2006	2005	2006	2005
Paris Hilton	56%	71%	50%	69%
Guess?	37%	19%	42%	19%

Legal Proceedings

On June 21, 2006, the Company was served with a shareholder’s class action complaint (the “Class Action”) filed in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida by Glen Hutton, purporting to act on behalf of himself and other public stockholders of the Company, and 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 Class 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 was a director of the Company at that date. The Class Action related to the proposal (previously disclosed in the Company’s June 14, 2006 Form 8-K) from PF Acquisition of Florida LLC (“PFA”), which was owned by Ilia Lekach, to acquire all of the outstanding shares of common stock of the Company for $29.00 ($14.50 after the Stock Split) per share in cash (the “Proposal”). The Class Action sought equitable relief for inadequate and unfair consideration, without full disclosure of all material information, to the detriment of the public shareholders, all in breach of defendants’ fiduciary duties. The Class Action alleged that the Prop osal was solely designed to ensure that the Company’s management completed the Proposal despite the fact that the consideration called for in the Proposal was unfair to the public shareholders and the Company’s public shareholders had not been provided with all material information concerning the Proposal necessary for them to make an informed decision. Counsel for the plaintiffs has informed Company counsel that plaintiff does not intend to pursue this litigation further. It is anticipated that this matter will be voluntarily dismissed by the plaintiff.

During August and September 2006, five new identical class actions were filed against the Company, Ilia Lekach and Frank Buttacavoli (together the “Second Class Action”).

The Company and the other named defendants retained Florida securities counsel and on September 26, 2006, the defendants moved to dismiss the Second Class Action.

At a hearing on October 23, 2006, the judge consolidated the five cases. At the plaintiffs’ request, the lead plaintiff was provided the opportunity to file a Consolidated Amended Complaint (the “Amended Class Action”) which was filed on November 8, 2006. The Amended Class Action included the allegations in the Second Class Action as well as new allegations, among them, that the Company improperly recognized revenues on sales to related parties during the three-month period ended September 30, 2005, and failed to comply with certain SEC disclosure rules surrounding “Management’s Discussion and Analysis of Financial Condition and Results of Operation”. On December 1, 2006, the Company and the other named defendants filed a motion to dismiss the Amended Class Action.

The filing of the Company’s reports on Form 10-Q for the fiscal quarters ended September 30, 2006 and December 31, 2006 were delayed pending the completion of an independent investigation by special counsel and independent forensic accountants engaged by Parlux's Audit Committee. The investigation was focused on, and was the result of, allegations made in the Amended Class Action, including among others, that Parlux improperly recognized revenue on sales to related parties and failed to comply with SEC disclosure rules. Based on the findings of the investigation, it was determined that there was no merit to the allegations.

The Amended Complaint continues to name the then Board of Directors as defendants along with the Company, as a nominal defendant. The Amended Complaint is largely a collection of claims previously asserted in a 2003 derivative action, which the plaintiffs in that action, when provided with additional information, elected not to pursue. It adds to those claims, assertions regarding a 2003 buy-out effort and the abandoned buy-out effort of PF Acquisition of Florida. It also contains allegations regarding the prospect that the Company's stock might be delisted because of a delay in meeting SEC filing requirements. It relies in large measure on a bevy of media articles rather than facts known to the plaintiffs. Glen Hutton, the plaintiff in the now abandoned class action, is included as an additional plaintiff.

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, adding alleged violations of securities laws included in the Second Class Action, which the Company moved to dismiss of 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 days to respond, and a response was filed on March 29, 2007. Based on the allegations in the Amended Complaint and the information collected in the earlier litigation and presently known to the Company, it is believed that the Amended Complaint is without merit.

On June 20, 2006, the Special Committee of Independent Directors of the Board (the “Committee”), through their counsel, responded to the Proposal, indicating that they did not believe it was prudent for the Company to move forward to consider the Proposal due to the contingencies therein, and requested removal of such as well as a deposit to cover the Company’s expenses that may have been required to evaluate the Proposal.

On March 2, 2007, the Company, Ilia Lekach and Frank Buttacavoli were named as defendants, along with Perry Ellis International, Inc. and its Chairman and CEO, George Feldenkreis, Rene Garcia, Quality King Distributors, Inc., E Com Ventures, Perfumania, Model Reorg, Inc., Glenn Nussdorf, DFA Holdings, Inc., Duty Free Americas, Inc. Falic Fashion Group, LLC, Simon Falic and Jerome Falic. This action by Plaintiff Victory International (“Victory”) relates to Perry Ellis International’s failure to consent to the assignment by the Company of its contractual license to the Perry Ellis brand of perfumes. The Plaintiff is alleging that Perry Ellis International unreasonably withheld its consent and, instead, conspired with a variety of people to prevent Victory from obtaining this license. No direct allegations are made against the Company. The allegations against Messrs. Lekach and Buttacavoli relate to the recent attempt by Glenn Nussdorf to replace all of the directors of the Company with his nominees. The First Amended Complaint alleges that Mr. Nussdorf and certain affiliates are among the alleged co-conspirators with Perry Ellis International to prevent Victory from obtaining the license. It is the Company’s intention, as well as that of Mr. Lekach and Mr. Buttacavoli, to seek dismissal from this case on the basis that the complaint fails to state a cause of action against any of them.

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.

Facility Acquisition and Sale

On July 22, 2005, the Company finalized an agreement with SGII, Ltd. (an unrelated Florida limited partnership), to purchase certain real property in Sunrise, Florida for approximately $14 million. The property, which was intended to be used as the Company’s corporate headquarters and main distribution center, includes approximately 15 acres of land and a 150,000 square foot distribution center, with existing office space of 15,000 square feet. On December 29, 2005, the Company closed on the Sunrise Facility, financing $12.75 million of the purchase price under a fifteen year conventional mortgage with GE Commercial Finance Business Property Corporation.

As a result of various factors including the Company’s continuing 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 facility during the latter part of August 2006.

On May 15, 2006, the Company entered into an agreement to sell the Sunrise Facility for $15 million receiving a non-refundable deposit of $250,000 from the buyer. The sale was completed on June 21, 2006, and the mortgage was repaid. Accordingly, the Company had classified the property as “Property held for sale” in the accompanying consolidated balance sheet at March 31, 2006, along with the corresponding mortgage liability. The Company has recorded a gain of $494,465 from the sale, which is included in the accompanying condensed consolidated statement of operations for the nine months ended December 31, 2006.

New Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48 (“FIN48”),Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.FIN48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006 requiring adoption by the Company during the quarter ending June 30, 2007. The Company is currently evaluatingFIN48 and has not yet determined the impact, if any, the adoption of FIN 48 will have on its consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measures (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently reviewing the provisions of SFAS No. 157 to determine the impact for the Company.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB No. 115 ("SFAS No. 159"). SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for the Company's fiscal year ending March 31, 2009. The Company is currently assessing the impact of this statement on its consolidated financial statements.

Financial Statement Effects of Restatements and Discontinued Operations

As a result of the recent Audit Committee investigation, the Company has determined that additional international distributors should be classified as related parties. Additionally, due to the sale of the Perry Ellis fragrance brand (as discussed further in Note P), the activity for Perry Ellis is now being presented separately as discontinued operations. Accordingly, the accompanying condensed consolidated financial statements for the three and nine months ended December 31, 2005 and the balance sheet at March 31, 2006 have been restated from the amounts previously reported, the effects of which are shown in the table below:


Reclassification	As Previously Reported			Perry Ellis Discontinued Operations			Related Party Restatement			As Restated
Condensed Consolidated Balance
Sheet at March 31,2006:
Trade receivables, net	$	22,177,303					$	(684,347	)	$	21,492,956
Trade receivables from related parties	$	14,850,612					$	684,347		$	15,534,959

Condensed Consolidated Statements of
Operations for the periods ended
December 31, 2005:
Three months ended:
Net Sales:
Unrelated customers	$	37,064,671		$	(8,099,544	)	$	(1,249,896	)	$	27,715,231
Related parties	$	19,347,644		$	(10,504,681	)	$	1,249,896		$	10,092,859
Cost of Goods Sold:
Unrelated customers	$	16,398,465		$	(3,952,892		$	(644,041	)	$	11,801,532
Related parties	$	8,628,802		$	(4,931,543	)	$	644,041		$	4,341,300

Nine Months ended:
Net Sales:
Unrelated customers	$	80,327,524		$	(25,672,268	)	$	(4,516,769	)	$	50,138,487
Related parties	$	49,230,418		$	(31,511,248	)	$	4,516,769		$	22,235,941
Cost of Goods Sold:
Unrelated customers	$	34,454,291		$	(12,290,152	)	$	(1,814,737	)	$	20,349,402
Related parties	$	22,049,905		$	(14,136,146	)	$	1,814,737		$	9,728,496

Condensed Consolidated Statements of
Cash Flows for the nine months ended
December 31, 2005:
Cash flows from operating activities-2005:
Increase in trade receivables-customers	$	(11,096,179	)				$	(1,063,897	)	$	(10,032,282	)
Increase in trade receivables-related parties	$	(5,474,007	)				$	1,063,897		$	(6,537,904	)

The adjustments discussed above did not result in any restatement of the Company’s net income, earnings per share or working capital amounts from those that were previously reported.

Discontinued Operations

On November 28, 2006, the Company’s Board of Directors approved the sale of the Perry Ellis fragrance brand license back to Perry Ellis International (PEI) at a price of approximately $63 million, including approximately $21 million for inventory and promotional products relating to the brand. A definitive agreement was signed on December 6, 2006 and the closing took place shortly thereafter. The sale included all inventory, promotional products, molds and other intangibles. The Company anticipates the transaction will generate proceeds of approximately $63 million, and result in a pre-tax gain of approximately $34.3 million, subject to final inventory valuations. The gain on sale of the Perry Ellis fragrance brand, based upon preliminary balances, is calculated as follows (in 000’s):


Estimated proceeds			$	62,536
Less assets sold and transaction expenses:
Inventories	$	19,110
Prepaid promotional supplies and development costs		1,889
Molds, net		122
Intangibles		5,956
Other prepaid expenses		158
Commissions and legal fees		1,024		28,259
Net gain on sale before income taxes			$	34,277

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


	Three Months Ended December 31,				Nine Months Ended December 31,
	2006		2005		2006		2005
Net revenues	$	11,701,541	$	18,604,225	$	35,992,631	$	57,183,515
Gain on sale of brand		34,277,316		—		34,277,316		—
Operating income		3,467,879		7,213,033		13,626,402		24,354,700
Income from discontinued operations	$	37,745,195	$	7,213,033	$	47,903,718	$	24,354,700

As of March 31, 2006 the carrying values of the assets relating to the Perry Ellis brand are summarized as follows:


Assets:
Inventories	$	16,492,198
Prepaid promotional supplies and development costs		1,590,217
Molds, net		15,808
Intangibles		6,065,143
Total Assets:	$	24,163,366

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 District of New York against Quality King Distributors, Inc., Model Reorg, Inc., Nussdorf and his proposed slate of new directors.

On February 6, 2007, 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 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 will continue to serve as Parlux's Executive Vice President, Chief Operating Officer and Chief Financial Officer. The parties' settlement provided for the immediate appointment to the Parlux Board of three of Mr.&n bsp;Nussdorf's nominees, Neil Katz, Anthony D'Agostino and Robert Mitzman. The Parlux Board now consists 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 will conduct a search for a permanent CEO, and will 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 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. Lekach received $1.2 million as severance pay and an additional $1.2 million for his consulting services and non-competition covenants. 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 had 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 will receive no other compensation under his employment agreement. The Company is currently determining the valuation of such warrants, but anticipates recording a share-based compensation charge of approximately $3,000,000, along with the other settlement costs, during the quarter ending 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 million of his expenses incurred in connection with the consent solicitation and the litigation.

* * * *

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	PARLUX FRAGRANCES, INC.

	/s/ NEIL J. KATZ
	Neil J. Katz, Interim Chief Executive Officer (Principal Executive Officer)


	/s/ FRANK A. BUTTACAVOLI
	Frank A. Buttacavoli, Executive Vice President, Chief Operating Officer and Chief Financial Officer (Principal Financial and Principal Accounting Officer)

Date: April 13 2007

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Parlux Fragrances (PARL) Inactive 10-Q2007 Q3 Quarterly report

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