GENERAL

Management Overview

On August 11, 2008, we issued 5,900,000 shares of our common stock and Warrants to purchase an additional 1,500,000 shares of our common stock in exchange for the shares of Model Reorg, which merged into our wholly-owned subsidiary, Model Reorg Acquisition LLC. Because the shares issued to the Model Reorg shareholders amounted to approximately 66% of our shares outstanding after the issuance, the transaction has been accounted for as a "reverse acquisition," and Model Reorg is being treated as the "accounting acquirer." Accordingly, our historical financial statements reflect the historical results of Model Reorg prior to the transaction date of August 11, 2008 and those of the combined companies beginning effective August 11, 2008, and the Merger consideration has been allocated among the fair values of E Com's assets and liabilities as of the Merger date. All intercompany balances and transactions have been eliminated in consolidation. The Company is continuing to use the same fiscal year end, the Saturday closest to January 31, as E Com used before the Merger. Since Model Reorg's fiscal year end before the Merger was October 31, its fiscal quarter that began November 1, 2007 and ended immediately before the beginning of E Com's next fiscal year on February 3, 2008 is a separately audited transition period. We refer to the fiscal year beginning February 3, 2008 and ending January 31, 2009 as "fiscal 2008", the transition period beginning November 1, 2007 and ending February 2, 2008 as the "transition period", and the fiscal year beginning November 1, 2007 and ending October 31, 2008 as "fiscal 2007". The audited consolidated financial statements of Model Reorg as of October 31, 2007 and for the year ended October 31, 2007, as well as the audited consolidated financial statements of Model Reorg as of and for the thirteen weeks ended February 2, 2008 are included in Item 8. The unaudited financial statements of Model Reorg as of July 31, 2008 and for the three months and nine months ended July 31, 2008 and 2007 were filed with the SEC in a form 8-K/A on October 27, 2008.

The Company's net sales in fiscal 2008 increased 26.7% from the twelve months ended February 2, 2008 to $429.3 million, primarily due to the inclusion of the results of the Perfumania retail division beginning August 11, 2008. Perfumania's sales rose modestly compared to the prior year as a result of an increase in the number of stores. Wholesale revenues decreased by 22.5% from the prior period due primarily to the impact of the economic slowdown on consumers' ability to purchase and our wholesale customers' ability borrow. A portion of the decrease was also due to the fact that the prior period's results had included sales to E Com before the Merger.

Principally because of the addition of Perfumania's operating expenses for the period beginning August 11, 2008, our operating expenses for fiscal 2008, exclusive of the impairment charge described below, were $127.4 million or approximately 108% higher than those for the previous year. Excluding expenses of Perfumania's retail division, operating expenses decreased slightly.

Because of the impact of the economic slowdown on our sales, as well as our sharply diminished market capitalization, we recorded charges of $68.1 million for impairment of long-lived assets and goodwill for the fourth quarter of fiscal 2008 and the full fiscal year. As a result, we recognized a loss from operations in fiscal 2008 of approximately $60.7 million.

Including $12 million of interest expense and an income tax provision of $14.3 million, we realized a net loss of approximately $87.0 million in fiscal 2008, compared with net income of $13.6 million in the year ended February 2, 2008.

The following table sets forth selected items from our Consolidated Statements of Operations expressed as a percentage of total net sales for the periods indicated:

                            PERCENTAGE OF NET SALES



                                  Fiscal year Ended           Thirteen weeks Ended          Fiscal year Ended
                                  January 31, 2009              February 2, 2008            October 31, 2007
Total net sales                               100.0 %                        100.0 %                    100.0 %

Total gross profit                             31.4                           29.2                       27.6

Selling, general and
administrative expenses                        28.0                           17.0                       18.4
Asset impairment                               15.9                             -                          -
Depreciation and
amortization                                    1.7                            0.3                        0.4
Recovery on vendor advances                      -                              -                        (0.7 )

Total operating expenses                       45.6                           17.3                       18.1

(Loss) income from
operations                                    (14.2 )                         11.9                        9.5

Interest expense                               (2.8 )                          2.8                        3.9

(Loss) income before income
taxes                                         (17.0 )                          9.1                        5.6
Income tax provision                           (3.2 )                          3.8                        2.2

Net (loss) income                             (20.2 )%                         5.3 %                      3.4 %

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Preparation of these statements requires management to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, management evaluates its estimates, including those related to bad debts, inventories, asset impairments, sales returns and allowances, and other contingent assets and liabilities. As such, some accounting policies have a significant impact on amounts reported in these financial statements. The judgments and estimates made can significantly affect results. Materially different amounts might be reported under different conditions or by using different assumptions. We consider an accounting policy to be critical if it is both important to the portrayal of our financial condition and results of operations, and requires significant judgment and estimates by management in its application. We have identified certain critical accounting policies that affect the significant estimates and judgments used in the preparation of its financial statements.

Accounts Receivable, Net of Allowances

In the normal course of business, we extend credit to wholesale customers that satisfy pre-determined credit criteria. Accounts receivable, net of allowances, as shown on the consolidated balance sheets, is net of allowances for doubtful accounts. An allowance for doubtful accounts is determined through the analysis of the aging of accounts receivable at the date of the financial statements, assessments of collectability based on an evaluation of historical and anticipated trends, the financial condition of our customers and an evaluation of the impact of economic conditions. Should circumstances change or economic conditions deteriorate significantly, we may need to increase our provisions.

Inventory Adjustments and Writeoffs

Inventories are stated at the lower of cost or market, with cost being determined on a weighted average cost basis, which approximates FIFO. We review our inventory on a regular basis for excess and potentially slow moving inventory based on prior sales, forecasted demand, historical experience and through specific identification of obsolete or damaged merchandise and we record adjustments to reduce the carrying value of inventory to the lower of cost or market in accordance with our assessment. If actual sales are less than our forecasts, additional writeoffs could be necessary. Inventory shrinkage is estimated and accrued between physical inventory counts. Significant differences between future experience and that which was projected (for either the shrinkage or inventory reserves) could affect the recorded amounts of inventory and cost of sales.

Impairment of Long-Lived Assets

When events or changes in circumstances indicate that the carrying values of long-lived assets may be impaired, an evaluation of recoverability is performed by comparing the carrying value of the assets to projected future undiscounted cash flows in addition to other quantitative and qualitative analyses. Inherent in this process is significant management judgment as to the projected cash flows. Upon indication that the carrying value of such assets may not be recoverable, the Company recognizes an impairment loss as a charge against current operations. Property and equipment assets are grouped at the lowest level for which there are identifiable cash flows when assessing impairment. Cash flows for retail assets are identified at the individual store level. Factors that could trigger an

impairment review include a significant underperformance relative to expected historical or projected future operating results, or a significant negative industry or economic trend. Judgments are also made as to whether under-performing stores should be closed. Even if a decision has been made not to close an under-performing store, the assets at that store may be impaired.

Due in part to the deteriorating United States economy and resulting decline in retail sales which occurred in the fourth quarter of fiscal 2008 and in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), the Company conducted an internal review of its long-lived assets at the store level in the fourth quarter of fiscal 2008 and determined that the carrying value of certain assets exceeded their projected future undiscounted cash flows. The Company then determined the fair value of the identified long-lived assets by discounting their projected future cash flows using a rate approximating the Company's weighted average cost of capital, which resulted in an impairment charge of approximately $3.3 million.

As the projection of future cash flows requires the use of judgments and estimates, if actual results are materially different than these judgments or estimates, additional charges could be necessary. Significant deterioration in the performance of the Company's stores compared to projections could result in significant additional asset impairments.

Impairment of Goodwill and Intangible Assets

Pursuant to the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142") the Company's goodwill is tested for impairment annually (or more frequently if impairment indicators arise). Pursuant to SFAS 142, a reporting unit is defined as an operating segment or one level below an operating segment (a component), for which discrete financial information is available and reviewed by management. The Company's reporting units were identified as its retail and wholesale segments. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. The second step, if necessary, measures the amount of the impairment. Fair value is principally estimated using a discounted cash flow model which depends on, among other factors, estimates of future sales and expense trends, liquidity and capitalization. The discount rate used approximates the weighted average cost of capital of a hypothetical third party buyer. Owned tradenames that have been determined to have indefinite lives are not subject to amortization but are reviewed at least annually for potential impairment in accordance with SFAS 142, as mentioned above. The fair values are estimated and compared to their carrying values.

Trademarks, including tradenames and owned licenses having finite lives are amortized over their respective lives to their estimated residual values and are also reviewed for impairment in accordance with SFAS 144. The recoverability of the carrying values of all long-lived assets with finite lives is re-evaluated when changes in circumstances indicate the assets' value may be impaired. Impairment testing is based on a review of forecasted operating cash flows and the profitability of the related brand.

Since the third quarter of fiscal 2008, the capital markets have experienced substantial volatility and the Company's stock price declined substantially, causing the Company's book value to exceed its market capitalization, plus a reasonable control premium. In addition, the operating performance and cash flows of our retail and wholesale segments declined during the fourth quarter of fiscal 2008. Accordingly, the Company compared its market capitalization to the combined fair values of its reporting units and analyzed its future cash flow projections. Based on management's impairment review at January 31, 2009, we determined that goodwill was impaired in full and a portion of Perfumania's tradename was impaired, and we recorded an impairment charge. We will continue to monitor the expected future cash flows of the Company's reporting units and the long-term market capitalization trends to assess the carrying values of the intangible assets. Further declines could result in additional impairment charges.

Sales and Allowances

Revenue from wholesale transactions is recorded when title passes. Wholesale revenue is recorded net of returns, discounts and allowances. Revenue from retail sales is recorded, net of discounts, at the point of sale, and for consignment sales, when sale to the ultimate customer occurs. Revenue from Internet sales is recognized at the time products are delivered to customers. We record an estimate of returns, discounts and allowances, and review and refine these estimates on a regular basis based on current experience and trends. Our historical estimates of these costs have not differed materially from actual results, however, if the actual rate of sales returns increases significantly, our operating results could be adversely affected.

Valuation of Deferred Tax Assets

SFAS No. 109, "Accounting for Income Taxes," ("SFAS 109") requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent we believe it is more likely than not that a portion of these assets will not be realized. Financial Accounting Standards Board ("FASB") "Interpretation No. ("FIN") 48", "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109" clarifies the accounting for uncertainty in income taxes recognized under SFAS 109. FIN 48 prescribes a comprehensive model for the financial statement recognition, presentation and disclosure

of uncertain tax positions taken or expected to be taken in an income tax return and also provides guidance on various related matters such as derecognition, interest and penalties, and disclosure. We consider many factors when assessing the likelihood of future realization of our deferred tax assets including our recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carry-forward periods available to us for tax reporting purposes and other relevant factors. The range of possible judgments relating to the valuation of our deferred tax assets is very wide. Significant judgment is required in making these assessments and it is very difficult to predict when, if ever, our assessment may conclude that the remaining portion of our deferred tax assets is realizable. Significant differences between future experience and that which was projected in calculating deferred tax assets could result in significant additional adjustments to our deferred tax assets and income tax expense.

FISCAL YEAR 2008 COMPARED TO THE YEAR ENDED FEBRUARY 2, 2008

As discussed above, because the Merger with Model Reorg was treated as a reverse acquisition for accounting purposes, (i) the consolidated financial statements for the periods discussed in this section include only the results of Model Reorg for the year ended February 2, 2008, as well as for the partial year through August 10, 2008, and (ii) the results of the Perfumania retail operations are included only for the period August 11, 2008 through January 31, 2009. However, we also provide information about Perfumania's business during the period before August 11, 2008 to assist in understanding the trends in our current business, including comparisons between Perfumania's fiscal 2008 and Perfumania's fiscal 2007 (the 52 weeks ended February 2, 2008) net sales, gross profit and selling, general and administrative expenses. Furthermore, as a result of the Merger, wholesale transactions between Perfumania and Model Reorg that were previously recorded as affiliate transactions became intercompany transactions that are eliminated in consolidation. In order to provide a meaningful period-to-period comparison, the following discussion compares the year ended January 31, 2009 (fiscal 2008) with the year ended February 2, 2008.

Net Sales:

We recognized net sales of $429.3 million in fiscal 2008, an increase of 26.7%
from the $338.7 million recorded in the twelve months ended February 2, 2008.
The breakdown of sales between wholesale and retail was as follows:



                                                                           For the year ended
                                                                            ($ in thousands)
                                                    Percentage of                                  Percentage of              Percentage
                            January 31, 2009            Sales              February 2, 2008            Sales              Increase (Decrease)
                                                                              (unaudited)
Retail                      $         225,867                52.6 %        $          76,267                22.5 %                      196.2 %
Wholesale                             203,427                47.4 %                  262,430                77.5 %                      (22.5 )%

Total net sales             $         429,294               100.0 %        $         338,697               100.0 %                       26.7 %

Excluding $144.4 million in sales from Perfumania which are included in the above sales for the period from August 11, 2008 through January 31, 2009, net sales decreased by $53.8 million or 15.9%. Included in wholesale sales are $15.4 million and $32.3 million of pre-Merger sales to E Com in fiscal 2008 and the year ended February 2, 2008, respectively, which are not recognized following the Merger. The remaining decrease in wholesale sales of $42.1 million is the result of the continuing tightening of credit resources generally, which decreases customers' ability to purchase. Also, the reduction in consumer spending and the weak global economy caused wholesale customers to reduce their demand for fragrance for the 2008 holiday season.

Perfumania's retail sales for fiscal 2008 increased by 4.0% to $253.9 million compared to the prior year. The average number of stores operated was 329 in fiscal 2008, versus 283 in the prior year, which contributed to the increase in retail sales. However, Perfumania's comparable store sales decreased by 4.4% during fiscal 2008. Comparable store sales measure sales from stores that have been open for one year or more. We exclude stores that are closed for renovation from comparable store sales from the month during which renovation commences until the first full month after reopening. The average retail price per unit sold during fiscal 2008 increased 8.0% from the prior year and the total number of units sold decreased by 3.6%. We attribute the increase in the average retail price per unit sold to changes in our product mix and promotions resulting in more sales of higher priced merchandise. The number of units sold was affected by softness in the United States economy, declining consumer confidence and the resulting weak mall traffic.

We expect the softness in wholesale and retail sales to continue for the foreseeable future until consumer confidence and the global economy improve.

Cost of Goods Sold:

Cost of goods sold includes the cost of merchandise sold, inventory valuation
adjustments, inventory shortages, damages and freight charges. Cost of goods
sold increased 21.6% from $242.1 million in the year ended February 2, 2008 to
$294.5 million in fiscal 2008. The breakdown between wholesale and retail was as
follows:



                                                            For the year ended
                                                             ($ in thousands)

                                                                                    Percentage Increase
                                    January 31, 2009        February 2, 2008            (Decrease)
                                                               (unaudited)
Retail                              $         133,327       $          45,999                     189.9 %
Wholesale                                     161,147                 196,131                     (17.8 )%

Total cost of goods sold            $         294,474       $         242,130                      21.6 %

Excluding $82.5 million in cost of goods sold for Perfumania, which is included in the above cost of goods sold for the period from August 11, 2008 through January 31, 2009, cost of goods sold decreased by $30.1 million or 12.4%. This decrease was due principally to the decrease in wholesale sales.

Gross Profit:

Gross profit increased 39.6% from $96.6 million in the year ended February 2,
2008 to $134.8 million in fiscal 2008. The breakdown between wholesale and
retail was as follows:



                                                                Percentage Increase
                       January 31, 2009     February 2, 2008        (Decrease)
                                               (unaudited)
  Retail               $          92,540   $           30,268                 205.7 %
  Wholesale                       42,280               66,299                 (36.2 )%

  Total gross profit   $         134,820   $           96,567                  39.6 %

Gross profit percentages for the same periods were:

                                           For the year ended

                                 January 31, 2009      February 2, 2008
                                                         (unaudited)
           Retail                            41.0 %                39.7 %
           Wholesale                         20.8 %                25.3 %
           Gross profit margin               31.4 %                28.5 %

Excluding $62.0 million in gross profit from Perfumania which is included in the above gross profit for the period from August 11, 2008 through January 31, 2009, gross profit decreased by $23.8 million or 24.6%. Excluding Perfumania's results, the decrease in gross profit was due to the decrease in wholesale sales discussed above.

Perfumania's retail gross profit for fiscal 2008 increased by 3.7% to $112.7 million versus $108.6 million in the prior year, due to the increase in Perfumania's retail sales discussed above. For these same periods, Perfumania's retail gross margins were 44.4% and 44.5%, respectively.

Operating Expenses:

Principally because of the addition of Perfumania's operating expenses for the period from August 11, 2008 through January 31, 2009, operating expenses for fiscal 2008, exclusive of the $68.1 million impairment charges described below, were approximately $127.5 million, or 100% higher than those for the year ended February 2, 2008. Excluding expenses of Perfumania and the impairment charge, operating expenses were approximately equal to those for the year ended February 2, 2008.

Selling, general and administrative expenses include payroll and related benefits for our distribution centers, sales, store operations, field management, purchasing and other corporate office and administrative personnel; rent, common area maintenance, real estate taxes and utilities for our stores, distribution centers and corporate office; advertising, consignment fees, sales promotion, insurance, supplies, freight out, and other administrative expenses. The breakdown of operating expenses was as follows:

                                                               For the year ended
                                                                ($ in thousands)

                                                                                          Percentage Increase
                                   January 31, 2009            February 2, 2008               (Decrease)
                                                                 (unaudited)

Selling, general and
administrative                     $         119,994          $           62,328                         92.5 %
Asset impairment                              68,078                          -                         100.0 %
Depreciation and
amortization                                   7,423                       1,336                        455.6 %
Recovery on vendor advances                       -                       (2,367 )                     (100.0 )%

Total operating expenses           $         195,495          $           61,297                        218.9 %

(Loss) income from
operations                         $         (60,675 )        $           35,271                       (272.0 )%

Selling, general and administrative expenses increased 92.5% from $62.3 million in the year ended February 2, 2008 to $120.0 million in fiscal 2008 due to the addition of Perfumania's expenses following August 11, 2008. Excluding Perfumania's selling, general and administrative expenses of $60.5 million, which are included for the period from August 11, 2008 through January 31, 2009, selling, general and administrative expenses decreased by $2.8 million or 4.5%. Included in selling, general and administrative expenses are expenses in connection with service agreements with Quality King Distributors, Inc. ("Quality King"), which were $1.1 million for fiscal 2008, compared with $3.7 million for the year ended February 2, 2008. These service agreements are described in Note 7 to the consolidated financial statements included in Item 8 of this Form 10-K.

Perfumania's selling, general and administrative expenses for fiscal 2008 increased by 14.6% to $114.6 million compared to $100.0 million in the prior year. The increase was largely attributable to the additional payroll, occupancy and store opening expenses needed to operate the 52 net new stores opened over the past year.

. . .